About Sales Commission

A sales commission is a form of payment for services based on a predetermined percentage of goods sold. Many businesses, such as real estate brokering, car sales, and marketing initiatives, are paid on the basis of sales commissions.

Significance

The amount of a sales commission is calculated as a percentage of the sale. For example, if the sales commission rate is 30 percent, for every $100 of goods sold, the salesperson would make $30. This percentage may be affected by a range of factors, including seniority with the company, experience and sales success rates. Many skilled salespeople make six- or seven-figure yearly salaries based on commissions alone and enjoy the system because it allows them to work more or less based on their individual needs. However, it is an unpredictable source of income and can be a source of anxiety to some.

Types

Another formula used to determine a sales commission amount is the accumulative formula. This method offers more incentive for the salesperson to sell more by establishing pay rate plateaus that increase along with the number of sales. A variation of the accumulative method is that the first 100 units sold will be paid at a 10 percent commission, while the next hundred will be at 11 percent, and the next hundred at 12 percent.

Effects

When a commission is offered, it tends to be the only form of compensation a salesperson receives. It is very rare that a company will offer a salesperson a sales commission and salary, and in fact it uses this incentive as a marketing tool. The more a salesperson's income is based on her sales, the more she will want to sell and the more the company will sell as a whole.

Misconceptions

There are typically strict rules on sales commissions, such as the commission is rescinded if the product is returned or the service denied. Also, commission tends to be paid based on gross profit, not on gross sale. This prevents the parent company from paying the sales commission on money from the amount before taxes.

Warning

While sales commissions are used by legitimate companies, they are also used heavily in fraudulent Internet marketing and pyramid schemes as a way to entice employees. Scam programs offer potential employees sales commissions not only on their own work, but on the work of the people they enroll in the program as well.