How Does Sales Commission Work?
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With a sales commission structure, a business compensates its sales representatives based on the revenue they generate for the company rather than paying a straight salary. The more a representative sells, the higher his earning potential. Some commission work structures are based on individual performance, while others are team-based. Companies also may offer combination pay packages that include salary plus commission. The commission definition and terms vary depending on the individual business. Examples of commission-based jobs include real estate, auto sales and art commissions.
Straight Commission Work
A straight commission, or commission-only structure, means the sales representative gets no base salary or hourly rate of pay. His entire compensation is based on what he earns selling his company’s products or services. This structure benefits a company because it doesn’t have to pay its workers anything unless they generate business. It can also be beneficial to aggressive sales reps who make a lot of sales, because in many instances, there are no caps on what a commission-only salesperson can earn. On the other hand, it can be challenging for workers to have a fluctuating paycheck with no guarantee of when they’ll earn their income. The real estate and auto industries typically work on a straight commission basis.
In a salary-plus-commission work structure, sales representatives earn a steady but usually small paycheck, regardless of how much money they generate, but still earn much of their income based on the sales they make. This approach is often taken in the retail industry. For example, a clothing boutique may hire sales staff to help customers, run the cash register and straighten racks, and pay them an hourly rate for their services. If they sell a certain volume of clothing, they earn extra -- usually a percentage of total sales. When a company pays both salary and commission, the commission percentage rate is typically lower than what it would be if the employee was commission-only.
Bonus Commission Structures
Some companies pay their staffers salaries and provide an opportunity to earn cash bonuses based on the company meeting pre-established earning quotas. This is often seen in business organizations that sell contractual services, such as memberships, consulting or other professional services. Many bonus structures are set up to reward team performance rather than individual performance. For example, an entire department or division may have a collective earning goal that everyone must meet for a bonus to be paid. In some instances, bonuses are given or withheld company-wide based on how the entire organization performs financially in a given time period.
Variable Sales Commissions
Businesses may reserve the right to pay different commission rates for different types of revenue generation. For example, a company trying to break into expanding markets may reward sales reps who sell in a new territory more than those selling to established customers. Likewise, commission rates may be higher for big-ticket items or long-term contracts than for single purchases. Profit margins can also factor in -- commissions are typically lower on small margin items than on those that bring the company a greater profit.
Pros and Cons of Commission Work
Many salespeople appreciate the flexibility that comes with commission-based jobs. For many high ticket items, the commission can equal more than a salary and work out better in the long run. Moreover, Loyalty is rewarded in sales as sales people develop and nurture relationships over time. Many successful sales people bring their customers with them when starting a new job or opportunity, so they don't have to start from scratch. Commissions can motivate sales people to work harder and hustle to make sales, leading to more sales and higher pay.
While businesses may save money using a commissioned sales force, they can also experience high turnover if sales reps can’t earn enough in commission to support themselves. Additionally, a commissioned sales staff may potentially be more assertive with customers than employees earning a steady paycheck. This can translate to disgruntled would-be buyers that don’t like a high-pressure sales pitch, or to deals that sacrifice long-term business relationships in order to meet short-term bonus targets. As salaries can fluctuate, sales people can't always depend on a specific salary during a given pay period.
- Wagepoint: How Commission Works and How to Choose the Right Payroll Structure
- Monster.com: Sales Commissions: Find the Plan That Works for You
- Startup Nation: The Pros & Cons of Sales Commission
- Flexjobs: The Pros & Cons of Commission-Only Jobs
- Commission (remuneration) - Wikipedia
- How to Really Motivate Salespeople
Lisa McQuerrey has been a business writer since 1987. In 1994, she launched a full-service marketing and communications firm. McQuerrey's work has garnered awards from the U.S. Small Business Administration, the International Association of Business Communicators and the Associated Press. She is also the author of several nonfiction trade publications, and, in 2012, had her first young-adult novel published by Glass Page Books.
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