Prompt Pack Bonus Commission Plan

Bonus / Commission Plan

When to use this

Use this skill when drafting:

• A sales commission plan for sales representatives, account executives, or distribution staff — specifying how commission accrues on sales performance
• An annual bonus plan for executives or employees — specifying the performance targets, calculation, and payment conditions
• A combined plan for roles with both a base-plus-commission and a performance-bonus component

These documents can be:

• A standalone plan document (attached to or referenced in the employment contract)
• A section within the employment contract
• A company-wide policy applicable to a defined group of employees

Triggers: new hire package design; annual plan cycle; IPO/equity compensation planning; existing plan review or compliance audit.

Prompt template

Draft a bonus/commission plan for [sales/executive/employee] roles at [Company]. Include eligibility, performance metrics, calculation methodology, payment timing, pro-ration rules, clawback provisions, and discretionary elements.

Use [[conversation-clarifying-questions]] to elicit [bracketed] inputs before drafting.

Required inputs

Document structure

1. Eligibility

Define who is covered:

• Job grades, roles, or individuals by name (for executive plans)
• Commencement of employment: "Employees who join before [date in the plan year] are eligible on a pro-rated basis; employees joining after [date] are not eligible for the current plan year"
• Employment status at payment date: typically, eligibility requires active employment at the payment date; employees who resign before the payment date forfeit the bonus (address this explicitly — see jurisdictional notes)

MENA trap: in UAE and KSA, a bonus that has been paid consistently for several years may be treated by labour authorities and courts as a contractual entitlement (part of the basic wage), not a discretionary reward. To preserve discretion:

• State clearly in the plan (and in the employment contract) that the bonus is discretionary and does not form part of basic salary
• Add a non-reliance statement: "The payment of a bonus in one period does not create any entitlement to a bonus in any subsequent period"
• Vary the bonus design or amount periodically to prevent crystallization as a custom

2. Performance metrics

2.1 Commission plans (sales roles)

Define the commission structure clearly:

Simple commission:

• Commission rate: [X%] of net revenue
• "Net revenue" definition: gross sales price minus returns, discounts, taxes, and excluded items (list excluded items — e.g., pass-through expenses, government fees)
• When commission is "earned": on invoice date, on payment by customer, on product delivery — specify; "on payment" is most defensible for businesses with long payment cycles

Tiered commission:

Quota definition: set the individual's quarterly/annual quota and the process for adjusting it (quota relief for territory changes, product changes).

2.2 Bonus plans (executive/employee roles)

Define the performance framework:

Company-level metrics (examples):

• Revenue vs. budget: [50% weight]
• EBITDA vs. budget: [30% weight]
• Strategic KPIs (e.g., customer NPS, project completion): [20% weight]

Individual-level metrics (examples):

• Individual performance rating (1–5 scale): [50% weight]
• Specific objectives (SMART objectives set at start of year): [50% weight]

Target bonus: [X%] of base salary at 100% performance; [Y%] at threshold (minimum payout); [Z%] at stretch (maximum payout). State the threshold below which no bonus is payable.

Worked example (include in the plan):

If target bonus is 20% of base salary (USD 100,000 = USD 20,000 target):

• 80% achievement → 50% of target bonus = USD 10,000
• 100% achievement → 100% of target → USD 20,000
• 120% achievement → 150% of target → USD 30,000 (capped at 150%)

3. Calculation methodology

State the formula with no ambiguity:

For commission:

Commission = (Actual Sales Revenue × Commission Rate) – Previous Period Commission Paid

For bonus:

Bonus = Base Salary × Target Bonus % × Performance Multiplier

Where Performance Multiplier = weighted average of company and individual metrics,
as calculated per the schedule

Define rounding (to the nearest currency unit; to 2 decimal places for percentages).

Define currency: is the bonus denominated in USD and paid in local currency? At what exchange rate?

4. Payment timing

• Commission: typically monthly or quarterly; state the payment date (e.g., 15th of the month following the calculation period)
• Bonus: typically annually; state the payment date (e.g., by March 31 for the preceding calendar year)
• Accrual: state whether bonus/commission accrues during a performance period even if not yet paid

MENA payroll compliance — UAE WPS (Wage Protection System):

• All UAE mainland and most free zone employers must pay salaries via the WPS
• If a bonus forms part of "wage" (basic salary) under UAE Labour Law, it must be paid through WPS
• Discretionary bonuses paid above basic salary: can be paid outside WPS cycle but must be reported
• Wage Protection Law reminder: UAE Decree-Law 33/2021 includes "commissions" in the definition of "wage" if they are contractually agreed and recurring; this has implications for gratuity calculation (see below)

5. Pro-ration rules

• New joiners: pro-rated based on the number of months employed during the plan period; define the start date (first full month vs. actual start date)
• Leavers during the plan period: address three scenarios:
  1. Resignation before payment date: typically forfeited; but see jurisdictional notes
  2. Termination without cause before payment date: consider pro-rated entitlement
  3. Termination for cause: forfeited
• Parental leave and sick leave: define whether time on leave is included or excluded from pro-ration calculations (employment law may impose a minimum)

UAE employment law note: an employee who resigns and has accrued commission on sales made (where commission was earned on the transaction date, not the payment date) may have a legal claim for accrued commission. Define "earned" commission carefully.

6. Clawback provisions

A clawback allows the company to recover previously paid bonus/commission if:

• The financial results on which the bonus was based are restated downward
• The recipient is found to have engaged in misconduct contributing to the overstatement
• For sales commission: the customer cancels or returns the goods/services after commission was paid

Format:

Clawback trigger: [financial restatement within 3 years; misconduct finding; customer cancellation within 90 days]
Clawback amount: [pro-rated reduction in bonus / full repayment / net-of-tax amount]
Recovery mechanism: deduction from future payroll; demand for repayment
Time limit for exercise: [2 years] from original payment

MENA employment law note: wage deductions in UAE are subject to Article 25 of Decree-Law 33/2021 — deductions are limited to specified purposes and amounts. A clawback that results in deduction from wages must comply with these limits. For material clawback amounts, the employer may need to bring a civil claim rather than deducting unilaterally.

KSA: Saudi Labour Law does not readily permit wage deductions; clawback is better implemented as a contractual repayment obligation with a civil remedy than a payroll deduction.

7. Gratuity interaction (MENA)

This is a critical MENA-specific issue:

UAE: end-of-service gratuity under Decree-Law 33/2021 is calculated on "basic salary" only. Commission and discretionary bonuses are generally excluded from the gratuity calculation base. However, if commission is contractually promised and recurring, UAE courts and the Ministry of Human Resources have sometimes included it in the gratuity base.

Drafting mitigation: state clearly in the plan and employment contract that commission/bonus is not part of "basic salary" for the purpose of gratuity or end-of-service benefit calculations.

KSA: same principle applies under Saudi Labour Law. Severance (end-of-service award) is calculated on the last basic wage; recurring contractual bonuses included in "basic wage" by Saudi courts in some cases.

Lebanon: NSSF contributions are based on total remuneration including bonuses; this affects the employer's cost calculation.

8. Discretionary elements

State which elements are discretionary (subject to board or management approval) and which are formula-driven:

• "The bonus amount calculated under section [X] is subject to final determination by the Board/Remuneration Committee, which may apply a positive or negative adjustment of up to [X%] based on qualitative factors"
• "The Company reserves the right to modify, suspend, or terminate this plan at any time on [30/60/90] days' notice, without this constituting a breach of any employment obligation"

The notice period for modifying or terminating the plan is important — in UAE and KSA, altering a contractual commission structure unilaterally without notice can trigger a constructive dismissal claim.

9. Taxes

• The plan should state that bonus/commission payments are subject to applicable income tax (relevant for EG where income tax applies; LB where income tax applies; and globally for expatriate employees with home-country tax obligations)
• The company is responsible for withholding applicable taxes
• UAE, KSA: no personal income tax on employment income for local nationals and most residents

Jurisdictional notes

UAE

• WPS compliance: bonuses paid as part of regular payroll must flow through WPS
• Gratuity: Decree-Law 33/2021 — gratuity is 21 days per year of service for the first 5 years; 30 days per year thereafter; based on basic salary only unless commission is recurring/contractual
• Labour Court: if a commission plan is ambiguous, UAE courts tend to interpret in favour of the employee

KSA

• Saudi Labour Law does not permit pure discretionary bonuses in practice if they have been paid consistently — document the legal basis (performance, not custom)
• Commission plans: state clearly in the employment contract and plan that commission is performance-linked and non-recurring as a right

Lebanon

• NSSF contributions on all remuneration (including bonuses) at employer rate
• Income tax (impôt sur le revenu) withheld from all employment income

Egypt

• Income tax applies at progressive rates on employment income including bonuses
• Social insurance contributions on regular bonuses included in the contribution base

Common mistakes

• No definition of when commission is "earned" vs. "paid" — creates disputes on termination
• Clawback mechanism incompatible with local wage-deduction rules
• Plan treated as contractual without the discretionary savings clause
• Gratuity impact not addressed — employer discovers at end-of-service that regular commissions inflate the gratuity base
• No quota/target definition — a commission plan without a defined quota is unworkable

Related skills

• [[kb-employment-law-mena]] — UAE, KSA, LB, EG employment law reference
• [[heuristic-always-state-jurisdiction-first]] — employment law is strictly jurisdiction-specific
• [[persona-sme-founder]] — SME context for designing employee compensation packages
• [[prompt-pack-agreement-legal-draft-review]] — reviewing an employment agreement or existing bonus plan