Q&A - What is commission and when should it be used in a pay package?
Recommend on Google+
Commission is a payment made to employees based on the value of sales achieved. It can form all or (more often) part of a pay package. Commission is, therefore, a form of “incentive pay” (see also profit-related pay, bonuses).
Commission, like piece-rates, is a reward for the quantity or value of work achieved. In most cases, the employee is paid a flat percentage of the value of the good or service that is sold.
The rate of commission depends on the selling price and the amount of effort required in making the sale.
For example, commission rates could range from 5% where the product sells easily (e.g. household goods sold door-to-door) to 30% where the effort is substantial.
The main advantage of commission from an employee’s point-of-view is that it enables high performing sales people to earn huge amounts.
The main advantage to the employer is that the payroll cost is related to the value of business achieved rather than just the amount produced. After all, businesses exist to sell goods and services for profit – not just to make things.
However, there are several drawbacks with using commission payments:
• Sales people may cut corners to make sales (e.g. not explain the product or service in enough detail to potential customers) – i.e. customers are misled & missold
• High commission earnings enjoyed by some of the sales team may be resented elsewhere in the business – particularly if the sales actually depend on a team effort
• It is difficult to change what proves to be an over-generous commission structure without upsetting and demoralising the sales team
• Once commission payments have been made, the sales force may lose some motivation until they begin to focus on the next payment (which might be up to 12 months away)
As a result of the above disadvantages, most businesses that use commission as an incentive payment method offer a basic pay plus a moderate commission level. In this way, if sales and profits justify the change, the commission rate can always be increased slightly.
blog comments powered by Disqus
The UK Economy - Private and Public Sector Pay [14 Mar 2011]
Business Pricing Tactics Under Scrutiny [12 Dec 2010]
Strategy Case Study - Vauxhall/Opel restructuring [24 May 2010]
Build a Tower - Build a Team [22 Apr 2010]
Taking Demand-based Pricing To Extremes [8 Feb 2010]
What business students can learn from how businesses have handled the recession [1 Feb 2010]
Introducing business and the economic environment with Darling’s debt dilemma [27 Jan 2010]
Revision presentation - motivation in practice [17 Jan 2010]
Revision Presentation - Protecting Staff through Legislation [30 Dec 2009]
Office of National Statistics publishes annual survey of hours and earnings [12 Nov 2009]
The Jenson Button Business Lesson [21 Oct 2009]
The gentle touch in city finance [14 Oct 2009]
The Changing Face of Human Resources [11 Sep 2009]
Motivation in practice - how not to do it - lessons from Britain’s bosses [1 Sep 2009]
Fantasy Football hit by the weakness of sterling [17 Jul 2009]
How to improve profitability? - give customers a “staff appraisal” [12 Jul 2009]
Q&A - Outline the main costs and benefits of inflation [1 Jul 2009]
Work For Free? Or Pie In The Sky? [16 Jun 2009]
A stunning example of how wage costs can differ for the same job [10 Jun 2009]
Q&A - What are the main drawbacks to an entrepreneur of starting a business [22 May 2009]
Motivating employees - the end of the mobile phone sales shark? [17 May 2009]
Q&A - What is share capital [2 May 2009]
Q&A - What is profit-sharing? [1 May 2009]
Q&A - What is “piece-rate” pay? [1 May 2009]
Q&A - Explain “time-rate” pay [1 May 2009]
Q&A - What factors should a business consider when deciding what to pay employees? [1 May 2009]
Q&A - What is job enlargement? [1 May 2009]
Q&A - What causes an exchange rate to change? [1 May 2009]
Q&A - How are businesses affected by changes in interest rates? [1 May 2009]
Q&A - What are the main methods of financial reward? [1 May 2009]
Q&A - Explain Taylor’s theories of motivation at work [1 May 2009]
Q&A - What is credit and why do businesses need it? [1 May 2009]
Q&A - What is repeat business and why is it important? [1 May 2009]
Staff retention in a recession? Give them more holidays (and a pay cut too!) [20 Apr 2009]
How can the same product be cheaper to buy new than second-hand? [16 Apr 2009]
Viability of wind farms poses a “sources of finance” challenge [9 Apr 2009]
Flight to value at Waitrose [15 Mar 2009]
Q&A - What is meant by repeat business and why is it important? [1 Mar 2009]
Q&A - What is meant by the production process? [1 Mar 2009]
Q&A - What are the disadvantages to a start-up of setting up as a franchise? [1 Mar 2009]
Q&A - What are the financial objectives of a new business? [1 Mar 2009]
Q&A - What is meant by adding value [1 Mar 2009]
Huge losses force Taylor Wimpey into drastic promotional activity [6 Sep 2008]
Can a company get the sack? [20 Aug 2008]
Not enough customers to break the daily grind at Beanscene [14 Aug 2008]
Tipping and the Minimum Wage [5 Aug 2008]
The exciting topic of budgeting makes the front pages [29 Jul 2008]
The Challenge of Recruiting for the Best Job in the World (OCR Applied Unit 9) [1 Apr 2008]
Counting the Cost of Workplace Sickness [17 Mar 2008]
Has the Google bubble burst? [10 Mar 2008]
John Lewis staff bag a bumper bonus [7 Mar 2008]
21p extra on the National Minimum Wage [5 Mar 2008]
BUSINESS TEACHER RESOURCE NEWSLETTER
Get first news of business teaching resources, ideas and other materials from tutor2u. Over 9,400 business teachers from the UK and around the world receive our regular teacher email newsletters. Sign up for free here!
Popular Topic Tags
recession, demand, prices, price, unemployment, profit, economics, costs, investment, inflation, supply, employment, trade, competition, gdp, risk, china, debt, euro, entrepreneur, capacity, production, innovation, downturn, tutor2u, revision, pay, exports, manufacturing, confidence, profits, food, incentives, banks, strategy, globalisation, aqa, expectations, oil, csr, usa, startup, retailers, housing, productivity, sterling, supermarkets, takeover, google, economies of scale, mortgage, cash flow, advertising, quiz, leadership, property, buss4, tesco, economic growth, video, efficiency, enterprise, motivation, stakeholders, apple, deflation, corporate social responsibility, ebea, market share, airlines, pricing, taxation, merger, slowdown, bank of england, acquisition, interest rates, market failure, borrowing, competitiveness, sustainability, product life cycle, credit crunch, budget deficit, aqa business studies, facebook, twitter, aqa business, bbc, nelson thornes, philip allan updates, starbucks, philip allan, monopoly, diversification, recruitment, organic growth, stocks, training, oligopoly, starter activity, shareholders, uk economy, poverty, dollar, emerging markets, government failure, management, retailing, suppliers, buss1, marketing mix, tim harford, cpi, branding, opportunity cost, breakeven, government spending, hodder education, vat, product, customer service, eu, losses, wages, evaluation, india, external growth, wealth, environment, edexcel, location, promotion, technology, information failure, business studies revision, sources of finance, franchise, aqa gce business, elasticity, regulation, spare capacity, welfare, jobs, economic cycle, marketing, zondle, strategic direction, british airways,View all tags for the Business Blog
