TECHNICAL GLOSSARY

Commission Pay: Definition, How It Works, and Examples

Commission compensation is a way of compensating employees on the basis of their performance on the job as measured by sales. Sales, real estate, and insurance companies commonly use commission pay as a way of incentivizing their employees to achieve or exceed their targets.

In contrast to a fixed salary, commission pay provides employees with compensation based on the results of their work, which links their compensation directly to the company's revenues and business goals.

How Commission Pay Works

Commission payments generally take several forms:

Commission Rate:

This is a percentage of the sale which is paid to the sales person for any given sale; for example, if the sale of a product was for $100 and the commission rate was 10% then the total commission that the sales person would earn would be $10.

Sales Targets:

Employers will often set sales targets that need to be met before employees will be able to earn their commissions. Examples of sales targets are:

• Total sales revenue
• Number of units sold
• A variety of other quantifiable performance measures.

Performance Measurement:

Performance is trackedusing electronic tracking systems, excel spreadsheets, or manual recording systems. Having accurate performance records will ensure that commissions are paid in a consistent manner and with equity.
Commission Calculation:
After both commission and performance data has been collected the employee’s commission will be calculated using the following formula:
Total Commission = Commission Rate x Sales Volume
Using this method of commission calculation will provide transparency and motivation for employees to reach their respective sales targets.

Who Pays the Commission?

As a rule, the employer pays the commission as part of the overall compensation package that is outlined in the employee's employment contract or commission plan. However, there may be some rare instances when a third party is involved at some point based on some kind of written agreement between two parties.

Commission vs. Base Salary

Employees who receive a base salary plus commission have some degree of job security while at the same time having the incentive to work hard and sell lots of products or services. Employees working in a commission only position have a greater potential for increased earnings but they will also have a greater chance of fluctuating earnings based upon their sales.

Government Pay Revision Commission (PRC)

In the case of public sector employees, the PRC typically makes recommendations regarding revisions to salary levels, allowances, and benefits for these employees. The PRC does not directly base its recommendations on sales, but rather looks to ensure equality and competitiveness of all governmental and public sector compensations for all employees in the government.

Overall Benefits of Having a Commission Structure for Employees:

• Motivate; therefore increasing sales/productivity
• Reward higher performers with more money
• Align incentives for employee's to achieve the revenue goals of the company