What is commission? A comprehensive guide
If you’re applying for sales roles, it’s likely you’ve seen the word ‘commission’. But if you’re new to sales and have never had a job where your salary includes commission, you may be unsure of what it means and how it works.
In short, commission is a percentage of the sales you make, added to your base salary. It’s a motivator for sales professionals to close as many deals as they can. The only way to know if a commission-based job is right for you is to learn more about how commission pay works and how you can make the most of this type of salary structure.
What is commission pay?
Commission pay is where employees or contractors receive a portion of the sales they generate or the deals they close. It's a variable form of payment based on performance, typically calculated as a percentage of the revenue from a sale, or as a fixed amount for meeting specific targets. Essentially, working on commission means the more you sell, the more money you make.
The most common commission-based roles are:
- Sales consultant
- Real estate agent or broker
- Recruiter
- Advertising sales professional
There are different types of commission structures (and earning caps), so it’s best to check your contract before signing on.
Types of commission pay
When working on commission, there are a few different pay structures that might apply. The most common types of commission pay structures are:
- Straight commission: also known as commission only, this is a pay structure where there is no base salary, you are paid only a percentage of the sales you make.
- Base plus commission: you receive consistent base pay, regardless of performance, as well as earning commission on sales.
- Revenue commission: you earn a percentage of the revenue you have brought to the business, either through sales or KPIs.
- Tiered commission: you earn different commission rates for different levels of performance. Higher levels of performance earn higher commission rates.
Commission is sometimes called a bonus or commission bonus, but these are different types of pay. 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.
For example, you may receive 30% of every sale or deal, but you may also receive a fixed-amount bonus for simply performing your typical workload to a high standard.
Advantages of commission pay
There are advantages to commission pay, especially for someone who is competitive, money motivated or goal-oriented. For employees or contractors, some of the top advantages of commission pay include:
- Control of your own income
- Potential for higher earnings
- Motivation to excel and perform well
- Flexible work schedule and independence
- Opportunity to grow your skills to drive performance
- Recognition for good performance and work
Commission pay can be a great pay structure if you like to work towards clear goals, as hitting targets directly impacts your income. You may feel you have more control of how much you earn and are motivated to learn more about your industry and about sales techniques in general, to increase your earning potential.
Disadvantages of commission pay
Working on commission isn’t for everyone. One of the top reasons people don’t enjoy commission pay is that a steady income may not be guaranteed. While working hard can help you generate income on commission, it’s not possible to control external market conditions. For example, economic downturns, low seasons or inflation may result in less spending. During these times, you may earn less than you do in the higher sales seasons.
Another disadvantage of commission pay is the culture it can create in the workplace. Some people thrive in a competitive environment, while others find it demotivating and stressful.
How does commission work?
How your commission works depends on your employer and your employee or independent contractor agreement. It’s important for you to know how your commission is calculated before signing on, so you can negotiate your pay structure with your employer.
Some of the most common ways commission is calculated are:
- Straight commission: you receive a fixed percentage of the sales you make. For example, you may receive 20% of the value of each sale or deal you make.
- Single-rate commission: all sales are the same and you receive a fixed rate, regardless of volume and other factors.
- Multi-rate commission: different commission rates for different types of sales, which are often in tiers or categories. They separate higher- and lower-cost products or services.
- Gross margin commission: is calculated based on the profit margin rather than the total sales value, typically used in wholesale or manufacturing environments.
- Territory commission: based on the geographical area the sale or deal was made in.
- Milestone commission: paid when specific milestones or targets are reached, such as a specific number of sales.
- Revenue-based commission: calculated based on a percentage of the total revenue generated, e.g., 10% of your total earnings for the business in a specific time period (week, fortnight, month).
- Profit-based commission: calculated based on the profits of the sales made by an individual employee.
The type of commission structure you’re on will depend on the business, your industry and your award, if applicable.
Is commission taxable?
Yes, commission is considered wages, so it’s subject to income tax. If you are a full-time permanent employee, this will be taken out of your paycheck by your employer. Contractors are responsible for calculating how much tax they need to pay, unless stated otherwise in their contract. If you’re unsure, check your contract or ask your employer or accountant.
Working on commission can be highly motivating and rewarding. If you’re driven by competition and feel as if commission will give you more control of your income, then commission work may be ideal for you.
FAQs
What types of jobs use commission pay?
Sales, real estate, financial services, advertising and marketing, recruiting, travel sales and insurance are some of the industries that commonly use commission pay. Commission jobs will be performance-based with KPIs or targets that need to be reached before you start earning any commission.
Can I negotiate my commission rate?
Unless your commission is laid out per an award or agreement, you can negotiate your commission rate. 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.
What are some common misconceptions about commission pay?
Some common misconceptions about commission pay are:
- It’s guaranteed high income and ‘easy money’,
- there is a lack of stability, and
- it’s a payment structure that could suit anyone.
Receiving commission pay relies on meeting targets, so theoretically, the harder you work the more money you receive.
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