Commission

Commission is a payment that is based on the completion of a task, such as a sale. It is a common form of payment in sales-based or marketing jobs. It is usually paid as a percentage rate of total sales or a flat rate either in addition to or in lieu of a base salary. Employers typically use commission as an incentive to motivate their employees to perform well, which in turn helps the company make a profit. Workers in commission-based positions need to be highly motivated and have good people skills to generate income. People who fail to make sales risk not earning money. Some examples of commission-based jobs include automobile salespeople, insurance agents, real estate agents, advertising sales representatives, loan officers, and travel agents.

Background

Employers use commission to encourage employees to increase productivity. For example, the more inventory an employee sells, the more money this person will make for himself or herself and the company. Linking pay to performance generally increases a person's desire to perform well to generate more money.

Commission can be paid in several ways. Base plus commission is the most common type of commission pay. With base plus commission, also called salary plus commission, an employer pays an employee a predetermined, fixed annual base salary plus a set percentage of total sales that the employee generates during a particular period. This commission could be paid in several ways. An employer can add it to each paycheck or pay it in a separate check according to a schedule. Since sales fluctuate and usually are not consistent, having a base salary ensures a steady stream of income to an employee during lean sales times. Employers can set base salaries lower than typical salaries because it is expected that the employee will supplement this salary with sales income. However, employees who earn base salaries usually are less productive than ones who are paid strictly commission. Employers can offset this by offering lower commission percentage rates to those paid a base salary.

With straight commission, employers do not pay employees a salary. Employees' salaries are generated entirely by sales. Because of this, the percentage of total sales earned is typically much higher than that of base plus commission salaries. People who earn straight commission salaries have the ability to make more money than those who have base plus commission salaries. Employers can offer additional incentives, such as higher percentage rates, to employees who exceed a certain total of sales. However, employees must be motivated to make sales, or they will not earn money. In lean sales periods, employees experience reduced or even no income.

Variable commission is like straight commission, but the rate is determined by exceeding sales goals and by how much. Employees who surpass sales goals will generate more income, which motivates them to sell more. However, they may focus on making more sales over giving quality service, which could potentially hurt profits over time.

Draw against commission is a type of straight commission plan. With this plan, employees receive a predetermined amount of money known as a predetermined draw at the beginning of a pay period that they must pay back at the end of this period. Whatever is earned above this amount is kept as earnings. Employees who do not exceed sales end up owing money back to their employer. However, some employers may allow employees to pay back funds during a profitable pay period. Over time, employees who do not surpass sales over several periods may end up owing significant debt to their employers.

Residual commission collects every pay period. This type of commission is generated by long-term accounts that make continuous money for the employer. It can be considered a steady source of income. For example, an insurance salesperson would continue to receive commission on an account for as long as his or her client remains insured with the company. Sometimes, employees continue to receive residual commission on accounts after they leave a company. However, these accounts can cause a great loss of income to an employee and employer if a client terminates his or her account.

Overview

In the United States, the Fair Labor Standards Act (FLSA) regulates labor practices and provides standards for commission-based workers. The Department of Labor's Wage and Hour Division ensures the FLSA is followed regarding paying at least the minimum wage and overtime compensation if necessary. It is up to the employers' discretion to calculate commissions, determine how they are earned, set a schedule for when they will be paid, and draw up termination agreements. According to the act, commissioned workers must receive earnings that are at least equivalent to the federal minimum wage, which was set at $7.25 as of 2017, or the state's minimum wage—whichever is higher.

In addition, employees paid a commission are entitled to receiving overtime wages for time worked beyond a normal forty-hour weekly schedule. Some businesses, such as those in retail or service that make at least 75 percent of income from sales, are exempt from paying overtime to commission-based employees. People who work in outside sales are also exempt from FLSA overtime guidelines. Outside sales include employees who sell items outside of an office setting; they include door-to-door salespeople, pharmaceutical representatives, and others who sell a company's products or services by traveling to clients.

In addition, to be exempt, commissioned employees must generate at least one and one-half times the minimum wage each hour when more than forty hours a week are worked. If employees do not earn this much, the employer is responsible for paying the difference to ensure the employee receives the minimum wage plus overtime pay (one and one-half times the hourly rate).

Employers who fail to follow the FLSA requirements face receiving fines, penalties, and in some cases, jail time. The Department of Labor provides several resources to ensure employers are educated about the laws regarding commissioned employees and even offer access to an FLSA overtime security advisor, who can be reached online, by phone, or in person at a local Wage and Hour Division office.

Bibliography

"Commission." Investopedia, www.investopedia.com/terms/c/commission.asp. Accessed 4 May 2017.

"Commission-Based Pay: What Are the Components of a Commission-Only Sales Plan? Can We Pay Employees Commissions Only?" Society for Human Resource Management, 12 Dec. 2012, www.shrm.org/resourcesandtools/tools-and-samples/hr-qa/pages/whatcomponentsofacommissionsalesplan.aspx. Accessed 4 May 2017.

Doyle, Alison. "What Is Commission Pay?" Balance, 11 Jan. 2017, www.thebalance.com/what-is-commission-pay-2061954. Accessed 4 May 2017.

Hopkins, Christy. "Commission-Based Jobs: Ultimate Guide to Working in One or Hiring Them for Your Business." FitSmallBusiness, 25 Apr. 2017, fitsmallbusiness.com/commission-based-jobs. Accessed 4 May 2017.

Magloff, Lisa. "A Commission-Based Salary." Houston Chronicle, smallbusiness.chron.com/commissionbased-salary-11999.html. Accessed 4 May 2017.

Nichols, Lee. "Rights of Commission-Only Paid Workers." Houston Chronicle, smallbusiness.chron.com/rights-commissiononly-paid-workers-44625.html. Accessed 4 May 2017.

Smith, Charmayne. "Commission Salespeople & Overtime: Federal Labor Laws." Houston Chronicle, smallbusiness.chron.com/commission-salespeople-overtime-federal-labor-laws-4955.html. Accessed 4 May 2017.

Sundheim, Ken. "7 Different Ways Sales Professionals Are Paid." Business Insider, 18 Apr. 2011, www.businessinsider.com/7-different-ways-sales-professionals-are-paid-2011-4. Accessed 4 May 2017.