Author: Alex Thompson

What Is Commission Pay and How Does It Work

As an employee, it may be challenging to project your annual income because of varying commission. Take your learning and productivity to the next level with our Premium Templates. Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling and more. Start with a free account to explore 20+ always-free courses and hundreds of finance templates and cheat sheets.

And in real estate you can get a cut of the money you make selling a property. In fact, in some roles commission makes up almost all of your compensation, meaning your income is variable and highly dependent on your output. 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. That means the more products or services an employee can sell, the higher the amount they receive. When you think of commission, your mind immediately goes to a sales-type role (think of a retail salesperson trying to get you to buy that extra pair of jeans).

Choosing between two jobs to find a satisfying career

As a business, variable commission permits you to tie the bulk of your compensation plan to revenue rather than incur a fixed salary cost. As a business, you can incentivize workers to work proactively and stimulate healthy competition amongst your sales teams without employees fearing they won’t make sales — or get paid. Amber combines her yearly salary of $110,000 with a 20% commission off these hires, giving her an annual salary of $216,000.

This basically means that the person must get some percentage to goal in order to start earning any commission—the understanding being that a certain level of underperformance is unacceptable. Now that you understand what commission pay is, you’ll see why this pay structure isn’t for everyone. Some people like the security of a fixed income, while others love the thrill of the sales hunt. While it’s worth trying to negotiate your commission rate, you’ll have even better chances of success with your salary range.

Variable commission

Remember though, as a general rule it’s always smart to negotiate your base salary first. Because this is the part of your income that you can always count on year after year—and won’t fluctuate with performance—it’s worth trying to increase that number before arguing for a higher commission. Muse career coach Theresa Merrill explains that commission is harder to negotiate than other types of compensation—like a signing bonus—because it’s less discretionary and usually a set standard across the company. Commission can be a confusing topic for anyone, whether you’re great with money or not. Maybe you’re considering a job with a commission structure or are currently in a field where commission is a big chunk of your compensation. If you’re not sure how it all works in the business world, we’ll break down the concept so you come out a little wiser than you were before.

If nothing else, agree to revisit the commission structure after you’ve been working at the company for a while, she suggests, and get it in writing. But on the flip side, companies also have the right to protect themselves from employees who may try to rig the system to earn more commission. And if you’re interviewing for a sales position, showing off your negotiating skills is advantageous. For a business, turnover could be high as many employees will seek out more stable and consistent employment. Working with colleagues who earn way more than you do can trigger negative emotions such as envy and resentment.

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. Commission refers to the compensation paid to an employee after completing a task, which is, often, selling a certain number of products or services. As a business, you have to be careful about hiring good sales employees who will consistently generate enough income to make back your investment in them. Salary plus commission means you’re guaranteed a fixed salary and earn commission on top of that.

1. Additionally, you’re likely to receive the benefits that come with formal employment, like healthcare, a retirement fund, and the promise of a severance package.
2. As an account manager, you can earn commission on clients you upsell or renew for the year.
3. Higher revenue for the salesperson drives them to produce more.” If you can tie your commission plan back to your ability to overperform and produce, you’re more likely to convince the hiring manager to be more flexible.
4. You may feel more comfortable making many small sales or going after a few big commission payments.
5. Salary plus commission means you’re guaranteed a fixed salary and earn commission on top of that.

If you sell a deal where the customer signs on for two years or a special kind of product, for instance, you may earn extra commission for that. Although money isn’t the only relevant factor when choosing a job, your annual salary will enormously impact your present and future financial well-being. If you’re considering a commission-based salary, weigh the pros and cons, the types of work environments you enjoy most, and whether the high of a big sale will match the low of a difficult month. Straight commission offers more flexibility in your schedule and you get to decide where you want to direct your energy. You may feel more comfortable making many small sales or going after a few big commission payments.

If you’re concerned about a company’s commission structure, make sure in your interviews and when networking to ask thoughtful questions—such as “What is the commission structure like for this role? ” (and read this article outlining all you need to know about receiving fair bonuses, too). Generally speaking, if you don’t have anything in writing, there’s no guarantee you’ll get your commission. You can check out this section of the Workplace Fairness website on what to do if your employer won’t pay you your earned 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.

The pros and cons of commission-based pay

Some states consider “earned” commission mandatory wages and thus require employers to pay up even after the person has left the role, but because your company decides what constitutes commission “earned,” things can get a bit murky. The company has a sales goal of $1 million per salesperson, with a 5% commission on annual salary for every $100,000 sold. Caitlin’s yearly salary is $50,000, meaning for each $100,000 she sells, she makes a $2,500 sales commission. 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.

What Kinds of Jobs Work Under a Commission Structure?

While many industries set standard commission rates or have policies binding all employees and contractors, presenting a commission structure that benefits both parties is a great way to find a rate that works for you. As an employee, you may feel extra pressure to hit sales quotas because your employer guarantees you salary and benefits. For example, a recruiter might only earn a commission after a recruit has stayed in a job role for 90 days.

Disadvantages of Commission-based Pay

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. 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.

Even if you don’t sell anything, you still receive your salary — making your commission more like a bonus. A commission-only pay structure means you can’t depend on the security of more traditional compensation structures, like hourly wages, firm salaries, and overtime pay. The hotel’s pay structure varies depending on what Patrick rents out. He gets a flat $500 fee for renting the banquet hall or conference room and a 15% commission for every hotel room he rents.

If you’re just entering the job market or transitioning into a new career, you’ve probably come across commission-based positions during the job hunt. When considering commission-based work, take the time to ensure this payment structure works best for your financial needs. Analyzing employee compensation and benefits is essential before accepting a position. Compensation plays a crucial role in career satisfaction and well-being outside work, influencing your motivation and job performance. The straight line shows what it would look like if you were to make your percentage to goal equal to the percentage of your commission—otherwise known as a standard commission rate. For example, a company may define commission “earned” for a salesperson as when the new client signs a contract.