What is Commission Pay?

Hiring employees is pretty straightforward - but it's hard to figure out ways to keep them highly motivated.

One method that some companies use is commission-based pay. Commission can lead to all sorts of positive outcomes - for the employee, as well as the business.

But there are legal rules when it comes to offering commission pay. If you neglect them, you could end up paying wage reimbursements and risk losing talented workers.

In this guide, we'll look at what commission pay is, what the laws cover, and how to reward high performing employees.

What is commission pay?

Commission pay is a financial incentive given to employees based on high performance or achievements.

Paid commission is commonly used in sales roles. The employee earns more money, on top of basic salary, in recognition of their efforts.

But commission isn't just based on individual performance. Employers can also use it to reward an entire sales team for their collective efforts.

Sales commission generally involves being paid money as an incentive. But people can earn extra commission through company products and stock shares. In the end, they all count as financial incentives.

What industries commonly use commission pay?

Many companies use sales commissions as incentives or rewards for their staff. But it's better utilised in some sectors than others.

The most common industries that use commission pay include:

• Estate agencies.
• Travel agencies.

Are there different types of commission?

Yes, there are two categories that commission falls into - short-term and long-term. Commission usually involves giving financial incentives to hard working staff. But, you can also offer other rewards that aren't directly linked to money.

Let's take a look at both types:

Short-term schemes

A short-term scheme is offered through things like bonus payments or sales commission.

People receive these rewards for their specific efforts or performance. Short-term schemes are especially beneficial when you want to grow motivation and engagement on an everyday basis.

Long-term schemes

A long-term scheme is offered through things like pay rises or company shares.

Staff are offered rewards, but often receive them in the future. The main aim of long-term schemes are to encourage retention and loyalty with the business. They're seen as valuable investments; so these rewards are often investable, too.

Examples of sales commission payments

There are many plans employers use to offer sales commission payment.

They're chosen based on what works for their specific company or work strategies. Let's look at each one in more depth:

Straight commission

Straight commission involves being paid commission based on what you actually earn.

It can be outlined as a fixed rate; or as a 'commission percentage' based on total sales. For example, an employee works as an event manager at a restaurant. They receive a fixed rate of £500 for renting out the dining rooms, as well as 20% commission on all drink sales.

The biggest benefit that straight commission offers is work flexibility. An employee can pick and choose how they'd like to make extra money or sales.

The downside to straight commission is that it lacks job security. They won't have access to job securities you'd find with fixed hourly wages or annual salary.

Salary-plus commission

Salary-plus commission offers commission paid on top of your annual salary.

Even if an employee doesn't sell well, they'll still receive sales commission. For example, all employees receive 5% bonus payments at the end of each working year.

The benefit of salary-plus commission is that an employee earns extra pay - regardless of whether they sell or perform well.

The downside of salary-plus commission work is that an employee might feel discouraged if they don't meet the same sales quotas as their colleagues.

Variable commission

Variable commission involves being paid commission based on specific job terms.

An employee may still need to sell products; but they'll follow their own commission rate. For example, employees receive 10% for every car they sell. Their commission rate will vary per month because each car they sell to new customers has a different price.

The benefit of this commission-based job is that an employee will know what deal leads to the highest sales goal.

The downside to variable commission pay is that it's hard for a company to manage annual income. Their sales numbers will vary, and so will the commission rate.

What are the benefits of commission-based pay?

People go to work to earn a regular salary. But how do you encourage loyalty and drive from your staff? Especially if they can't see how it'll benefit them in any way.

When you reward high performance through commission, it grows engagement, performance, and productivity. They benefit from more money; and you benefit from more overall output.

Let's look at the benefits of commission pay:

Boosts productivity and revenue

When you offer additional rewards to staff at work, it can boost productivity and output.

Some may see the benefits of working a little harder to gain a prize. So, they'll change their own attitude or mindset to reach this. This leads to more commission earned over time - growing overall revenue for the company.

Many employees prefer to work this way as it provides better control over their work situation. They probably wouldn't sell with the same care or enthusiasm if they were pressured. But with sales commission, they'll motivate themselves to hit their sales goal.

Grows job performance

Commission pay can also help you see which employees stand as valuable members of your business.

This is seen through job performance; both in individuals, as well as teams. Collectively, your workforce develops their overall skills and work engagement.

Commission-based pay and bonus schemes can even help inspire other employees to perform better. Seeing their peers attain rewards motivates them to work at the same level.

Decreases employee turnover

When employees are recognised for their hard work, they feel respected and valued.

Their gratification then turns into loyalty and retention. They'll choose to remain working in their job role - decreasing staff turnover over time.

Workplace reputations like this don't stay quiet for long. It quickly becomes known in the recruitment realm; and highly skilled workers will want to work at the same place.

Strengthens work relations

Commission-based pay isn't just given to individuals; you can also offer team-based incentives.

A hard-working employee is a valuable asset for any company. But when you have a whole team of hard workers, the benefits are multiplied.

Solid teams aspiring for the same goals helps strengthen employee relations. Commission-based jobs like this also help build mutual trust and respect.

What are the downsides of commission-based pay?

There are some downfalls to commission-based pay you can't afford to ignore.

Some are manageable for employers; others require a little more thought. If you don't control these issues, your commission structure could cause huge consequences for the company.

Let's look at the downsides of commission pay:

Expensive processes

No matter how much revenue you make, commission pay can be an expensive process.

There are many things to think about; from outlining a budget to paying commission taxes. For some companies, a compensation plan can ruin their annual revenue.

Employers should also consider external financial issues that may impact their commission plan. For example, economic crashes or sudden business losses. Here, you might struggle to pay basic salary, let alone commission on top.

Leads to unhealthy competition

Motivation in the workplace can either go two ways. It can grow encouragement at work or it's received in a bad light.

Employers should make sure their commission structure doesn't lead to unhealthy competition. Your structure must be inclusive across every employee eligible for commission. And that they're earning their payment fairly.

Some sales teams might go to great lengths to earn the highest commission. And this can include using unethical or even illegal methods.

When they act this way, it ruins employee relations for good. It can also affect the relationship between a new client or potential customers.

Judged on financial worth

When using sales commission, it automatically categorises staff into high and low performers.

Being judged on your financial worth can be highly unmotivating for some people. It leaves them feeling unsupported, undervalued, and even disrespected at times.

Your staff may end up leaving due to unfair or highly stressful work conditions. In the end, it can potentially ruin someone's mental health and wellbeing.

Causes potential discrimination

With or without intent, commission structures can discriminate against certain people or groups.

Some employees may already face barriers or disadvantages compared to their peers. Maybe they have a disability or suffer from social anxiety. Either way, it may make it hard for them to work, let alone outperform.

This can lead to unequal pay and can stunt career path development.

What is the law on commission pay?

In the UK, there is no specific law that covers commission-based pay. However, there are money-based legislations that employers must comply with.

Every employee and worker has a legal entitlement to fair wages. This is covered under:

• The National Minimum Wage Act 1998 (NMW).
• The National Minimum Wage (Amendment) Regulations 2016.

Commission pay should be offered in addition to an employee's base salary. Meaning, you need to provide them separately through their own pay period. Basic salary and commission payments should be kept separate on payslips, as they're subject to their own tax deductions.

Employers cannot reduce an employee's base salary because they were paid commission. This could lead to an unlawful deduction of wages. Claims like this often result in compensation payments for lost wages.

Can an employee negotiate their sales commission rate?

Yes, an employee can negotiate their sales commission rate. But it's ultimately up to the employer whether to accept their higher commission terms or not.

Potential candidates may try to negotiate their commission rate based on previous sales skills. Or you might have to consider negotiation if an employee reaches a certain amount of sales goals.

Many industries used fixed rates when it comes to their sales commission plan. This allows everyone to have an equal chance to earn extra money. The term is usually added as a commission agreement clause in contracts or handbooks.

Employers should be considerate and flexible with commission negotiations. If more sales teams are performing well, you might ruin their flow if you fully reject negotiation terms.

How to manage commission pay in the workplace

It's important to keep your sales teams motivated and engaged at work. Not only does it grow their work skills, but it also leads to greater income for your company.

Many companies use a sales commission plan to encourage high performance. But employers must ensure their plans comply with all legal requirements.

Let's look at ways to manage commission pay in the workplace:

Create a commission structure

The first step you should take is to create a commission structure.

Your payment structure should clearly present how much commission staff can earn at work. Make sure you highlight what your sales commission plan includes. And what methods won't be tolerated (i.e., cheating the system).

Your commission structure plan should be accessible to all eligible employees. Add the terms to contracts or policies covering your sales commission plan.

Set fair sales goals and objectives

Employers must set fair sales goals and objectives when earning commission.

Your commission work should be reasonable against an employee's capability and means. Avoid copying what other companies use as their payment structure. Your commission plan should be based on your staff and job requirements.

Outline financial security

It's important to outline financial security within your commission-based job.

If your job only offers commission without a base salary, make sure this is clearly presented. Sales commission work might not be suitable for all people; some might desire a fixed income or annual salary. By presenting these terms early, you'll be able to filter through potential candidates.

Keep a record of commission payments

It's important for employers to keep a record of all commission payments.

If you don't manage your sales commission calculation, you could end up overpaying staff and losing money.

Invest in digital tracking software to record your sales commission payments. It's less time-consuming and minimises human errors. Review these reports on a bi-monthly or annual basis.

You can even include rewards that aren't money-based, like company products or stock shares. Even though these aren't cash payments, you should still consider their financial value.

Get expert advice on commission pay with Peninsula

Employers will only benefit from a sales team who are motivated at work. It boosts their career development, as well as grows your company’s income.

Commission payment is a great way to utilise this. But if it's done wrong, you could end up paying lost payments, losing staff, and even facing reputational damages.

Peninsula offers expert advice on commission pay. Our HR team offers 24/7 HR employment advice which is available 365 days a year.

Want to find out more? Contact us on 0800 028 2420 and book a free consultation with an HR consultant today.