What’s it: Commission-based pay is money paid to employees based on the value involved, expressed as a percentage. How to pay commissions can vary between jobs and companies. For example, companies pay commissions to salespeople based on their sales value. Meanwhile, stockbrokers may charge a commission each time a client makes a transaction. And, for this article, let’s focus on commissions for salespeople.
This compensation system aims to encourage sales staff to sell as many products as possible. When staff can sell more products, they get paid more. On the other hand, if they sell less, they make less money.
How does commission-based pay work?
The company encourages sales staff to increase sales by incentivizing commissions. If they are successful, they earn more money, and the company books more revenue.
How to pay sales staff can vary between companies. For example, some companies pay commissions in addition to existing salaries or wages. Others may only pay commissions. Here are the variations:
- Salary plus commission. Employees receive a commission in addition to salary. They like this compensation system because their income is more secure. If they don’t generate sales, they still earn a basic income from a salary.
- Direct commission. Employees only receive a commission as their income. So, when they don’t sell products, they don’t earn any income at all. In other words, employees control how much they earn.
- Variable commission. Companies offer different commissions according to certain criteria. For example, your company pays higher commissions when your employees sell to key customers. Say, the key customers are those who buy in large quantities. So, when you can sell to them, your company can reach the revenue target faster. That’s the reason why you give a higher commission.
The commission is calculated based on the value sold. Suppose your company sells a product for $10. You offer a 3% commission for each product sold to drive sales. If an employee sells 100 products in a month, he receive $30 (= 3% x $10 x 100 products) as commission.
Say the employee earns a base salary of $400 a month. Thus, he received a total payment of $430. Then, if in the following month he sells 200 units, he gets double the commission ($60).
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