What is Commission Pay and How Should You Use it?

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07 Jun 2018

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In a business, a commission is a payment you make to your staff. You would base commission pay on the value of the sales that an employee achieves. Popular jobs that offer commission on top of the pay package are sales and recruitment roles.

How Commission Works

A commission is a form of incentive pay. It can form all or part of an employee's financial package. Usually, if you're going to pay your staff commission, you pay them a flat percentage of the value of the product (goods or service) that they sold. The selling price of the product, and the amount of time and effort your employee devotes to the sale, can influence the commission rate that you pay your staff.

How to Work Out Commission

If you're offering your sales team a five percent (5%) commission on each product that you sell, and the product price is £100, then 5%/ equals £5. Remember that you want to offer a competitive rate that will incentivise your staff. But, while you want them hungry to sell, you want to be careful with your monthly expenditure, too.

Is Commission Pay Effective?

With a good rate, high performers can earn lots of money. And while they're doing this, they're bringing value to your business and their motivation is high. Score one for commissions. Another advantage for employers is that your payroll cost relates to the revenue of your business that your teams are achieving. After all, if you make the product as well as selling it,  you want to offset production costs by making as much profit as possible. And in theory, it's a recipe for exponential growth. More profit means more staff, which means faster, safer, more efficient production, and more sales teams.

However, Where There Are Pros, There Are Cons

The drawbacks to commission payments include: Your sales staff might cut corners when they try to sell the product. Some employees may want to complete the sale and get their commission pay quickly.  They might actually mislead a customer into buying something other than what they think they're buying. Sometimes a team effort can lead to one person earning a bigger payout than their colleagues do. This can create resentment. Beware of your commission structure. If it's too high, your company will suffer as money seeps out. If you suddenly have to lower commission pay rates, staff motivation could plummet. A demotivated sales or recruitment team will lose productivity. And then, the rates will get even lower. Hire employees with a basic salary and a modest commission rate, and only grow your rates based on plenty of financial analysis and planning. Don't pay large sums once per year or else you could see employee performance levels drop. If your structure pays out on a month-by-month basis, you keep your staff aware that how they perform every four weeks will impact how much extra money they earn.

Talk to Our Experts

If you have any questions about commission pay, contact our employment law, HR, and reward experts on 0808 145 3377.

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