In an effort to maintain a flexible pay schedule and to offer employees options beyond a monthly or bi-weekly salary as well as to reward them for their hard work, some organizations pay their employees using commission. In short, being paid on commission means you are rewarded based on the amount of a certain product you sell or deals you close.
There are four main commission structures that companies use. Here is a closer look at each.
Basically, employees paid on straight commission only receive pay for the actual products they sell. Some common examples of industries that use straight commission include sales, real estate, cosmetics or other retail sectors.
Best for: Shorter sales cycles or one-call closes, expensive products that will generate sizable commissions (e.g. selling a house), experienced salespeople who are confident in their abilities and can close quickly.
Base Salary plus Commission
Using this model, employees make a base or minimum salary and then receive sales commission in addition to it. Sometimes, companies will offer this type of compensation when hiring new employees to allow them to build their client or account lists. This is also a better idea for industries with longer sales cycles or that require a salesperson to gain expertise over time, such as selling a software application.
Best for: Longer sales cycles, new salespeople or those building their account list.
Draw Against Commission
This allows employees to receive an advance against future commissions they may earn. Companies with longer sales cycles that only offer straight commission compensation typically offer this to help employees that may experience inconsistent cash flow.
Most companies will deduct from a future paycheck anything above what the employee actually earned. For example, if an employee takes a $2,000 draw and only earns $1,500 in commission for the month, they would owe the company $500. Some organizations do not require instant payback, giving employees the chance to make up the difference over time.
Best for: Straight commission models and longer sales cycles.
Guarantee Against Commission
Similar to a draw, a guarantee is the minimum salary the salesperson will receive in advance regardless of commission earnings. Unlike a draw, a guarantee does not need to be paid back.
Best for: New products with an uncertain market and longer sales cycles.
Is Commission Just for Salespeople?
For the most part, commission models are typically used when compensating salespeople. It is considered by most to be the fairest way to pay salespeople, as the earnings are directly related to the amount of work and/or time they’ve devoted to building client relationships and closing deals.
It’s important to remember that a salesperson doesn’t always mean he or she is selling a specific product. Consultants that sell services are also good candidates for commission structures. Other common instances of sales commission compensation include:
- Real Estate
- Retail Sales
- Service Technicians
Basically, any profession that allows you to easily relate specific sales, accomplishments, settlements or company earnings back to the efforts of a single person or sales team lends itself well to commission structure.
Taxes and Commissions
If you’re considering offering your employees commission, or if you are in a position to receive commission, make sure to pay close attention to how taxesare calculated. In draw or guarantee sales models, any current or advanced commissions received count as one income. You’ll also need to account for state taxes.
Paying your employees on commission can be a great incentive for top performers and is a way to encourage your salespeople to excel. Not everyone will thrive under a commission-based pay system, but those who feel the need to prove themselves through hard work will take great pride in earning themselves (and, in turn, your business) more revenue.