How To Calculate Commission in 9 Steps (With Examples)
People in various industries earn their living through commission, an incentive-based payment system based on the transactions an individual completes. The specific amount of an employee's commission depends on numerous factors. If you work in a commission-based field, understanding the factors that influence your commission can help you negotiate a fair rate.
In this article, we explain what a commission is, including the common types of commission that you can earn, and provide a step-by-step guide teaching you how to calculate your rate.
What is a commission?
Commission is a form of payment to employees based on the number and value of the products or services they sell. Some employers offer a commission as an additional reward on top of a fixed salary, whereas others provide a commission-based salary only.
Commission can be an excellent tool for motivating employees to meet performance objectives in terms of sales and profit growth. It can be especially beneficial to small businesses, as the wages they pay out are proportional to the performance outcomes of their workforce. There are various types of commission, including:
With a straight commission, an employee earns a percentage of every sale made, receiving no other forms of payment. For example, imagine a sales associate who earns 10% straight commission. If in one month, they facilitate the sale of 10 units that cost $2,000 each, their personal earnings for the month amounts to $2,000.
In a graduated commission structure, the percentage that a salesperson earns increases proportionally with their sales volume. The employer establishes commission tiers, with each successive tier bringing in a higher commission than the previous.
The first tier, for example, might represent salespeople who generate up to $10,000 in revenue, and who earn 10% commission. The next tier-up might be for those who bring in $10,001 to $20,000, who earn a 15% commission.
Gross profit commission
With gross profit commission, a salesperson earns a percentage of the gross profit realized on the products they've sold. Though gross profit is bound to be lower than the revenue earned per sale, the commission rate is generally higher—often up to 50%. Employers may prefer this system because it encourages their employees to shift their focus to a longer-term view of operational success.
What to know before you calculate commission
Accurate calculation of a commission requires that you know the particulars of your agreement with your employment. Consider the following factors before you make your calculation, as they influence your payments:
Commission base: The commission basis is the dollar amount on which the calculation is based. It's usually the total amount of sales but can also be the gross margin, net profit or inventory value.
Commission rate: This is the fixed number or percentage connected to the sales amount.
Override: The commission rate may change according to the result.
Commission period: The period over which you calculate the sales amount and apply a commission is called the commission period.
Split: The commission may get split if several people contributed to the sales. There might also be an agreement that states the area manager earns a percentage of the sales results achieved by the employees in the region.
Commission tier: A policy can apply one rate on a certain amount of the commission base and a different rate on the remainder.
Related: 11 Sales Jobs With High Commission
How to calculate commission
If you work on commission, follow these steps to calculate your expected earnings:
1. Determine the commission period
Employers commonly pay commissions on a weekly, biweekly or monthly basis. Employees typically receive their commissions at the end of the period, but payments may have delays if employers require payments from clients before paying you. Speak with your employer to determine your commission period, and then gather all sales concluded during each month.
2. Identify the commission base
The commission base is usually the purchase price of products sold. Determine the total dollar amount of sales concluded during your commission period.
Example: During February, you sold products totaling a value of $10,000. Your commission base is $10,000.
3. Multiply the commission base by the commission rate
To calculate the amount of commission you can expect to receive, multiply your rate by your commission base.
Example: If the commission rate is 5% and your commission base is $10,000, you'd multiply the latter by the former, as follows:
$10,000 x 5% (or 0.05)
Here, the total is $500.
4. Consider the various commission rates
In some cases, the employer can apply a different rate according to the product. To calculate with various rates, identify the various commission bases and multiply each one by the correct rate.
Example: Product A has a 5% commission rate and Product B has an 8% commission rate. In the commission period in question, you sold $10,000 worth of the former and $5,000 worth of the latter. Thus, your calculation is:
($10,000 x 0.05) + ($5,000 x 0.08) = $500 + $400
Here, your total commission payment is $900.
5. Apply the tier if necessary
If the commission rate varies with the dollar amount of sales for the same product, this is a tier system. In that case, calculate the commission for each tier using the appropriate rate.
Example: You sold Product C for a total of $40,000. The first $25,000 of the sale has a commission rate of 5%, while the amount above $25,000 has a rate of 3%. Your calculation is:
($25,000 x 0.05) + ($15,000 x 0.03) = 1,250 + 450 = $1,700
Your total commission payment is $1,700.
6. Calculate override, if it applies
In some cases, management can decide to change your commission base if you sell for more than a specific amount. This is called override, and it applies to the total base amount.
Example: A product has a commission rate of 5% that raises to 6% if your sales exceed $20,000. One month, you sell $10,000 worth of this product. For this period, your calculation is:
$10,000 x 0.05
The next month, you sell $30,000 worth of the product, so your rate changes and the calculation is:
$30,000 x 0.06
Your commission for the first month is $500, while the second month is $1,800.
7. Deduct returns, if necessary
If the policy mentions that you're to deduct returned products, subtract their value from the sales dollar amount.
Example: You sell $10,000 worth of product at a commission rate of 5%, but some customers ask for returns for a value of $200. Here, you'd calculate your corrected base first, as follows:
$10,000 - $200 = $9,800
Then you'd calculate your commission payment as:
$9,800 x 0.05
After the returns, your commission is $490.
8. Split the commission, if necessary
According to your agreement with your employers, the commission might be split between the different people involved in the sale.
Example: You and two other people are involved in March sales amounting to a $30,000 base. The rate is 6%. To calculate the total commission, you'd multiply $30,000 by 0.06, which equals $1,800. You'd then divide equally among the three of you, as follows:
$1,800 / 3
The commission payment for each of you is $600.
9. Calculate the manager's portion, if it applies
If the area manager takes a percentage of your commission, deduct it to obtain your payment.
Example: If your commission is $600 and the area manager gets 2%, calculate the manager's portion ($600 x 0.02 = $12) and deduct it from your commission, as follows:
$600 - $12
Your portion is $588.
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