Commission – Payment made to employees based on the value of sale achieved; a share of sales
To remember what commission means use the following mnemonic:
If you work for this company, your mission (commission) is to sell as much as possible and you will get your share.
Commission is used to motivate employees to generate sales. There are many different ways commission is paid. Here are some examples:
- Straight commission – i.e. 25% on every product sold.
- Commission split by all in a territory – e.g. 20% for all, split by 3 people.
- Commission based on profits made on the product not the sales. So it depends how much is given away.
- Guaranteed base amount regardless of sales, used for a new recruit.
- Tiered – i.e. 5% up to £10,000 sales, 8% on anything after this.
- Set amount every month permanently for customers that keep the service - £2000/month account get £100/month commission.
- Base rate + commission – A base salary and a smaller commission on sales.
Disadvantages of commission
Sales people may cut corners to make sales and not explain the product fully, possibly misleading the customer. For example, selling an electric car saying the car will travel 150 miles without needing to be charged, but it will in fact only travel 120 miles before needing to be charged.
If you work on a customer for a year, but you are on holiday when the customer comes into the showroom and signs up to buy with another salesperson, this could lead to resentment when it was in fact a team effort.
If one salesperson does so well that they are earning more than the owner of the company, and not leaving many sales to any of the other salespeople, it could create problems. It may also be difficult to change an over generous payment system.
A giant sale at the beginning of January may lose a salesperson’s motivation for the rest of the year.
If a carpenter is paid by how many tables they make, the quality of the staircase could become very poor and the balance between speed and accuracy could become a point of argument.
Someone on commission could have a poor couple of months and the need for money for their family could lead to health problems.