Many employees work on a commission basis, and that is how they get their pay. This commission pay can come in various forms, depending on the agreement with the employer. Learning the various types of commission payments and how they work will help you determine whether it is the right fit for you, and we hope to help you achieve that in this chapter. In addition, you’ll learn the difference between commission pay and overtime pay. Read on.
What Is Commission Pay?
Commission pay is a payment made by an employee in exchange for a sale. Some employees earn commission to pay on top of their base salary, while others work solely on commission. When an employee receives a commission, they receive a percentage of the sale as income. For example, if an employee sells a couch for $500 and receives a 10% commission on all sales, they will earn $50 on that transaction.
A business uses many variables to determine an employee’s commission, such as how often they sell, how much they sell, and how well they perform. These factors ensure employees receive pay based on performance factors, driving them to sell more products or services.
Employees benefit from commission-based pay because they ultimately control how much they make from work. When a corporation uses commission pay, it does not limit the employee’s ability to boost their own income in numerous ways.
Typical commission-based jobs include:
- Sales
- Recruiting
- Finance
- Property investment
How Does Commission Pay Work?
Commission pay differs depending on the type of commission and the work agreement. Salespeople, for example, typically get commissions based on the number of sales they make. Recruiters are paid a commission based on the salary of the employees they place. Stockbrokers earn commissions on each customer transaction.
The commission is typically paid monthly, quarterly, or annually. A company may want to wait until the sales contract is signed and finalized before paying out the commission. In the recruiting industry, the employee who was placed by the recruiter may be required to stay with the company for a particular number of months before the recruiter collects compensation.
Different Types Of Commission Pay
There are various kinds of commission payments. Consider the following frequent types of commission pay and their implications for the employee:
#1. Salary plus commission
Salary plus commission pay means that the employee receives a commission on top of their base salary at work. Employees prefer this sort of pay since there is a guaranteed salary regardless of sales volume. In merchandise sales, salary plus commission is typical since the corporation offers a base income for all of its employees. The commission is whatever the sales associate earns in addition to their salary.
#2. Straight commission
A straight commission is when an employee’s only source of revenue is a commission. The straight commission is calculated by the company based on how much the employee sells. When an employee is paid on a pure commission, they have complete control over their earnings, which can be large if there is no wage cap.
However, a corporation may face a slow period at certain times of the year, which immediately affects an employee on pure commission. As a result, firms advise employees to budget their commission payments in order to plan for future expenditures. The straight commission is fairly popular in real estate, where agents are paid based on the number of houses they sell.
#3. Draw against commission
When a corporation offers a draw against commission pay, it gives the employee a set sum of money at the start of their employment. This sum is referred to as the “draw.” If the employee sells more than this amount, it becomes their income; everything else is commission. If they do not sell enough, they must return the entire amount to the employer.
Draw against commission may appear dangerous because there is no guarantee that the employee will earn the same amount of money in sales as stated at the outset. However, many employees use the commission draw as a goal and drive to sell.
#4. Residual commission
Any compensation earned by an employee after the client makes their initial purchase is referred to as a residual commission. Residual commission money is particularly widespread in the real estate and insurance industries. Even if an employee leaves the company where they earned the residual commission, they will continue to get it if the client stays with the company.
Employees benefit from residual commission pay because they continue to earn money after their initial interactions with customers. This form of commission money is very useful when there is no consistent source of income. The employee earns a residual commission from a client’s ongoing payments toward their insurance or home.
#5. Graduated commission
When a corporation implements graduated commission pay, the commission is distributed based on the number of sales. These several categories determine the company’s commission levels. The level of an employee is determined by the amount of commission they receive.
When an employee receives a graduated commission, they can gradually improve their commission by increasing their performance. As a result, they advance one level. Employers who use a tiered commission openly recognize high-performing staff.
#6. Bonus Commission
A corporation offers incentive commissions to employees who meet sales targets. Bonus commissions are not guaranteed, and businesses are not compelled to make them on a constant basis. They act as an additional inducement for personnel to continue selling even after they have met their commission goals.
#7. Variable Commission
A variable commission fluctuates based on parameters determined by the company. This form of commission pay is prevalent when a company wishes to acquire specific clients or meet a specified sales goal. As a result, the employee’s commission changes based on who they sell to and how much they sell.
When a corporation uses variable commission, the employee is more aware of how certain sales may affect their compensation. As a result, they can properly prioritize sales based on which ones provide the highest commission.
Commission Pay and Overtime Pay
Sometimes, commission pay can come in as overtime pay. However, some corporations structure overtime pay differently from commission pay. What, then, is overtime pay?
Overtime pay is commission received outside of regular working hours or during hours that differ from the standard shift.
Read Also: WHAT IS HOLIDAY PAY?: Who’s Entitled to its Benefits
The Basic Conditions of Employment Act limits overtime to 10 hours per week. Employees earning less than the threshold must be paid 1.5 times their regular wage rate for overtime worked, with the exception of Sundays, which must be paid at twice the regular rate. You could also give compensated time off for overtime performed.
Overtime pay rules and amounts must be specified in your employees’ contracts, along with the specifics of their salary or wage earnings.
In addition to other remuneration, overtime compensation should be properly regulated and calculated. Overtime compensation should be paid at the same time as regular employee salary and wages.
The commission pay for overtime. as well as the number of overtime hours worked, must be clearly recorded on the employee payslip for easy identification.
How Much Can You Expect To Earn As Commission Pay?
Whether the person is paid a base wage or completely on commission, the commission earned is frequently fluctuating. The rate or percentage of pay may vary depending on the product or service sold. It may increase incrementally once the employee meets particular sales targets, either in terms of dollars or units.
When you are offered a position with commission pay, make certain that you completely grasp all of the factors that may affect your take-home earnings.
One technique is to ask current employees in similar occupations about the range of commission-based earnings for varying levels of performance. You can, for example, ask questions like:
“How much do the top 10% earn?”
“What does a mid-level performer make?”
“What is the average commission in the group I intend to join?”
“How much commission do you expect to make in your first year in this position?”
Take the chance to chat with potential sales colleagues and ask if they believe that commission objectives and targets are reasonable and what the hurdles are to earning a consistent commission income.
The Advantages of Commission-Based Pay
Working for a commission offers numerous benefits to highly motivated and talented salespeople. However, keep in mind that building a customer takes time. When you start a new job, it will probably take a few months before you start earning your true potential. Make sure you have enough money to live comfortably while meeting new people.
Although many occupations give a base income, the benefit of working for the commission is that you have control over how much you make.
Salespeople that are highly motivated will earn higher commissions than their less ambitious rivals. There are also certain jobs that pay more than others.
As a sales leader or recruiting manager, developing a commission pay program can help you achieve the following:
#1. Employee Efficiency
A well-planned commission pay plan can be extremely motivating for your sales staff.
It should ideally motivate your sales staff to operate at a level or speed that is tough for them for most of the month/year — but not so demanding that they believe they will never accomplish their targets.
Benchmarks and sales targets should be ambitious and improve the company’s bottom line, but they should also be reachable for your reps who work hard to fulfill them.
#2. Reduced Turnover and Increased Competitiveness
It’s no coincidence that organizations with excellent remuneration structures have the highest retention rates.
In reality, most sales professionals who leave their organization for reasons other than “personal reasons” report that remuneration was a factor in their decision.
Companies that pay in the 75th percentile have a 50% lower turnover rate. Lower turnover means the following for sales management:
- Productivity has increased.
- Less money is spent on recruiting and training new salespeople.
- The ability to set specific sales goals that will lead to more long-term, predictable, and sustainable growth.
The best sales commission structure for your company will be tailored to your specific needs and objectives, but having one that is both lucrative and challenging is a great way to motivate and retain an elite sales force.
#3. Streamline Your KPI Monitoring Process
A well-defined commission model will help you to break down the sales process and determine which sales representatives are top performers and which representatives may require additional training.
Looking at total sales alone provides a misleading impression of how a sales professional is performing. Examine how many variables influence a sales representative’s success (and even this is a relatively basic breakdown).
A clear sales commission structure will allow you to logically break down and evaluate the various performance criteria of your team members.
What is a disadvantage of commission?
Commission-only compensation, in particular, is problematic because it provides workers with less stable earnings. As a worst-case scenario, it could spark aggressive actions that bring legal trouble to your business. This was the case for private providers of vocational education who relied on commissions to attract new students.
Is commission better than hourly?
When an employee’s success is directly proportional to the company’s bottom line, commission-based compensation makes perfect sense. Commissions are useful because they incentivize employees to perform above and beyond the call of duty because their pay is dependent on their success.
What is a good commission rate?
The average sales commission paid by companies is between 20 and 30 percent, but it can go as high as 50 percent. Start by calculating how much it would cost to hire full-time employees and independent contractors under different sales commission structures to find the right fit that aligns with your goals.
Do you pay tax on commission?
Yes. You are required to make tax payments on any bonuses or commissions that you receive from your employer. Most times, the reverse is the case.
Will I get my commission if I quit?
Your employer is obligated to pay any and all accumulated commissions upon the termination of your employment for any reason (including resignation, layoff, or termination). Upon termination or layoff, your employer is obligated to pay any commissions owed to you as soon as possible.
What happens if a company doesn’t pay commission?
Depending on where you live, you may want to consider filing a claim if your employer is refusing or unable to pay you the commissions that you are owed. It’s possible, too, that you can sue your employer to get the back pay you’re owed.
How do I protect my commission?
Unless you’re working for a family member or close friend, you should sign a commission agreement. Having a legally binding contract in place is a prerequisite for any serious business transaction. It’s the paper that keeps the commission fee safe. The standard commission for an agent is a set percentage of the total sale price.
In Conclusion,
Introducing commission-pay programs has a plethora of benefits. It not only increases productivity, but it also gives employees a sense of achievement, having earned what they worked for. From the various types of commission pay we have listed above, you can determine which one is right for you.
Commission Pay FAQs
What is an example of commission pay?
If an employee brings in $50,000 in business in a month and their commission rate is 2%, they will receive $1000 in addition to their income, minus all relevant taxes.
How often is commission paid?
The commission is typically paid monthly, quarterly, or annually. A company may prefer to wait until the sales contract is signed and finished before paying out the commission.
Is commission better than salary?
The advantage of commission pay over salary is that you control how much you make. However, some salary-based jobs pay more than commissions.
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