Commission-Based Pay for Employees: Pros and Cons Explained

Commission-based pay for employees isn’t immune to potential record keeping woes. Record-keeping isn’t impossible but it may deter some employers from implementing this type of pay for employees. First and foremost, there needs to be information about metrics or sales goals employees are working toward for their commission. Second, every sale needs to be accounted for and documented to ensure employees are entitled to the commission percentage if they reach a goal.

Advantages of Commission-based Pay

If you’re not sure how it all works in the business world, we’ll break down the concept so you come out a little wiser than you were before. Commission-only jobs often don’t come with the same benefits as regular jobs. This can include things like health insurance, paid vacation days, and retirement plans. If these are important to you, you might want to think twice before taking this type of role. What better motivation than a direct increase in your paycheck based on your performance? If you’re the type of person who is driven by results, then you are likely to work harder in this role and see a direct benefit from it.

How to calculate payroll for commission-based pay

For example, you may get a 20% commission on sales of product A but only a 10% commission on sales of product B. Commissions are a popular form of compensation in many industries because they provide incentives for staff to generate revenue and increase profit. They are a percentage of the money the employee makes for the company within a set period. If setting up your team with a commission-based pay structure sounds like a win to you, there’s no need to wait to start. Set yourself up for success with Homebase to easily communicate the update to your team and document the details, as well as get payroll moving. In the business space, healthy competition between employees to reach sales goals can be extremely motivating.

Advantages and disadvantages of implementing commission pay

Seasonality plays a significant role in many commission-based jobs, particularly in sales.
On the one hand, you have the potential to make a lot of money.
However, there is ongoing debate about the potential disadvantages of commission-based pay in the workplace.
You may want to negotiate your commission rate if it’s a large part of your income or you’re performing far above the expectations of the role.
Of course, commission-based pay does impact payroll in a big way.
While commission is a fixed amount or percentage of sales, a bonus is often tied to your performance or your team’s or company’s annual performance.
Working on commission gives you flexibility, control, and independence in terms of your income and workload.

For instance, selling a high-margin product might earn a 15% commission, while a low-margin one only yields a 5% commission. Unlike traditional salaried positions, where employees receive a consistent paycheck, commission-based roles often lead to fluctuating incomes based on sales performance. For individuals who rely solely on commission for their income, budgeting can become a significant challenge. In recruiting, you’re often provided a commission on each candidate you successfully place—usually a percentage of their annual salary. As an account manager, you can earn commission on clients you upsell or renew for the year.

Best Payroll for Hourly Teams

With an employee scheduling app, employee schedule maker, and work schedule app, Homebase is built for staff scheduling, shift swapping, predictive scheduling, auto scheduling, rotating schedules.
When a business has specific targets to hit or a revenue metric that needs to be met that day, week, or month, this can trickle down to employees.
There is just one commission rate, and it is applied to all sales equally.
For example, if you become a manager of a sales team, your company could institute a floor to your commission structure, or shift your commission to more of a bonus plan.
The type of commission structure you’re on will depend on the business, your industry and your award, if applicable.
Closing five deals in a month will bring in $15,000, but no sales would mean no income.

Whatever the case may be, make sure you have those payment terms in writing so that employees know when they can expect payment. Employees who receive commission-based pay work in a number of different professional environments. Often they’re motivated by multiple factors, like a competitive performance element to the role, or products and services sold and revenue. Commission-based pay usually has some kind of metric or goal attached to it, and can be offered as a standalone compensation or in conjunction with a base salary.

Since the amount they give their employees depends on the sales or income they generate, employers can keep costs down, particularly for employees who do not perform well. It’s also a great way to develop a workforce that is proactive and motivated. Ultimately, all of the commission-based jobs above are worth considering. Just make sure you’re comfortable with any sales aspects, as those are a common requirement of the work, as well as how the commissions are structured.

Income Variability

Your employees, no matter your business’s industry, can develop goals around customer engagement and their own percentage of close/win sales to keep themselves on track. Professionals who are into sales and marketing deal with tough competition. Employers offer a commission to motivate their employees, make them more productive, generate more commission jobs meaning sales, and attract customers. However, some professionals earn commissions for other activities, like setting up meetings with prospects, securing contract renewals, filling job openings, and more. If you’re using commission-based pay, make sure to plan effectively. Compensation Planning Software simplifies commission planning for hundreds of employees, integrating direct compensation, sales compensation, and total rewards into one system.