What is commission-based pay?

Commission-based pay or commission pay is when an employer bases an employee’s income on a percentage of goods or services sold. Many sales team members receive commission-based pay, though the pay tiers and structures vary from company to company.

Is commission-based pay a positive thing?

Commission-based can benefit employees because they have more control over how much they make (more sales means more commissions). This can help employees make substantially more than they would in another position, and for many employees who earn a commission, there isn’t a limit to how much they can earn.

When do employees receive commission?

There are several ways to approach commission pay. For instance, a sales team member can earn a commission on sales they make. Recruiters’ commission is typically a percentage of the salary of the employee they place. Employees usually receive commissions monthly, quarterly, or annually.

What are the types of commission?

Employers can create a commission structure that best suits them. A few options are:

Straight commission

Straight commission is when an employee’s earnings are based on their sales performance. Employees do not earn a fixed salary or hourly wage.
Straight commission can motivate employees to work at their highest levels and constantly improve their performance. This model also has its risks as employees may face roadblocks such as slow seasons or longer sales processes. Straight commission is common in real estate where they only earn money after selling property.

Salary plus commission

Salary plus commission gives employees a safety net while also allowing them to earn even more income, often uncapped.
Salary plus commission is common in sales, where workers may earn a base salary and a commission based on the deals they close. Employees searching for more financial stability may find this option more appealing.

Variable commission

In variable commission, the commission rate depends on the sale type. For example, an employee may earn a higher commission rate if they close a massive deal that exceeds a benchmark. Just as in other commission methods, employees can feel motivated to sell and earn more.
Companies using Variable commissions can adjust the commission rate based on their needs and budget.

How is commission taxed?

The IRS and state and local governments might expect citizens to pay income taxes on their commissions. This includes supplemental income not reported on their W-2 or 1099-MISC form. Employers can withhold tax on commission when processing payroll.

What are the disadvantages of commission pay?

Commission pay can motivate those in sales roles, but it also has a few drawbacks, including:

• Fluctuating income can be challenging for employees who want a stable income
• Commission can cause disruptions within the sales team if employees forgo collaboration for individual winnings
• The pressure of generating sales can lead to burnout and low morale
• Commission structures can add complexity to payroll processes