The pros and cons of commission-based pay for your employees

How an employee gets paid for their work can be as varied as the work itself. Receiving a paycheck twice a month isn’t the norm for everyone. If you’ve ever heard a person say they’re working on commission or that they’ll get a commission from a sale, then that person is receiving a commission-based pay.

Employees who receive commission-based pay work in a number of different professional environments. Often they’re motivated by multiple factors, like a competitive performance element to the role, or products and services sold and revenue. Commission-based pay usually has some kind of metric or goal attached to it, and can be offered as a standalone compensation or in conjunction with a base salary.

Here, we’ll go through what it really means to provide commission-based pay to your employees, how it works, and the benefits of commission-based work, as well as the pros and cons of this pay method. We’ll also go through the how-to’s of calculating commission-based pay and payroll.

Well—what are you waiting for? Read on.

What does it mean to be commission-based?

Commission-based jobs base an employee’s income on a percentage (or, in some cases, a flat rate) of goods or services sold. Many employees who are part of a sales department will more likely than not be on commission-based pay, though the pay tiers and structures do differ.

According to the U.S. Department of Labor, commission-based pay is typically used as a way to motivate employees and increase productivity. Commission-based work is meant to be more competitive and move the company or team toward a communal goal, so these are great jobs for folks who are ambitious and thrive in competitive environments. For people who love the thrill and uncertainty of a seemingly limitless income target, commision-based pay offers a real thrill. After all, if an employee is measured by how much they sell or the revenue number coming from it, and they get a percentage of a lot, then they will, of course, keep increasing their income.

Of course, commission-based pay does impact payroll in a big way. So it’s important to keep detailed records to avoid any errors and ensure employees are getting the right compensation.

How does commission pay work?

There are a number of ways commission-based pay can be incorporated into an employee’s overall salary or wages. Here are a few of the common ways commission pay works:

• Straight commission: Employees get a percentage of a sale and no other compensation.
• Base pay (or salary) plus commission: Employees are guaranteed some pay in addition to earned commission from sales of goods or services.
• Variable commission: There’s an earned percentage of sales for employees, but it can sometimes change depending on sales targets or other metrics.
• Draw against commission: Think of this like paying yourself a loan, but it’s your paycheck. It’s a guaranteed amount to be paid out, but it’s deducted from future commissions.

There’s also a salary plus a bonus pay structure option. Typically that tier is reserved for employees in a particular role or company who earn extra income if they’ve met a sales goal or hit a productivity metric that far exceeds it, usually deemed as exemplary performance.

The most common roles for commission-based employees are often in sales-centric positions, like at car dealerships, luxury boutiques, or roles that involve donor donations. However, there are other roles that are also commision based.

Some examples of jobs that pay commission include:

• Travel agent
• Sales representative
• Hair stylist
• Insurance agent
• Financial provider
• Real estate agent
• Massage therapist

These can be competitive positions that are client-based, with an influx of new or repeat clients, or based on one-time sales, like those at direct selling companies.

Businesses that can benefit from commission-based employees

Can your business benefit from a commission-based pay system? Well, that depends on the services or goods being provided. For the most part, the roles at these businesses are sales or service oriented, which makes it easier to assign a metric like product amount sold or a dollar amount per day or week or month.

But there are a variety of businesses across the sales spectrum that can really benefit from having commission-based employees on their roster.

Businesses that can benefit from commission-based employees:

• Spa services. Massage therapists, acupuncturists, hair stylists, cosmetologists—all of these roles and businesses have the potential for commission-based earnings.
• Financial services. Investment advisors or stockbrokers are just a few positions in the financial world with commissions (and not just the big firms!).
• Real estate. Real estate agents will get a percentage of any sale they close on a property.
• Tattoo artists. Tattooing is both an art and service; tattoo artists can make a portion from the overall price of the piece (particularly if it’s large and done through multiple sessions).

The pros and cons of commission-based pay

Commission-based pay structures are everywhere. Generally they’re popular simply because they do work. If your company sets healthy goals for your employees, and encourages playful competition all in the name of investment in the company or brand, then commission-based pay becomes a no-brainer approach for compensation.

However, it’s important to understand any potential issues or any questions that may arise if you move to a commission-based pay system for your employees, especially if it’s something you’ve never done before.

Let’s run through the pros and cons of commission-based pay.

Pros of commission-based pay

Commission-based work promotes a higher level of motivation

Employees are often more motivated to do their best work and close a deal if they know their income is attached to it. Selling more means making more, right? This motivation doesn’t just live in the workplace either. Employees will seek out ways to make themselves more effective in their role through workshops, development courses, or generally seeking out more knowledge. By optimizing their skillset and developing further, there’s a higher potential to increase sales for the business and income for the employee.

Commission-based employees are goal-focused

There are a number of ways to keep employees engaged with their work. One of the most effective? Goal-setting. When a business has specific targets to hit or a revenue metric that needs to be met that day, week, or month, this can trickle down to employees. Even in the easiest example of a retail business that has a sales goal per day (think of a bookstore, for example), this is a broader goal that focuses your employees.

Goals can be built from there. Your employees, no matter your business’s industry, can develop goals around customer engagement and their own percentage of close/win sales to keep themselves on track.

Investment in company growth

A key reason to have commission-based pay for employees at your company is that it can help your team stay engaged and invested in its growth. Without adding more profit and sales, there’s a higher chance that that job won’t be around for much longer. It’s a cycle: more sales, means more income for an employee. The really neat thing is that the cycle grows and doesn’t remain as a stagnant ring. The more employee investment through sales or deals won, means the company can continue growing and potentially provide more opportunities.

Cons of commission-based pay

Commission-based pay means keeping impeccable records

Record-keeping is essential for almost every job From employee hours worked, to scheduling, to payroll, to literally everything in-between, it can be a headache if done improperly. Commission-based pay for employees isn’t immune to potential record keeping woes.

Record-keeping isn’t impossible but it may deter some employers from implementing this type of pay for employees. First and foremost, there needs to be information about metrics or sales goals employees are working toward for their commission. Without that, there’s no anchor to base their pay on. Second, every sale needs to be accounted for and documented to ensure employees are entitled to the commission percentage if they reach a goal.

If records aren’t well-kept, this can be demotivating for employees.

Negative competition for commission-based employees

Competition is all well and good when it’s friendly. In the business space, healthy competition between employees to reach sales goals can be extremely motivating. But there is a downside. If employees—or employers for that matter—take the race for top seller too far, it can very quickly veer into negative territory.

Nothing feels worse at a job than when you’re unsupported by your colleagues and boss. Some employees and employers may view commission-based pay as a way to promote a negative environment in the workplace. Check to ensure you’re not hyping team members up to create a rivalry rather than harmony.

If sales are down, you have to compensate up to the minimum wage

Commission-based pay structure and pay schedule is determined by the contract a business and employee have. And if sales are great and business is booming, that can mean a higher income ceiling. But what if sales are down?

Commission-based pay comes with its risk, especially if income is exclusively derived from commissions earned. According to the Fair Labor and Standards Act, employers with employees on commission-based pay who aren’t reaching sales goals need to compensate up to the minimum wage of the state.

How to calculate payroll for commission-based pay

So, after reading the pros and cons, you’ve decided you want to do commission-based pay for your employees. Wondering what’s next? Calculating payroll at your business for that income.

Don’t worry: it sounds more daunting than it really is. Take the following steps into consideration when determining how to calculate payroll for commission-based pay employees.

1. Develop your commission structure

Decide what you want your commission structure to look like with employees. Will it be a flat rate? How much can you afford as a percentage to give to your employees? Is 5% sufficient if they’re successfully upselling and bringing in new business? It’s important to set this out at the beginning and put it into a contract visible for all employees so the terms are clear.

2. Calculate commission-based on pay structure and hours worked

To calculate commissions owed to your employees, tally up hours worked and sales made at the end of each pay period. Are taxes included too? Factor that in. From there, you’ll know how much employees will be paid.

3. Set a payment schedule

Your payment schedule will be determined by the commission structure (flat rate? percentage?) and if you want to pay employees monthly or after a certain number of sales. Paying employees their commissions faster does incentivize them to keep working. And that’s good, since it usually means you’ll see an increase in productivity. Whatever the case may be, make sure you have those payment terms in writing so that employees know when they can expect payment.

4. Create a record-keeping system for commission-based sales

Make sure you have an easy, accessible record-keeping system for your commission-based sales. Always include basic information such as the sale date, amount, employee, and the product sold.

An effective way to keep all records together is through a centralized tool with access to different data points. Homebase offers a great digital option to keep all your records centralized on payroll, employees, and more, making your admin job a whole lot easier.

5. Use payroll tools to help you pay commission-based employees on time and accurately

Incorporate payroll tools like Homebase to take any stress out of paying your employees their commissions. Homebase’s payroll has an abundance of automations and integrations when it comes to figuring out taxes, direct deposits, integrations, and paying for commission-based employees.

If setting up your team with a commission-based pay structure sounds like a win to you, there’s no need to wait to start. Set yourself up for success with Homebase to easily communicate the update to your team and document the details, as well as get payroll moving. Try Homebase for free today.

Commission-based pay FAQS

What is commission-based pay?

Commission-based pay is when an employee’s income is based on a percentage (or, in some cases, a flat rate) of goods or services sold. Many employees who are part of a sales department will more likely than not be on commission-based pay, though the pay tiers and structures do differ.

What businesses can benefit from commission-based pay?

Businesses like those directly involved in sales of goods or services benefit the most from commission-based pay. Some of those positions might include financial sector workers like investment advisors, real estate agents, or spa and hospitality roles.

How do I know I calculate commission-based pay?

As an employer, you decide what you want your commission structure, and commission-based pay for employees, to look like. You get to decide whether it’s a flat rate, a percentage of sales, commission plus salary, or entirely commissioned income. Calculate it through meticulous record keeping of sales, employee hours worked, and products sold. That will help you determine how much to pay your commission-based employees in a given pay period.