Commission pay

What is commission pay?

Commission pay is a type of compensation where employees earn a percentage of the sales they generate (or the deals they close). This pay structure is commonly used in sales-oriented roles, where the commission serves as an incentive for employees to increase their sales performance and contribute to the company’s revenue growth.

Commission structures can be standalone or combined with a base salary, offering employees the potential to earn more based on their productivity.

Types of commission pay

Commission pay can be structured in several ways, such as:

Straight commission

Employees earn only commission, with no base salary. Their entire income depends on their sales performance.

Base salary plus commission

Employees receive a fixed base salary along with commission on sales. This popular structure provides financial stability to employees with the opportunity to earn additional income based on performance.

Graduated commission

The commission rate increases as the employee reaches higher sales targets. For example, they might earn 5% on the first $10,000 in sales, and 10% on sales above that amount.

Draw against commission

Employees receive a draw, or advance, against their expected commission earnings. If their sales exceed the draw, they receive the additional commission; if not, the draw may need to be repaid.

Residual commission

Employees earn ongoing commission on repeat sales or renewals. This is common in subscription-based or long-term service contracts.

Benefits of commission pay

For employers, commission pay incentivizes employees to increase their sales efforts, leading to higher revenue for the company.

Since commission pay is performance-based, employers also only pay for results, aligning labor costs with business performance.

A competitive commission structure can attract and help retain high-performing sales professionals, who are motivated by the opportunity to earn more based on their efforts.

It’s also a beneficial system for employees, who can directly influence their income by improving their sales skills and efforts.

Key considerations

If you’re considering implementing a commission pay structure, ensure you pay attention to the following:

• Clearly define your commission structure, including rates, targets, and payment schedules, to avoid confusion and disputes.

• Ensure the commission structure is fair and achievable, offering realistic targets that motivate rather than discourage employees.

• Adhere to all local labor laws regarding commission pay, including minimum wage requirements and overtime regulations.

• Maintain transparency in how commissions are calculated and paid, ensuring employees understand how their compensation is determined.