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The pros and cons of commission-based pay
If you’re just entering the job market or transitioning into a new career, you’ve probably come across commission-based positions during the job hunt.
When considering commission-based work, take the time to ensure this payment structure works best for your financial needs. Analyzing employee compensation and benefits is essential before accepting a position. Compensation plays a crucial role in career satisfaction and well-being outside work, influencing your motivation and job performance.
But for some people, having a higher ceiling is the ultimate motivator — which makes them great candidates for commission-based jobs. But what is commission pay, and how does it affect your salary?
According to the U.S. Department of Labor, a commission is the sum paid to an employee for completing a task, which is usually selling a certain amount of goods or services. Commission might be paid on top or in place of a regular salary.
While the Fair Labor Standards Act (FLSA) doesn’t require commission payments, some employers incorporate sales commission into their employee compensation policies to incentivize workers to sell more.
Most companies calculate commission as a percentage of total sales, meaning the more an employee sells, the bigger the paycheck.
Many employers offer commission-based salaries to boost morale and motivate employees. Here are eight positions that are often partially or fully commission-based:
Recruiters
Account managers
Real estate brokers
Literary agents
Talent managers
Travel agents
Wealth managers
Sales representatives
Several commission-based pay structures exist. Here are three of the most common types:
A straight commission means your employer bases your earnings entirely on commission, so you’ll only receive a payment if you close a sale. Straight commission will either be a flat fee or a percentage of the total sale, varying from one business and service to another.
Here’s an example:
Patrick is an event planner working for a local hotel. The hotel's pay structure varies depending on what Patrick rents out. He gets a flat $500 fee for renting the banquet hall or conference room and a 15% commission for every hotel room he rents.
The upsides
Straight commission offers more flexibility in your schedule and you get to decide where you want to direct your energy. You may feel more comfortable making many small sales or going after a few big commission payments.
For a business, a straight commission-style payment system is a strong motivator for employees to work hard and bring in revenue.
The downsides
A commission-only pay structure means you can't depend on the security of more traditional compensation structures, like hourly wages, firm salaries, and overtime pay.
For a business, turnover could be high as many employees will seek out more stable and consistent employment.
Salary plus commission means you’re guaranteed a fixed salary and earn commission on top of that. Even if you don't sell anything, you still receive your salary — making your commission more like a bonus.
Here’s an example:
Amber is an executive recruiter at a major East Coast recruitment firm. She makes an annual salary of $110,000 and a 20% commission of the annual salary for each role she successfully fills. In March, she successfully hired three executive roles with yearly incomes of $150,000, $180,000, and $200,000.
Amber combines her yearly salary of $110,000 with a 20% commission off these hires, giving her an annual salary of $216,000.
The upsides
For employees, it’s nice to know you’ll earn something no matter how productive you are. Additionally, you’re likely to receive the benefits that come with formal employment, like healthcare, a retirement fund, and the promise of a severance package.
As a business, you can incentivize workers to work proactively and stimulate healthy competition amongst your sales teams without employees fearing they won’t make sales — or get paid.
The downsides
As an employee, you may feel extra pressure to hit sales quotas because your employer guarantees you salary and benefits. Additionally, your commission agreement may come with exemptions. For example, a recruiter might only earn a commission after a recruit has stayed in a job role for 90 days.
As a business, you have to be careful about hiring good sales employees who will consistently generate enough income to make back your investment in them.
A variable commission is when the commission rate depends on criteria stipulated by the company. This means some products, services, or types of sales may garner a higher commission than others, depending on their value to the company. Variable commission is also commonly tied to performance and sales goals.
Here’s an example:
Caitlin is a salesperson with a wholesale T-shirt distributor. The company has a sales goal of $1 million per salesperson, with a 5% commission on annual salary for every $100,000 sold. Caitlin's yearly salary is $50,000, meaning for each $100,000 she sells, she makes a $2,500 sales commission.
The upsides
As an employee, you know how sales impact your income, which helps you prioritize deals and clients based on your commission goals.
As a business, variable commission permits you to tie the bulk of your compensation plan to revenue rather than incur a fixed salary cost.
The downsides
As an employee, it may be challenging to project your annual income because of varying commission.
If businesses aren’t increasing employee salaries based on good performance, they may run the risk of higher employee turnover because of wage compression — when wages decrease for certain roles even though skill and qualification requirements haven’t changed.
No matter the commission type offered, we recommend considering the following pros and cons before accepting commission-based work:
Negotiating your pay is always a good idea. And if you’re interviewing for a sales position, showing off your negotiating skills is advantageous.
While many industries set standard commission rates or have policies binding all employees and contractors, presenting a commission structure that benefits both parties is a great way to find a rate that works for you.
Consider suggesting something like a sliding scale, where the commission rate increases based on performance. A business may be more inclined to be flexible with a commission plan that motivates you to bring them more revenue.
While it’s worth trying to negotiate your commission rate, you’ll have even better chances of success with your salary range. In 2022, only 42% of American workers negotiated their initial salary offer, but 85% of those who did got some or all of what they requested.
If you’re considering a commission-based salary, weigh the pros and cons, the types of work environments you enjoy most, and whether the high of a big sale will match the low of a difficult month.
Although money isn’t the only relevant factor when choosing a job, your annual salary will enormously impact your present and future financial well-being.
Now that you understand what commission pay is, you’ll see why this pay structure isn't for everyone. Some people like the security of a fixed income, while others love the thrill of the sales hunt.