Commission (remuneration)

The payment of commission as remuneration for services rendered or products sold is a common
way to reward sales people. Payments often will be calculated on the basis of a percentage of the
goods sold. This is a way for firms to solve the principalagent problem, by attempting to realign
employees' interests with those of the firm.[1]
One of the most common means of attempting to align principal and agent interests is to design a
contract with incentives that track agent performance. The principalagent theory provides an
explanation for the dissimilarities across the marketing firms in the types of compensation plans
used by them, such as fixed salary, straight commission or a combination of both fixed salary and
straight commissions.[2]
Although many types of commission systems exist, a common form is known as on-target earnings,
where commission rates are based on the achievement of specific targets that have been agreed
upon between management and the salesperson. Commissions are intended to create a strong
incentive for employees to invest maximum effort into their work.
Note that often a firm embracing a commission structure may not involve employees, but may solely
establish themselves using independent contractors. An example of this in the USA could be a real
estate agent.
Reward in the form of commission alone with no pay or salary is in the USA known as straight
commission. Reward may also take the form of commission plus a fixed salary. Industries where
commission is commonly paid include car sales, property sales, insurance broking and many
other sales jobs.
In 2011, California Governor Jerry Brown signed into law AB 1396 amending the California Labor
Code requiring all employers who pay commissions to enter into written contracts with their
employees regarding how commissions will be earned, computed and paid. [3] The new law, effective
on 1 January 2013, further states that commission excludes "short-term productivity bonuses such
as those paid to retail clerks" as well as "bonus and profit-sharing plans, unless there has been an
offer by the employer to pay a fixed percentage of sales or profits as compensation for work to be
performed."[citation needed]

Definition: Commission is a sum of money that is paid to an employee upon completion

of a task, usually selling a certain amount of goods or services. Commission may be
paid as percentage of the sale or as a flat dollar amount based on sales volume.

Employers often use sales commissions as incentives to increase worker productivity. A

commission may be paid in addition to a salary or instead of a salary. When commission
is paid in addition to a salary, it may be included in the employee's paycheck or paid on
a separate schedule i.e. bi-monthly or monthly.

What Is a Sales Commission?

Employees with a job in sales make base salaryand often a sales commission for
meeting or exceeding particular sales targets. A sales commission is
additional compensation the employee receives for exceeding expectations.
Employers pay employees a sales commission to incentivize the employees to produce
more sales and to reward and recognize people who perform most productively. The
sales commission has proven to be an effective way to compensate sales people and to
promote more sales of the product or the service.
Employers must design an effective sales compensation plan that rewards the behaviors
that the organization needs to promote. For example, if your inside sales team works
with the same customers and any sales person can take a call or respond to a
customers request for a quote, you will not want to pay a sales commission based on
individual performance. You will instead want to share the sales incentive equally across
members of the sales team, to encourage teamwork.

Why Pay Sales People a Base Salary?

Employers generally pay sales people a base salary in addition to the sales
commission. The salary recognizes the fact that a sales employees time is not all spent
on direct selling. You have other aspects of the job that you need to pay the sales staff
to complete.
These tasks can include entering sales in a tracking system, entering customer contact
information into a shared company database, collecting names for call lists, and
reaching out to potential customers at industry events and trade shows

Base salary can also vary from company to company depending on how much support
and service the sales rep is expected to provide to the customer while the customer
learns how to use or integrate the product. While some companies have additional
personnel in technical support roles or in customer service, others expect this follow-up
and teaching to come from their sales force.

How a Sales Commission Works

Depending on the compensation scheme, a sales person may be paid sales
commission based on a percentage of the amount of the sale such as 3% of the total
sales price, a standard commission on any sale such as $500 per sale over x sales in a
week or month, or a team-based percentage of the total sales of the department for a
specific period of time.
In the percentage of sales commission plan, the sales commission can increase or
decrease as the volume of sales increases. This is important because you want to
encourage increasing sales. You dont want sales people to become comfortable
producing sales at a particular level when your goal is to grow your company.
Depending on your companys culture, and your expectations from employees,
employers may elect to pay a standard bonus to all employees of the company when
sales exceed a certain dollar amount. Employers can also pay bonus based on
percentage of sales increase.
This cultural model emphasizes that, while the sales person may have made the actual
sale, customer service, training, and tech support taught the customer to use the
product. Marketing brought the customer to the door. Engineering designed and made
the product, and so forth.
Employers may also choose to reward employees with quarterly profit sharing in which a
percentage of sales are distributed to employees to reward and recognize their efforts.
In a profit sharing system, the employer is communicating that profitability is every
employees responsibility. Whether the employee makes direct sales, controls costs, or
spends prudently, each employee is rewarded for contributing to the profits.

How to Pay Sales Commission

You should pay employees sales commissions in their normal paycheck after the sale is
made. Another model pays the employees monthly. It is unfair to ask employees to wait
for their commissions until the customer pays you. The employee has no control over
when a customer will pay his bill. It is demotivating and demoralizing for a sales person
to have to wait to receive her commissions. In fact, if sales commissions are based on
any factor that the employee cannot control, you risk employee
motivation and engagement.
By paying the employee after they make the sale, you are reinforcing the employees
motivation to continue to produce sales.

Concepts Related to Sales Commission

You will encounter these terms when you explore sales commission further.
Draw: In a draw upon future sales commissions, the employer pays the sales employee
an amount of money up front. The employer presumes that the sales person will sell
enough products later to earn more than the draw in sales commissions. The draw
amount is subtracted from future commissions.
This is a tool frequently used when a sales employee starts in a new job in an
organization. It gives the sales person an income before they have made sales eligible
for sales commissions. It presumes that an employee will take some time to get up to
speed on the products, make contacts, and more.
Tiered Commission Plan: In a tiered commission plan, the amount of sales
commission increases as the salesman sells more product. For example, for sales of up
to $25,000, the sales staff receive a commission of 2%. For sales between $25,001 and
$50,000, sales staff receive a commission of 2.5%. For sales between $50,001, and
$75,000, they receive 3%, and so forth.
The tiered commission plan incentivizes employees to continuously increase the amount
of product sold. It also provides sales employees with additional incentive to sell new
products, upgrades to older products, and to stay in contact with potential repeat
customers.

You will need to provide your company name and other information, but this site has
information about trends in sales compensation that you may find useful.

Gommision and compensation?