Salary vs. Commission Pay Plans

Salary plus commission can balance stability and performance incentives.
Salary plus commission can balance stability and performance incentives. (Image: BananaStock/BananaStock/Getty Images)

Picking the best pay structure for the organization is a critical human resource function. Salary and commission are common components of pay structures. Some companies use straight salary plans where employees are paid a consistent wage periodically. Commission pay is based on sales or performance. Some workplaces use a combination of the two called salary plus commission.

Salary Basics

A straight salary pay plan means employees are paid an agreed upon salary or wage at incremental pay periods. Some companies issue paychecks weekly, while others pay semi-monthly or monthly. If an employee agrees to a $48,000 annual salary, for instance, his gross pay on 12 monthly payments would be $4,000. Salary or wage pay plans are more straightforward than commission plans that are based on performance.

Pros and Cons

Employees appreciate the stability of a salary pay plan. Knowing what your income is from month to month makes budgeting simpler. Companies also benefit from the ability to budget payroll expenses accurately. A main drawback of straight salary pay plans is that employees get used to consistent pay and can begin to take paychecks for granted. This may result in comfort and a lack of motivation to produce more or work harder.

Commission Basics

Commission is a pay plan in which employees are paid based on the results they produce. It is most common in selling jobs where sales employees are paid a percentage of the revenue or profit they generate. Experienced car salespeople often receive straight commission pay. If a salesperson receives 50 percent of the gross profits he produces, a sale of a $12,000 car acquired for $8,000 produces a $2,000 commission. Many retail sales associates receive commission pay on top of basic wages where they get a percentage of sales. A 5 percent commission on $300 in sales on a given day, for instance, would add $15 to an employee's paycheck.

Pros and Cons

Pay based on performance is a key benefit for employers in using commission. Commission can motivate employees to produce more than they do without extra pay incentives. Salespeople appreciate the ability to earn more income by selling more and setting higher goals. A drawback of commission pay is that it is usually a bit more complex to track and manage than straight salary. Plus, overuse of commission can cause salespeople to pressure buyers and potentially turn them off.

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