How does proration work?
Proration is a flexible and more tailored approach to commission calculation that operates with two key values: Sliding Scale Base and Incoming Commission Amount.
Sliding Scale Base (i.e. gross commission, sales volume, company dollar contribution) is the amount used for tier percentage calculations.
Below is the example of Sliding Scale Base for gross commission:
The Sliding Scale Base is affected by historical data. For example, if you select the year-to-date period, the previous amounts (i.e. sales volume) will contribute to the Sliding Scale Base that proration operates with. This way, having a $5000 of earnings within the selected period will let the agent skip Tier 1, if the Tier 1 is up to $5000.
Incoming Commission Amount is the amount you usually see on the SPLIT line of your transaction's Commissions tab. It is used for commission percentage calculations.
The most important thing to understand about the proration calculation is that the Sliding Scale Base and Incoming Commission amounts are two different instances. For example, your Sliding Scale Base for Sales Volume may operate millions of dollars of previously closed transactions. However, the final percentage calculation will happen with your Incoming Commission Amount, which may be far from millions.
Proration calculation follows this logic:
It splits the Sliding Scale Base amount between corresponding tiers.
Then, it defines the percentage portion of each tier's contributed amount in relation to the Sliding Scale Base amount.
Then, it takes this percentage, applies it to the Incoming Commission Amount, and then applies the tier's percentage rate to it.
At the end, the agent receives the sum of calculated amounts for each tier.
Sounds complex, but it will get easier in a while. Let us take a look at an example above:
Example: Gross Commission Sliding Scale Base
Understanding the operating numbers
Let's say the agent has a $25,000 commission basis with $5000 of pre-split deductions.
In this case, the $20,000 we see on the SPLIT line is our Incoming Commission Amount, which is always affected by any pre-split deductions.
However, the Sliding Scale Base here will be the total amount agent has (it includes shared income), which is 25,000$.
As we mentioned in the beginning, our proration operates with two amounts: $20,000 of Incoming Commission Amount and $25,000 of Sliding Scale Base. Proration will be based on the $25,000 Sliding Scale Base amount in order to split up the $20,000 of Incoming Commission Amount.
Understanding the calculation
At a glance, the whole calculation logic boils down to the following formula: Incoming Commission Amount * Percentage of SSB = Percentage Amount, which is then multiplied by the Tier Rate percentage. Let's see how it works in practice.
Let's assume we have the following tiers set up:
The Sliding Scale Basis (SSB) is being applied to each tier, one by one, which looks as follows:
Tier Amount | 0 - $5,000 | $5,000 - $10,000 | $10,000 - $15,000 | $15,000 + |
Tier Rate | 70% | 80% | 90% | 95% |
SSB $25,000 | $5,000 | $5,000 | $5,000 | $10,000 |
Note that in this case, we do not have any historical data and start from the first tier. If we have, for example, $5000 of previously earned gross commission, we would skip the first tier and start from the $5,000-$10,000 one.
Now, proration needs to get the Percentage for each tier's portion in relation to the Incoming Commission Amount of $20,000.
Tier Amount | 0 - $5,000 | $5,000 - $10,000 | $10,000 - $15,000 | $15,000 + |
Tier Rate | 70% | 80% | 90% | 95% |
SSB $25,000 | $5,000 | $5,000 | $5,000 | $10,000 |
Percentage of SSB | 20% | 20% | 20% | 40% |
Now, it multiplies the Incoming Commission Amount ($20,000) by the Percentage of SSB to get the Percentage Amount (or the Incoming Commission Amount to be used in each tier):
Incoming Commission Amount (ICA) | $20,000 | $20,000 | $20,000 | $20,000 |
Percentage of SSB | 20% | 20% | 20% | 40% |
Percentage Amount | $4,000 | $4,000 | $4,000 | $8,000 |
Then, it applies the corresponding Tier Rate (the split percentage from tiers) to the corresponding Percentage Amount to get the Final Amount per tier:
Percentage Amount | $4,000 | $4,000 | $4,000 | $8,000 |
Tier Rate | 70% | 80% | 90% | 95% |
Final Amount per tier | $2,800 | $3,200 | $3,600 | $7,600 |
In the end, the agent's commission is the sum of the Final Amounts for each tier: $2,800 + $3,200 + $3,600 + $7,600 = $17,200 out of the total of $20,000 Incoming Commission Amount. The brokerage would receive $2,800.
Example: Sales Volume Sliding Scale Base
Proration with a Sliding Scale Base of Sales Volume follows the same logic, except in replacing the Gross Commission amount from the transaction with the Sales Volume amount from the transaction.
Example: Transaction Points Sliding Scale Base
Understanding the operating numbers
Transaction point is the historical amount of closed transactions the agent participated in, measured in numerical values.
With proration enabled, we include the current transaction when determining the agent’s tier. If the agent represents both sides, then 2 points are counted. If the two points cross over a tier, then half is calculated in one tier, and the other half is calculated in the next tier.
Understanding the calculation
Let's assume we have the following tier setup with the $10,000 of Incoming Commission Amount:
If the agent has no historical data of closed transactions, they will land on the first tier, regardless if they represent one or both sides.
If the agent has one historical point and represents both sides of the current transaction, then they'll have $10,000 / 2 transaction points, which will result in $5,000 of Incoming Commission Amount per transaction point.
Tier Amount | 0-2 | 3-5 | 6 and more |
Tier Percentage | 80% | 90% | 100% |
Percentage Amount | $4,000 | $4,500 | $0 |
Final Amount per tier | $4,000 | $4,500 | $0 |
In the end, the agent's commission is the sum of the Final Amounts for each tier: $4,000 + 4,500 = $8,500 out of the total of $10,000 Incoming Commission Amount. The brokerage would receive $1,500.
Proration logic for agents with the commission on both sides
For a smooth and efficient record-keeping experience, we recommend handling listing and buying as individual transactions. As per the calculation logic, the Listing side always comes first. Then, the Buying side calculation considers the Listing side as a previous transaction along with other previous transactions closed within a selected period of time.
Let's say you're an agent involved in both the listing and buying sides of a transaction, and both sides have proration enabled. Here's how it works:
First, the proration algorithm calculates the listing side amount as it stands – for instance, $5,000.
Then, when it's time to calculate the buying side, the system takes the previously calculated listing side amount (the $5,000) and uses it as historical data in its calculation.