Commission – What is commission?
Commission, also known as sales commission, is a payment given to employees based on the sales they make.
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Commission is often calculated as a percentage of the value of a sale. The rate usually correlates to how difficult it is to sell the product, with easier sales having a lower commission rate.
Employers who offer sales commission should outline their rules for earning commission in their employees’ contracts. For example, it should be explicitly clear which sales are eligible for commission, which rates apply, whether there’s a commission cap, and when employees will receive the commission they earn.
The commission is usually earned on top of a base salary; however, some companies may offer commission-only sales positions. In the UK, jobs that offer commission-only positions are still required to meet the rules regarding minimum wage.
Commission might be considered a type of bonus; however, bonuses are usually one-off payments given at a particular time of year or under specific circumstances, whereas sale commission might be given whenever an employee makes a sale.
Commission and taxes
As an employer, you’ll be responsible for ensuring that your employees’ pay (including wages, commission, bonuses, and other kinds of cash benefits) is correctly taxed. Employers should report and tax employees’ pay through PAYE, HMRC's system for collecting Income Tax and National Insurance.
As an employee, you should bear in mind that commission is considered part of your taxable income. This means that you may cross a tax threshold, and may therefore pay higher taxes if you earn more through commission.
Pros and cons of sales commission
For business owners, the main advantage of sales commission is that payroll expenses are linked to the amount of money coming into the business. Commission may also increase motivation and productivity by incentivising more, or bigger, sales.
However, employers should also consider the drawbacks of using a commission system. For example, sales staff may cut corners to make more sales. Additionally, unequal pay can cause tension between employees.
For employees, the sales commission rewards staff with stronger sales records. For the most successful salespeople, the commission system might offer higher earning potential than sales jobs that don’t offer commission.
On the other hand, working for commission can be unpredictable and risky – particularly if you’re on a commission-only contract. For example, if you work for a company that’s particularly affected by seasonality, you might earn a lot more in some months than in others, which can make it difficult to budget throughout the year.