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As an employer, you may choose to pay your employees commission-based payment structures as part of their remuneration that may also include pension contributions and benefits-in-kind. This structure is particularly common in sales jobs. Paying your staff a commission directly incentives their performance with the success of the business as a whole. It is therefore an effective way to align the interests of your employees with your business. This article will explain what you, as an employer, need to know about paying your staff commission.
What is a Commission-Based Payment Structure?
Commission is a short-term performance-related pay structure model for your employees based on their job performance. It is therefore an incentive-based pay structure because their earnings depend on some key performance metric related to meeting key performance metrics including:
- performance goals;
- KPI targets ;
- sales; or
- onboarding clients.
The commission rates you may decide to offer your employees differs between jobs. Jobs where commission-based payment structures standard include:
- sales;
- recruitment;
- stockbrokers;
- estate agents; and
- account managers.
Why Pay Your Staff Commission?
Under traditional compensation structures, employees are paid a fixed salary. However, where employees actively contribute to revenue generation, employers commonly add a commission feature to their employees’ remuneration package. This is because doing so directly ties the interests of your employees with your business’ performance.
Many employees prefer commission-based payment structures because it gives them visibility on their earning potential. In many cases, commissions may be uncapped, which further incentivises performance.
There are also disadvantages to commission-based payment structures. For example, if commission is tied to one particular metric, employees may neglect other aspects of their duties that do not directly contribute to this metric. This can impair your business in unexpected ways. For instance, employees may mislead customers in order to win a sale.
Additionally, commissions can result in unhealthy competition between staff.
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What Are the Different Types of Commission-Based Payment Structures?
There are different ways you can structure your commission packages. Common structures include:
|
Salary with commission |
A salary with a commission is a standard commission payment structure. It provides your employee with the security of guaranteed basic pay and the ability to earn more than this with the commission when they perform well, such as by making sales. For instance, a base salary of £30,000 plus 10% of any sales. |
|
Straight commission |
Straight commission is where you pay your employees only based on their performance. Therefore, they do not receive a basic salary. Instead, they usually receive a percentage of sales. You must ensure that you do not violate any minimum wage regulations where you do not pay a fixed salary in addition to commission. |
|
Graduated pay commission |
Graduated pay commission is where your employees receive commission between them but based on their team’s performance as a whole. For example, your new employees may earn a 5% sales commission, but those who have been with you for longer may have a 15% sales commission. |
Important Legal Considerations
When determining your commission-based payment structure, you should consider if you wish to make it a term of their employment contract. Employees prefer this because the term contractually obligates you to honour any commission. In some industries, it is standard practice to include commission payments as part of the employment contract.
Employers tend to prefer commission structures that are non-obligatory. The downside is that this makes the role less attractive to high-performing applicants.
However, in all cases, you should ensure that the compensation structure is:
- transparent;
- simple to understand; and
- reasonably fair.
Key Takeaways
If your business is in sales, commission payments are likely to suit your employees’ job roles. Paying your staff commission can incentivise their performance at work and boost your business sales. However, adopting a commission structure requires careful thinking as to the type of commission you choose. You should also consider the disadvantages of commission structures. If you attach too much weight to a single metric, employees are likely to neglect other aspects of their role.
If you need help understanding commissions in England and Wales, our experienced employment lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. So call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
Commission is a performance-based incentive where payment is tied to a metric such as volume of sales.
Commission structures typically incentivise employee performance because employee remuneration is directly tied to the performance of the business.
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