Author: Jim Riley Last updated: Sunday 23 September, 2012
Commission is a payment made to employees based on the
value of sales achieved. It can form all or part of a pay package. Commission
is, therefore, a form of “incentive pay” (see
also performance-related pay, bonuses).
Commission, like piece-rates, is a reward for the quantity
or value of work achieved. In most cases, the employee is paid a flat percentage
of the value
of the good or service that is sold.
The rate of commission depends on the
selling price and the amount of effort required in making the sale.
commission rates could range from 5% where the product sells easily (e.g.
household goods sold door-to-door) to 30% where the effort is
Advantages of Commission
The main advantage of commission from an employee’s
point-of-view is that it enables high performing sales people to earn huge
The main advantage to the employer is that the payroll
cost is related to the value of business achieved rather than just the amount
all, businesses exist to sell goods and services for profit – not just
to make things (piece rates simply reward amounts produced, not sold).
Disadvantages of Commission
There are several drawbacks with using commission
• Sales people may cut corners to make sales (e.g.
not explain the product or service in enough detail to potential customers).
This was a major problem
in the recent pensions mis-selling scandal in the UK
High commission earnings enjoyed by some of the sales team may be resented
elsewhere in the business – particularly if the sales actually depend
on a team effort
• It is difficult to change what proves to be an over-generous commission
structure without upsetting and demoralising the sales team
• Once commission payments have been made, the sales
force may lose some motivation until they begin to focus on the next payment
(which might be up to
As a result of the above disadvantages, most businesses
that use commission as an incentive payment method offer a basic pay plus
level. In this way, if sales and profits justify the change, the commission
rate can always be increased slightly.
Recent research suggests that the use of commission is
reducing in comparison with the growth of other incentive payment methods.