Commission is the remuneration for the services rendered by one person to another.
In general, commissions are performance-based incentives for sales representatives who meet certain requirements with regard to sales and/or recommendations of products.
There are different types of commissions that can be paid to sales representatives based on their current activities and past results. Each company sets its own commission schedules as well as terms and conditions.
How Do Commissions Work?
It can be a percentage of the sale or a fixed amount. It is usually determined depending on different factors like sales, performance, experience, etc.
There are also chances that two different agents get paid differently for their services at work. The payment method varies from person to person and also from place to place.
Basis of How Commissions Are Paid
Performance-based commission means that companies pay per unit sold and the amount is directly dependent on the number of units that are sold in a given time period.
Activity-based commission means that companies pay for each transaction instead of the actual sale. This means that if an agent closes a deal by getting an order from a customer but doesn’t get paid yet upon delivery of the product, then he/she is paid for each transaction.
Combination of Both Performance and Activity
It means that the amount of commission depends on both types (performance-based and activity-based) mentioned above. For example, if an agent gets 3% for every product sold and $15 for every transaction processed successfully, then he will get paid on both types of commission.
Non-performance Based (e.g. project-based)
In some companies, time spent on a project is also included in the basis of how commissions are paid. For example, if an agent spends 50 hours working on a new client, then he/she will get paid for that.
Examples of Commission Structures
Straight Commission Plan
This means that sales agents aren’t paid a salary but get a percentage out of their total sales with the sky being the limit to it. This allows them to take control of their earnings since they can work more hours if they aim to earn more.
Tiered Commission Plan
This is another great way to induce motivation among sales agents. In this model, each time a sales agent reaches a particular benchmark, his commission rate increases.
Base Rate + Commission Plan
In this kind of structure, sales agents are given a monetary reward on top of their base pay.
Choosing Your Commission Structure
The best commission structure will largely depend on many factors that suit each company’s ecosystem. It will be good to consider boosting motivation among workers but at the same time, do make sure that this will not compromise income for the company and even workplace relationships.
Finding out the best commission structure is important to improve efficiency and increase productivity.
Benefits of Commission-Based Payment
- Workers receive a good incentive for greater effort and the company benefits from the extra sales volume.
- It promotes accountability, ownership, and responsibility among workers because it is directly linked with their sales volume.
- It is a source of unlimited working potential for workers.
- A job under a commission-based payment scheme is generally flexible which means workers are in charge of their own schedules.
Risks of Commission-Based Payment
- There is a high possibility for workers, say for example agents, to act in their own self-interest which could lead to conflicts of interest.
- It could affect working relationships within a team because it might spark envy and resentment towards those who earn bigger.
Difference Between Commissions and Fees
A financial advisor’s fee structure is usually any in-between commissions or fees or sometimes a mix of both.
Financial advisors who receive payment based on commissions derive their income by earning a percentage of the investment products they sell to their clients. Thus, the higher the value of the investment product, the higher he will earn.
On the other hand, a fee-based advisor earns income by charging a flat rate for the services he renders to a client regardless of the investment product the client will be availing of. This can either be a stated dollar amount or a percentage of assets under management (AUM).
Commission-based payment is a great method to compensate employees for their time and effort. However, it should be used with care as there are chances of conflicts of interest among the agents or advisors involved in this practice.
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.