- The commission is a form of remuneration where employees earn a percentage of the sales they make. It pays employees a percentage of the value of the sales they have made. Commission incentivizes employees to sell more and generate more revenue for the business.
- It is a popular way to incentivize salespeople and is commonly used in industries such as real estate and insurance.
- The amount of commission earned by an employee is calculated as a percentage of the sales value.
- The formula for calculating commission is: Commission = Sales value x Commission rate
- The commission rate is usually agreed upon beforehand and varies depending on the industry and the specific company.
Advantages of paying Commission:
- Commission incentivizes employees to sell more and generate more revenue for the business.
- It can lead to higher sales and increased profits for the business.
- It motivates employees to work harder to achieve targets and exceed expectations.
- It allows businesses to pay for performance, rather than just paying a fixed salary.
Disadvantages of paying Commission
- Commission can lead to aggressive sales tactics and unethical behaviour if not monitored closely.
- Employees may focus solely on making sales rather than building relationships with customers.
- Commission-based pay can create a competitive environment among employees and may lead to conflict. It can also create inconsistency in earnings, as sales can fluctuate from month to month.
Examples:
- A real estate agent earns a commission of 5% on the sale of a $500,000 property. Their commission would be calculated as follows:
- Commission = $500,000 x 0.05 Commission = $25,000
- A car salesman earns a commission of 2% on the sale of a $20,000 car.
- Their commission would be calculated as follows:
- Commission = $20,000 x 0.02 Commission = $400
