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Commission

The compensation paid to an employee after completing a task such as selling a certain number of products or services

What is Commission?

Commission refers to the compensation paid to an employee after completing a task, which is, often, selling a certain number of products or services.

 

Commission

 

Selling products or services is challenging. Professionals who are into sales and marketing deal with tough competition. Employers offer a commission to motivate their employees and make them more productive and generate more sales and attract customers.

Sales and marketing jobs in many industries, such as automobiles and real estate, generally offer commission-based compensation. It can be part of the salary of an employee or a separate form of income that is paid on a different schedule. It is calculated based on a percentage of total sales. That means the more products or services an employee can sell, the higher the amount they receive.

 

How Do Commissions Work

Companies vary in the way they set and pay commissions. One way is the flat commission wherein the employee gets a rate or percentage on any sale that he or she makes. The other way is ramped commission wherein the percentage increases when the employee generates more sales or reaches higher targets.

When accepting a job with commission-based pay, make sure to understand the process involved in calculating the amount. Keep in mind that several factors may affect your income, so take time to fully understand your employment contract.

 

Advantages of Commission-based Pay

 

1. Encourages employees to work harder

Highly talented professionals in sales and marketing get more out of commission-based pay since their income relies on how hard they work. The more sales they make, the more generous their compensation will be compared to their less motivated counterparts.

 

2. Helps manage payroll expenses

As for employers, compensating employees based on commission enables them to manage their payroll expenses. Since the amount they give their employees depends on the sales or income they generate, employers can keep costs down, particularly for employees who do not perform well. It’s also a great way to develop a workforce that is proactive and motivated.

 

Disadvantages of Commission-based Pay

 

1. Becomes too focused on earning commission

Highly motivated salespeople can earn a lot of money, but in some cases, they can become too focused on the commission. They will fail to fully explain their products or services to potential customers. Instead of generating a sale, they can discourage people from buying their offerings. The same goes for overly aggressive sales methods wherein new customers may be turned off by too much hard selling and other high-pressure tactics.

 

2. Affects team dynamics

Commission-based pay can also affect the dynamics of a team. Working with colleagues who earn way more than you do can trigger negative emotions such as envy and resentment.

 

Blended Approach

Many companies offer a blended compensation package to strike a balance between salary and commission. In such an approach, employees receive a base salary for job security and as part of initiatives to promote loyalty. It is also essential if the salespeople take care of other responsibilities aside from selling.

Employees also receive commission-based compensation on top of the base salary to motivate them to sell more products or services.

 

Related Readings

CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:

  • Annual Income
  • Gross Pay
  • Labor Force KPIs
  • Success Fee

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