Commission is a type of payment made to employees based on sales or task completion related to their role. The payment tends to be in addition to the base salary and is calculated using the sales or revenue generated by the employee.
Commission pay is especially common in the following sales roles:
- Sales account executives
- Financial advisory
- Insurance sales
- Affiliate marketing
- Recruitment consultant
Benefits of paying commission
Paying employees through commission can be a good way to encourage top performance. It can also potentially help the company manage costs, since companies will mostly have to pay out commission when business is good and less so during lean times.
Common issues with commission
A commission-based payment model can put a lot of pressure on employees, leading to burnout. It also can lead to employees placing more value on short-term over long-term success, for instance with regards to client satisfaction which can impact upon a company’s image.
On the company side commission as a salary variable adds an added layer of complexity to the payroll cycle, this is especially the case when it involves cross-border payments and different tax laws.
How does commission work?
Commission pay tends to differ country to country, industry to industry, and company to company. With that being said, the payment process tends to look something like this:
- The commission rate is set in advance – it will often vary depending on the service or product being sold.
- The company calculates the total amount of sales and/or revenue generated during a specific period – like a week or a month – and applies the commission rate to the total salary.
- The specific structure of the commission pay will depend on the company’s goals and the industry it’s in.
What are the different types of commission?
Common types of commission can include:
- Straight commission: There is no base salary, and the employee gets paid purely off the sales and revenue they generate.
- Tiered commission: The commission rate increases as the employee reaches higher sales and revenue targets. This means the commission stays lower for the employee if they’re only reaching lower targets.
- Residual commission: This type of commission applies to products that are paid for on a subscription basis. In this agreement, the employee receives commission for each payment a subscriber makes for a determined period.
- Draw against commission: The employee gets an advance on future commissions, known as a draw. If the employee doesn’t manage to make enough to meet or exceed the draw amount, he or she must pay it back to the employer.
- Combination commission: Here employees get a mix of both base salary and commission. The commission is often higher than the base salary, acting as a way to motivate employees to generate more revenue.
Handling commission payments with a global workforce
Managing commission when you have a global workforce can take some effort. For starters, there are the different tax laws that each country has surrounding global benefits such as commission: some countries may require higher taxes on commission pay than others. Then there’s currency fluctuation, which is constantly influencing commission rates. These shifts in value can be hard for employers to calculate when they’re happening both in real-time and in multiple countries.
Here, though, it’s important to choose a platform with extensive knowledge in the space – one that has expertise in a broad range of countries concerning commission-linked taxes and regulations, as well as anticipated fluctuations in currency values.