Commission pay is a type of compensation system in which an employee is paid a percentage or a fixed amount of money based on the sales they generate (or the number of products or services they sell).
The commission is typically a percentage of the total sales made or a fixed amount per sale. Commission pay serves as an incentive for employees to work harder and generate more sales.
The US Department of Labor describes commission pay as a sum of money paid to an employee for completing a task, which usually involves selling a certain amount of goods or services.
The commission pay model often rewards employees for hard work, drives sales growth, and improves the company’s bottom line. It can also be an attractive option for employees looking for unlimited earning potential based on their performance.
Who receives commission pay?
Commission pay is typically received by employees who work in sales-related roles or generate revenue for the company.
Some commission-based jobs include the following:
- Salespeople in various sales positions, including retail sales associates, sales representatives, and sales managers
- Real estate agents receive commissions based on the value of the property they sell
- Insurance agents earn commissions based on the policies they sell to their clients
- Financial advisors may receive a commission based on the investment products they sell
- Freelancers or independent contractors may receive a commission for their work, especially in marketing and advertising
Types of commission pay
Employers can use different types of commission structures and compensation plans to incentivize and reward their employees, such as the following.
Straight commission is a pay model where an employee’s compensation is based solely on their sales performance. Employees are not paid a fixed salary or hourly wage, and their earnings depend on the sales they generate.
Commission-only can be a highly motivating and rewarding pay structure for employees who are confident in their sales abilities and willing to work to achieve their goals. However, it can also be a high-risk model, as employees may experience fluctuations in their income based on factors such as market conditions, competition, and customer demand.
Straight commission is common in industries such as real estate, where agents are only compensated for commissions earned from property sales and/or purchases, depending on their local regulations.
Salary plus commission
Salary plus commission provides employees with a more stable income while incentivizing them to generate sales and contribute to the company’s bottom line. The salary portion of the compensation package offers a base level of financial security for the employee, while the commission payments can offer unlimited earning potential based on their sales performance.
Salary plus commission is a popular model in industries such as sales, where workers may receive a base salary and a commission based on the value and volume of deals they close. This pay structure can be attractive for employees looking to balance financial stability and earning potential.
With variable commission, the commission rate changes based on the level of sales generated. For example, an employee may earn a higher commission rate if they exceed a certain sales goal or generate sales above a certain threshold. The method encourages employees to push themselves and exceed their targets, as they can earn a higher commission for their performance.
Variable commission pay can also be an effective way for companies to manage their costs, as they can adjust the commission rate based on their business needs and budget.
Benefits of commission pay for employees
Commission-based pay offers several benefits for employees:
- Unlimited earning potential motivates employees to succeed
- Performance-based pay rewards employees for their hard work and success, providing a greater sense of accomplishment and job satisfaction
- Control over earnings with the opportunity to take ownership of their work
- Typically more flexibility in terms of work schedule and location
- Development of sales skills which is valuable for future career opportunities and personal growth
Benefits of commission pay for employers
Commission pay also offers benefits for employers:
- Increases revenue and company growth by incentivizing employees to work harder and generate more sales
- Cost-effectively compensates employees, as it ties compensation directly to performance
- Entices and retains top talent by offering an attractive commission plan
- Motivates employees to work together to achieve sales goals
- Offers a scalable pay model with an adjustable commission rate based on business needs and market conditions
Disadvantages of commission pay
Commission pay can be highly effective in sales-related roles, but it also comes with potential downsides that employees and employers should be aware of.
- Income fluctuations can be challenging for employees who want to maintain a consistent income
- Can generate unhealthy competition among employees who prioritize individual sales performance rather than working collaboratively as a sales team
- Pressure to generate sales and achieve targets can lead to burnout and job dissatisfaction
- Market conditions and external factors can lead to revenue volatility
- Complex administrative tasks are required to ensure commission rates are accurate and paid on time
Commission pay best practices
Maximize the benefits and reduce the downsides of commission pay by implementing best practices.
Begin by drafting clear and transparent policies that outline the commission rate, calculation method, pay period, and other restrictions.
Ensure regular communication between employers and commission-based employees, particularly regarding their sales performance. Regular performance evaluations provide opportunities to assess employee sales performance and deliver feedback to help employees achieve their goals. Provide training and development opportunities to help employees improve their skills as well.
Insist on fair and equitable commission rates that can be easily measured while prioritizing customer satisfaction to build long-term client relationships.
Finally, encourage collaboration and teamwork—even when working on individual sales targets—to create a positive and supportive work environment.