Commission

The basis of employee remuneration can vary and can be based on wages, salary, commission, piece rates or a combination thereof. Some industries and roles may offer commission to employees on top of a wage or salary to encourage performance. Commissions are just one of the ways employers can motivate employees to maximise their potential and productivity.

If intending to engage an individual on a commission-only basis, employers should be aware that employees must still be paid the minimum wage. In this guide, we discuss the definition of commission, eligibility for commission pay and employer obligations.

Definition

Commission is a form of remuneration made to an employee after they complete a task, complete certain projects within a certain period, or reach a target. Generally used as an incentive in sales-based roles, commission can be offered in a variety of situations. For example, when an employee is paid based on the sales they have made or other targets they have reached, they might receive commission in the form of a percentage of the total value of the sale made.

Commission payments are typically calculated based on a percentage of the sale or transaction value. This means that the amount that an employee can earn will vary depending on how much they work. Depending on the industry, paying an employee commission might be more practical than paying them an hourly wage.

Types of commission

There are different types of Commission available. Companies vary in the way they set and pay commissions.

• Straight commission - Employees are only paid when they make a sale and these commission are typically higher.
• Base salary and commission - A mix of fixed salary and commission which allows employees some security and stability and offers the potential for higher earnings.
  
• Tiered commission - In this type of agreement, the commission increases after achieving certain sales thresholds. This motivates employees to achieve more. For example, 10% commission is earned up to $100k of sales, then 15% commission is earned from $100k up to $200k and so on.
  
• Revenue commission - The employee earns commission per sale.
• Gross margin commission - The commission is based on profit, not on sales. It encourages employees to focus on profitability and the bottom line.
• Residual commission - The employee earns commission if the account generates revenue. This is generally used for recurring business models.
  
• Draw against commission - The employee gets guaranteed pay, which is later balanced against commission. It helps new employees settle in and stabilise.
  
• Territory volume commission - Commissions are split based on regional performance. This is a good option for team-based selling, but the drawback is it that it may de-incentivise top performers and high earners.
  
• Multiplier commission - The base commission is adjusted based on performance against various targets and KPIs. This type of commission can be complex, but it allows to performance to be measured multi-dimensionally.
  

Benefits of commission schemes

• Motivates employees to work harder - Commission pay can be highly motivating for those in sales and marketing. Giving employees an incentive to perform better can greatly increase sales and productivity for the business.
  
• Helps manage payroll costs - Compensating employees based on commission can help manage payroll costs effectively. Since employees are paid depends on the sales or income they generate, employers can keep their costs down, particularly for employees who do not perform well.
  

Disadvantages of commission schemes

• Aggressive tactics - Sales is already an aggressive, high intensity job and with the temptation of commission it can push employees to rely on unethical or risky tactics. They may become focused on the commission and lose track of other goals.
  
• Unpredictability - Not all months will be the same and the unpredictability can cause financial instability.
  
• Discourages team building - Earning commission is a highly individualistic role and it may discourage team building as employees will be focused on achieving their individual goals and targets without considering company goals.
  

Difference between commission and bonus

A bonus is usually associated with performance. Employers pay a bonus in addition to the employee’s base salary. Employers can pay bonuses like a commission when the employee meets previously agreed upon performance measures. Employers only need to pay bonuses if there has been an agreement to provide a bonus. A commission is directly tied to sales, whereas sales may be only one of many factors in deciding to pay a bonus.

Commission and the minimum wage

In cases where employees are paid commission only and will not receive an hourly wage or annual salary, they must still be paid at least the minimum wage. This means an employer cannot underpay an employee for the hours they worked, even if they have not met the sales goals or targets.

At the other end of the spectrum, commission can be capped at a certain amount, allowing employers to have control over the maximum amount they will pay.

Commission agreements

To avoid misunderstandings and set clear expectations the parties should record the commission scheme in an agreement. Some important considerations include:

• Will the commission be calculated on sales including or excluding GST?
  
• Will the employer pay commission only once the client/customer has paid?
• If goods are returned, will the employer deduct commission from the next pay cycle?
  
• How will the employer calculate and pay commission if employment ends abruptly or partway through a commission period?
  
• If the employee is paid commission based on a percentage of value of sales made, then what are the criteria around reducing or changing prices?
  

Manage commission with ease

If you are considering offering commission or bonuses should ensure that you have the relevant resources and agreements in place. Peninsula has worked with thousands of businesses in New Zealand supporting them in matters of employment relations and work health and safety. For assistance on managing commission-based employees, call the team at Peninsula.