Q&A - What is commission and when should it be used in a pay package?

Commission is a payment made to employees based on the value of sales achieved. It can form all or (more often) part of a pay package. Commission is, therefore, a form of “incentive pay” (see also profit-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.

For example, 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 substantial.

The main advantage of commission from an employee’s point-of-view is that it enables high performing sales people to earn huge amounts.

The main advantage to the employer is that the payroll cost is related to the value of business achieved rather than just the amount produced. After all, businesses exist to sell goods and services for profit – not just to make things.

However, there are several drawbacks with using commission payments:

• Sales people may cut corners to make sales (e.g. not explain the product or service in enough detail to potential customers) – i.e. customers are misled & missold
• 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 12 months away)

As a result of the above disadvantages, most businesses that use commission as an incentive payment method offer a basic pay plus a moderate commission level. In this way, if sales and profits justify the change, the commission rate can always be increased slightly.