Commission is a phrase that many of us may have heard of, but not one that we really ever fully understood the detail behind. However, knowing exactly what a commission is and how it works is crucial if you are to be paid on a commission basis or thinking about paying a person a commission.

What is a commission?

A simple commission, meaning in a contractual sense is that it is a form of payment. However, a commission definition becomes more complicated in practice as it is paid to an employee or contractor depending on various criteria. 

On a very basic level, if an employee or contractor is tasked with selling products, they then receive a percentage of the final value of all products sold. In that way, it can be used as a good incentive and motivator for employees to hit sales targets which help improve a company’s profitability. If you define commission structures clearly for employees, they should know what they have to do to maximize their take-home pay. 

How does a commission work?

The reason that commission can become complicated is that the structures will change from contract to contract, or company to company. For example, some contracts may pay an employee only partly on a commission basis, with their salary making up a big chunk of their paycheque still. However, some employers may choose to pay employees only on a commission basis, meaning that if the employee does not hit the right sales targets or criteria, they may not get paid very much in one month or another. 

As defined above, commissions usually work on a percentage basis of the amount of sales made. Importantly, there is also a time limit to make those sales. Most companies will work on a month-by-month schedule, meaning that employees have 30 odd days to drive sales and meet targets. 

Advantages of a commission 

As briefly alluded to above, a commission payment structure can be a good way of motivating employees. It can help incentivize them to keep hitting sales targets to help your company become far more successful and profitable. Another benefit to commission is that it is thought to align an employee’s views with an employer’s views more closely. Additionally, employees sometimes like the power they have over their income, and like that, in some months, they can materially improve their earnings. That then works in the favor of the employer as it usually means that more products have been sold, but it will also work to encourage the employee to continue making those sales levels. 

Contractbook and commission

While the idea behind commission may be simple enough - the more sales an employee makes the more cash they receive - commission structures can be complex. For that reason, using a contract to clearly outline what a person’s commission will be earned at, and how, is critical. It means that the employee knows from the outset what his or her payment terms are, and the company knows that they have been clear about the payment structure that the role receives. 

Plus, Contractbook allows companies to generate these contracts quickly and easily. The online collaboration tools mean that the negotiation stage between the company and potential employee is streamlined and efficient, saving precious time on completing the contract. 

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