What Is Commission Pay and How Does It Work?

By Indeed Editorial Team

February 26, 2021

Some employees earn all or some of their income through commission. There are many types of commission pay, and employers calculate them differently. Learning about the different types of commission can help you determine what kind of pay you can expect for your work. In this article, we explain what it means to be paid by commission and the different types of commission commonly offered.

What does it mean to be paid by commission?

A commission is a payment that an employee makes based on a sale. Some employees earn commission in addition to their base income, while other employees work only on commission. When an employee earns a commission, they make a portion of the sale in income. For example, if an employee sells a couch for $500 and they get a 10% commission on all sales, then they earn $50 on that sale.

A business uses many variables to determine an employee's commission, such as how often they sell, how much they sell and how well they perform. These factors ensure employees receive pay based on performance factors, driving them to sell more products or services.

Commission-based pay is advantageous to employees because they ultimately control how much they make. In many ways, when a company uses commission pay, it does not limit the employee's potential to increase their own income.

Jobs that typically make commission include:

  • Sales

  • Recruiting

  • Finance

  • Real estate

Related: How To Find Commission Rate in 5 Steps: (Plus Definition and Types of Commission Rates)

How does commission pay work?

Commission pay works differently according to the type of commission and the job. For example, salespeople usually make commissions based on the sales they make. Recruiters make commissions as a percentage of the salaries of the employees they place. Stockbrokers make commissions for each client transaction they make.

Companies usually pay commission monthly, quarterly or annually. A business may want to wait until the sales contract is signed and finalized and they receive funds to pay out the commission. In the recruiting field, the employee that the recruiter placed may need to stay with the company for a certain number of months before the recruiter earns their commission.

Related: Understanding Commission Structure for Sales (With FAQ)

Types of commission pay

There are several types of commission pay. Consider these common kinds of commission pay and what they mean for the employee:

Salary plus commission

Salary plus commission pay means the employee receives a commission in addition to their base salary. Employees find this type of commission beneficial because there is a guarantee of income regardless of how much they make in sales. Salary plus commission is common in merchandise sales where the company provides a base income for all its employees. Whatever the sales associate makes on top of their income is commission.

Related: Sales Compensation Plans: Types, Templates and How To Design

Straight commission

A straight commission is when an employee only earns a commission as their income. The employer calculates the straight commission by evaluating how much the employee sells. When an employee has a straight commission, they control how much they make, which can be a substantial amount if there's no salary cap.

However, during specific points in the year, a company could experience a slow period, directly affecting an employee on straight commission. As a result, businesses recommend employees to budget their money made from commission pay to prepare for future spending. Earning straight commission is very common in real estate where agents make their income based on the houses they sell.

Draw against commission

When a company provides a draw against commission pay, it gives the employee a specific amount of money at the start of their work. This amount is known as the "draw." If the employee sells more than this amount, it becomes their income, and anything else they make is commission. However, if they do not sell enough, they must give all the money back to the employer.

Draw against commission might seem risky because there is no guarantee that the employee earns the same amount of money in sales as provided at the start. However, many employees use the draw against the commission as a goal and motivator to sell.

Residual commission

A residual commission is any commission that an employee earns after the client makes their first purchase. Residual commission pay is especially common for real estate and insurance companies. Even if an employee leaves the company where they earned the residual commission, they still receive it if the client continues with the company.

Residual commission pay is beneficial because the employee continues to make money after the initial interactions with their customers. This type of commission pay is especially helpful when there is no steady income. A client's continual payment toward their insurance or home creates the residual commission for the employee.

Graduated commission

When a company uses graduated commission pay, they distribute commission according to the number of sales. These different categories create commission levels within the company. How much commission an employee earns determines which level they are on.

When an employee makes a graduated commission, they can increase their commission over time by improving their performance. As a result, they move up a level. When an employer uses a graduated commission, they openly distinguish strong performing employees.

Bonus commission

A company provides bonus commissions to employees who have exceeded sales expectations. Bonus commissions aren't guaranteed, and companies aren't required to make them consistently. They serve as an additional motivator for employees to continue making sales even if they hit their commission goals.

Variable Commission

A variable commission changes according to factors established by the company. This type of commission pay is common when the business wants to obtain certain clients or reach a specific sales goal. As a result, this commission varies depending on who the employee sells to or how much they sell.

When a company uses a variable commission, the employee is more aware of what sales will impact their income. As a result, they can properly prioritize sales according to which ones result in the most commission.

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