How does commission pay work

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.

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. The basic kinds of commission paid to employees include the following:. 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.

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. 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.

Employers need to calculate a gross commission value for each employee depending on the different employment commission structures. In this post, we will outline 7 different ways you can include commission in your pay structure. Bonus commissions are an opportunity to reward employees for their success. Bonus commissions can be awarded to individuals, teams or even company-wide for extraordinary performances.

This type of sales commission structure is common within startup organizations that want to reward high achievers and keep up office morale. Remember that any bonuses paid to an employee, even as a cash gift, are considered taxable and should be included within their total yearly earnings.

Straight commission can also be referred to as commission-only because it is the only pay an employee receives. There is no base salary or hourly wage included in this pay structure. All compensation is based on an agreed-upon percentage of sales. Companies can benefit from a straight commission setup because they do not have to pay for anything unless an employee is generating business.

A salary with commission is the most common type of commission structure. In this case, an employee has a fixed salary base, but they also receive commissions for their sales or performance. This structure has the luxury of stability while also encouraging employee performance. With this setup, any simple or easy to acquire sales can be rewarded differently than tough sales to encourage growth in specific markets.

It can also be used to reward the sale of long-term contracts or highly desirable customers. This type of commission is most common for businesses trying to break into new markets because the setup encourages and rewards specific types of sales. A graduated commission focuses on performance. A company can set up various tiers, and an employee will be paid the commission amount for the achieved level of sales.

The actual commission percentage will increase incrementally at a predetermined rate as an employee reaches higher levels of sales. This type of commission is most common for businesses that want to incentivize sales volume. A residual commission structure is for ongoing accounts. With this setup, an employee will continue to receive commission on a sale as long as it continues to generate revenue. Employees can benefit from this type of commission because, after a time, they will begin to build a steady commission income from their residual sales.

Sales jobs that are commonly paid with a commission-based salary include real estate, computing and technology systems, and automobiles.

Many sales jobs pay on a commission basis. This is because sales personnel contribute directly to company revenue. The more sales made, the more money the company makes. The concept behind paying on a commission basis is that sales representatives will work harder to make sales if their income depends on it. Paying based on commission is also a way for companies to keep payroll costs down, since the amount paid to sales representatives is directly related to the amount of revenue generated.

This also means that companies are not spending a lot of money paying for salespeople who are ineffective. Class A Report for example. True-blue sales professionals tend to embrace full commissions, as the payment percentages are higher, since they're not getting a base salary.

Some commission-based sales professionals may opt for a draw against commission payment model. In this scenario, the employee is allowed to "draw down" their pay at the start of a pre-agreed payment period. In doing so, they're borrowing against future commissions earned, and must pay the money back. Having a commission draw model enables an employee to "dip in the till" as needed, especially if the household budget is tight and cash is needed immediately.

Residual payments to an employee are a novel concept, as they reward a sales employee for selling a product or service to a customer who continues to buy from the employer over a period of time.

The longer they remain a cash-generated client, the longer a sales employee can earn a residual payment based on sales to that client. This commission payment model is popular in the financial sector, especially in insurance sales, where residuals are paid out over a long period of time as long as the customer stays with the company, and their insurance policy remains active.

A commission-based employee payment model, no matter how it's broken down, can be considered a "win-win" for both the employer and the employee. The company only pays for production and the employee is highly-compensated for being a great seller for the company. That arrangement historically works for both sides of the deal, and that's why commission-based sales models are still highly in vogue today.

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