Commission can be a confusing topic for anyone, whether you’re great with money or not. Maybe you’re considering a job with a commission structure or are currently in a field where commission is a big chunk of your compensation.
If you’re not sure how it all works in the business world, we’ll break down the concept so you come out a little wiser than you were before.
What Is Commission?
Commission is additional compensation that’s earned based on job performance. When you agree to a commission-based role or commission structure (often by signing an agreement), you agree to be paid a certain amount of money that’s dependent on hitting some goal—goods sold, meetings closed, hires placed, to name a few examples.
What Kinds of Jobs Work Under a Commission Structure?
When you think of commission, your mind immediately goes to a sales-type role (think of a retail salesperson trying to get you to buy that extra pair of jeans). Commission is popular in most sales jobs because their responsibilities are heavily tied to a company’s revenue goals. Having the opportunity to earn commission—sometimes a hefty amount—motivates those individuals to hit or get close to their quarterly or yearly goals.
But commission can pop up in other places, too. In recruiting, you’re often provided a commission on each candidate you successfully place—usually a percentage of their annual salary. As an account manager, you can earn commission on clients you upsell or renew for the year. And in real estate you can get a cut of the money you make selling a property. In fact, in some roles commission makes up almost all of your compensation, meaning your income is variable and highly dependent on your output.
When Is Commission Paid Out?
It works differently at every company, but in general commission payment can be distributed monthly, quarterly, or yearly, depending on a company’s structure and when commission is considered “earned.”
For example, a company may define commission “earned” for a salesperson as when the new client signs a contract. This means that the employee who sold the deal won’t get their commission until a signature is collected and the deal is verified (which usually means they double check to ensure the right salesperson is compensated and the overall transaction is clean and accurate).
Another example: In recruiting, typically commission is earned when someone is hired and stays at the company for a period of time, maybe three or four months. If the new hire leaves before then, the recruiter doesn’t get the commission.
How Is Commission Calculated?
Commissions can be calculated by a set percentage or by a formula. As mentioned above, a recruiter generally gets a percentage of the new hire’s starting salary (usually 10 to 20%), while sales people may have a formula-based commission structure.
Take this scenario. In sales, your total compensation could be 50% base salary and 50% commission. So if your total yearly compensation agreement is for $100,000, $50,000 of that is guaranteed for the year and $50,000 is based on how well you perform. You may earn less than the $100,000 if you don’t reach your goal, but you may also be able to earn more than that number as long as your company doesn’t have a cap or “ceiling”—meaning the point at which an employer stops paying you more commission.
But a company may use an upward sloping curve to decide commission (where you’d earn less than 60%) because they want to really incentivize employees to get as close to their goal as possible—and to even exceed it and make a lot more money. What can be frustrating about this, of course, is that it’s not an easy formula to follow, so it’s not entirely clear what your commission will look like until you receive your paycheck.
They could also use a tiered model (the staircase line). This means you earn the same dollar amount of commission until you reach a certain percentage of your quota, where it jumps up in amount.
There may be other exceptions when you can earn more than the formula typically allows. If you sell a deal where the customer signs on for two years or a special kind of product, for instance, you may earn extra commission for that.
There’s also a concept called a “minimum performance threshold” or “floor,” which is common for more senior-level employees. This basically means that the person must get some percentage to goal in order to start earning any commission—the understanding being that a certain level of underperformance is unacceptable.
If you’re unclear as to how your commission is calculated, talk to your HR or finance departments, or your boss or team lead.
What Happens if I Leave a Job Before Getting My Commission Check?
Whether or not commission is owed to an employee after they’ve been terminated or left a role depends on a number of factors, including what’s defined as “earned” between the company and the employee and state wage law (you can see your state’s rules and regulations around wages here).
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