Commission (remuneration)
Variable pay for sales, aligning agent and principal interests.
Wikipedia / Wikimedia Commons
Commission is a form of variable-pay remuneration for services rendered or products sold. It is a common way to motivate and reward salespeople, and can be designed to encourage specific sales behaviors, such as reducing commissions when granting large discounts or increasing them for selling certain promoted products. Commissions are usually implemented within a sales incentive program, which may include one or multiple commission plans based on territory, position, or products.
- field
- Sales compensation, remuneration
- known_for
- Variable-pay remuneration for services or products sold
- common_industries
- Car sales, property sales, insurance broking, most sales jobs
- typical_calculation
- Percentage of revenue, profit-based, or bonus-based
- legal_case
- Murray v. Beard (N.Y. 1886) – faithless servant doctrine
- california_law
- AB 1396 (2011) – written contracts for commissions required by 2013
Lore & Background
Commissions are a common method to solve the principal–agent problem by realigning employees' interests with those of the firm. Payments are often calculated as a percentage of revenue, but profit-based or bonus-based models also exist. On-target earnings represent a salesperson's base pay plus expected commissions assuming a quota is met, helping estimate total compensation. Commission structures can include multiple levels of attainments, each with different thresholds and rewards, and can apply to employees or independent contractors.
Reader's Guide
Commissions serve as a key mechanism in sales compensation, designed to motivate and reward performance while aligning employee behavior with company goals. The article notes that commissions can be structured to encourage specific actions, such as selling certain products or avoiding large discounts. Legal implications are significant: the 1886 New York case Murray v. Beard established that a disloyal broker forfeits commission rights under the faithless servant doctrine. In California, AB 1396 (effective 2013) requires written contracts detailing how commissions are earned, computed, and paid, excluding short-term productivity bonuses and profit-sharing plans unless a fixed percentage of sales or profits is offered. The article also discusses trail commission in the UK, where it was banned on new investment products as of April 2014 and phased out by April 2016, following the Retail Distribution Review. This reflects ongoing regulatory efforts to address conflicts of interest in commission-based compensation.
Did You Know?
- Commissions can be reduced when granting large discounts or increased for selling certain promoted products.
- On-target earnings include base pay plus expected commissions assuming a salesperson meets a quota.
- In Murray v. Beard (N.Y. 1886), a disloyal broker could not recover commissions under the faithless servant doctrine.
- Trail commission in the UK was banned on new investment products as of April 6, 2014, and phased out by April 6, 2016.
Frequently Asked Questions
What is Commission (remuneration) in sales compensation?
It is a variable-pay arrangement in which a worker earns a share of the revenue or profit generated by transactions they close. The structure is designed to tie the agent's income directly to the principal's business outcomes, creating a shared financial incentive.
How is a commission payout typically calculated?
Most plans express the payout as a percentage of the deal's revenue, though some anchor it to profit margins or a flat bonus per sale. Employers often layer multiple commission schedules that vary by territory, job title, or the specific product line being promoted.
Which industries rely most heavily on commission-based pay?
Auto dealerships, real-estate agencies, and insurance brokerage firms are the most well-known examples, but the model extends to virtually any role whose core function is closing sales. It is the default incentive framework across most front-line selling positions.
What legal protections exist for commission earners?
California's AB 1396, enacted in 2011, required that commission arrangements be set out in a written contract by 2013. On the common-law side, the 1886 New York decision in Murray v. Beard established the 'faithless servant' doctrine, permitting an employer to withhold earned commissions when the employee acted in bad faith.
Why do companies prefer commission over a fixed salary for sales roles?
Because it directly links an agent's take-home pay to measurable performance, pushing them to close more deals or steer customers toward priority products. Employers can also fine-tune the rate—such as lowering it when deep discounts are granted—to shape the exact selling behaviors they want to encourage.
More in Finance & Investment 1-18
Spotted an error? Know more?
This is a living reference — every entry is fact-audited, and reader corrections feed straight into our audit queue. Suggest an edit · See this site's audit record