Different Types of Commission Pay
Some types of jobs, particularly those in sales and marketing, offer commission pay, either as the employee’s sole earnings or in addition to a base salary. What is commission, and how is it paid?
Commission is a sum of money that is paid to an employee upon completion of a task, usually the task of selling a certain amount of goods or services. It can be paid as a percentage of the sale or as a flat dollar amount based on sales volume.
Employers often use sales commissions as an incentive to increase worker productivity. When a commission is paid in addition to a salary, it may be included in the employee's paycheck or paid on a separate schedule, usually bi-monthly or monthly.
Types of Commission Pay
The basic kinds of commission paid to employees include the following:
Base Salary Plus Commission
Preferred by many employees, this guarantees the employee a base salary, plus a percentage of the sales that they make during a given period. The advantage for the employee is that they can rely on their base salary during leaner sales periods. There is always fluctuation in sales during the course of the year, regardless of the product or service.
The employer has the advantage of being able to set the base salary somewhat lower, given that the employee has the ability to earn more based on their performance and ability to sell. In this type of structure, the percentage of the sales earned by commission will tend to be somewhat lower than that earned by employees working strictly on commission.
This means that the employee earns their entire salary based on a percentage of the sales they complete. This can be a very lucrative arrangement for highly talented and motivated salespeople. The percentage they earn on each sale tends to be higher than if they are receiving a base salary, and in some cases this percentage will increase after they achieve a pre-determined goal.
Draw against Commission
Some employees working on straight commission are able to draw against their commission, which means that at the beginning of a pay period, they are allotted a certain amount of money, called a pre-determined draw. Of course, they need to pay back the employer at the end of the pay period. In this situation, anything earned above the draw is the salary. This carries some risk to the employee, because if they don’t have a successful period, they can end up owing the employer money.
Sometimes commissioned salespeople can earn a residual commission on their clients' goods and services for as long as the client continues to purchase from the company. This is common in insurance companies, where the salesperson continues to receive a percentage of their clients' payments for as long as the client stays with the company. In the best case scenario, the salesperson might continue to receive a residual commission even after they move to another company.
Not all commission structures are based on individual performance. Some employers decide to encourage teamwork by setting group goals and then dividing commissions equally among team members when quotas are reached.
How Much Commission Can You Earn?
The commission earned is often variable, regardless of whether the employee is paid a base salary or purely commission. The rate or percentage of compensation may depend on the type of product or service sold. It may increase incrementally after the employee reaches certain sales goals, either by a dollar or unit amount.
When you are offered a job with commission pay, make sure that you understand fully all the variables that will affect your take-home income.
One strategy is to inquire about the range of commission-based earning for various levels of performance from current employees in similar jobs. For example, you can ask questions like:
- “How much do the highest 10% earn?"
- "How much does a mid-level performer earn?"
- "What is the average commission within the group I will be entering?"
- "What is the average commission earned during the first year in this role?”
Take the opportunity to speak with potential sales colleagues and ask if they believe that goals and quotas for earning commission are realistic and what the challenges are for earning solid commission income.
Benefits of Commission-Based Compensation
Working for commission pay has many advantages for highly motivated and talented salespeople. However, remember that developing a clientele takes time. When you begin a new position, you will likely need a few months to really start earning your true potential. Make sure you have enough savings to be comfortable while making new contacts.
Even though many positions pay a base salary, the value of working for commission is that you are in control of what you earn. Highly motivated salespeople will earn generous commissions, while their less ambitious counterparts will not. There are also some jobs that are more lucrative than others.
Tips for Working in a Commission-Based Job
Successfully working in a commission position takes a unique set of abilities. If you are driven to succeed, continually push to achieve more, enjoy helping people, and have a thirst for knowledge and excellent communication skills, you have a solid foundation to build the sales skills necessary for success as a commission employee.
It's important to be willing to put in whatever time it takes to learn about your product and your customers in order to deliver the level of service required to excel in commission sales.
The financial rewards can be great, but the most successful people working on commission are those who truly love their product or service and are committed to sharing it with everyone they meet.
U.S. Department of Labor. "Commissions." Accessed Jan. 13, 2020