What is commission pay and how does it work?

Written by luke arthur
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What is commission pay and how does it work?
Performance-based commission pay can motivate workers. (Images of Money; Flickr.)

When running a company, one of the most difficult tasks for business owners is keeping employees motivated. One way to motivate employees is through the amount of money they earn. With this in mind, many business owners use a commission pay structure for their workers. With commission, employees earn based on their performance and what they produce.

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Commission pay structure

With a commission pay structure, a company pays employees based on production and not on the amount of hours worked. With a salary structure, employees exchange a certain amount of time for a fixed amount of money. When a company uses commission, the employees receive a percentage of the amount of revenue they bring in. This is commonly used for salespeople and the commission is based on a percentage of how much they sell during a given time period.

Transparent rewards

One of the major benefits of using a commission pay structure is that it provides a transparent rewards system for employees. When employees are on commission, you know exactly how much they will be paid in exchange for the amount of service they provide. Other pay structures can get complicated and these tend to not motivate employees. With commission, everyone can see that when they meet a certain quota or hit targets, they get rewarded.

Sharing success

Another feature of commission pay structures is that they help employees share in the success of the company. When employees work on commission, they receive less or no pay, unless they bring in something for the company as well. Employees know that in return for making a sale, they will receive something also. This gives the employee a vested interest in seeing the company do well over the long term. If the employees do well, the company does well at the same time.

Combining with other incentives

In some cases, companies will use a commission structure in combination with other incentives. This is done so that the company can further motivate employees to perform well. For example, some salespeople receive commission and a base salary at the same time. This allows them to get something even when times are bad for sales. It also still gives them an incentive to perform. Other companies use a commission and bonus structure for their sales reps.

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