Commission vs Salary: Inside Sales Compensation Pros and Cons

Meanwhile, commission-based employees can receive salary or hourly rates; the commissions often supplement their base pay. Some, however, work only on commission, often as independent contractors. Hybrid compensation means that you earn a combination of commission and salary, usually with a lower base salary and a higher commission rate. This can be a good way to balance the pros and cons of both options, as you can enjoy some income stability and security, while also having some income variability and incentive. You can also benefit from more flexibility, as you can adjust your sales strategy and tactics according to your goals and preferences.

  • Before joining Fit Small Business, Heather was the Payroll/HRS Manager for a top cloud accounting firm in the industry.
  • Commission pay policies must be created with absolute understanding of legal pay requirements for each role.
  • You need to provide regular and constructive feedback and coaching that helps your salespeople grow and improve.
  • Many organizations tier the sales goals with bonuses given for achieving quarterly or team goals.
  • However, hybrid compensation also has some trade-offs and complexities.
  • Many companies offer a combination of salary and commission, known as base pay plus commission.

In this article, we will explore the pros and cons of both models and how they influence the behavior, mindset, and relationships of your sales staff. If, say, you’re trying to penetrate a new market, you can offer a higher commission to encourage your sales team to crack the market. Workers don’t always have clear metrics for evaluating their performance. Commission-based workers are compensated based on the revenue they generate for your business rather than a straight salary. However, you can also use it as an incentive for an hourly or salary position.

Salary Components for Sales, Marketing and Business Development Staff

Aside from one-off deductions or pay adjustments, a salaried employee’s pay typically remains the same for each pay period. Now, my compensation consists of a base salary in addition to a commission based on a percentage of sales. I am able to motivate myself because I know that the harder I work, the better I will do, and the more I will earn. If your employer treats your regular wages and commission as one combined employee wage, federal and state taxes would be withheld as usual. The total withholding would be based on your W-4 election, and it would be included on the W-2 you get from your employer at tax time. A 70/30 split between base salary and commission plus bonuses is a fairly typical mix according to a 2008 survey from the Canadian Professional Sales Association.

  • For help doing your payroll in-house, check out our guide on how to do payroll.
  • You need to recognize and reward both individual and team achievements that celebrate and reinforce your salespeople.
  • Employers are also required to withhold payroll and federal income taxes on commissions.
  • As such, you want to design a compensation package that helps you attract and retain the best people.

Commission pay is a variable form of compensation where an employee gets paid based on the amount of work they achieve or a percentage of sales they make. Commission pay is most often used for sales positions as incentive to increase sales volume and transaction amounts. When you are considering taking a commissions-based job, make sure you find out when commissions are paid.

The Disadvantages of Percentage-Based Sales Commission Plans

For instance, an employee might have a base salary of $40,000 per year, plus a 10% commission on sales. Employees do not receive a base pay and only earn a fixed percentage of the value of the sales they generate. For example, if an employee sells $10,000 worth of products and the commission rate is 5%, they would earn $500. If you’re classified as an independent contractor or a self-employed professional, the tax treatment for your commissions will be different.

Salary-based structure

Employers often use sales commissions as an incentive to increase worker productivity. Hourly employees usually work in service industries, shift work jobs, or other jobs with fluctuating workweeks, like construction. SmartAsset Advisors, LLC (“SmartAsset”), a wholly owned subsidiary of Financial Insight Technology, is registered with the U.S.

To motivate employees to sell more, some businesses increase commission percentages as employees reach certain milestones. For example, you might receive a 15 percent commission for all sales up to ​$500,000​, and then receive 17 percent of any sales you make above ​$500,000​. While tips and bonuses can be considered commissions, commission-based jobs are usually in higher-end retail, like car sales or real estate, insurance or financial adviser, and advertising sales. You’ve probably heard it before, most commission gigs are sales positions and in sales, if you keep your pipeline full of customers your income potential is unlimited.

Tips for Working in a Commission-Based Job

Ironically the incentive structure of commission pay is a negative as well as a plus. Some salespeople become determined to do whatever it takes to close the deal and earn the commission, even using unscrupulous tactics or false statements. It can also hurt team-building if some of your staff notice a big differential between their pay and the top salespeople’s.

It can also lead to complacency, mediocrity, and underperformance, especially if the salary is too high or too low for the market or the expectations. Moreover, it can make it harder to measure and reward individual contributions, as well as to identify and address performance issues. Whether you should pay your employees hourly vs salary, commission vs salary, or commission vs hourly depends on the flow and structure of your business. They all have pros and cons, and matching them with the right positions is essential so that you’re not paying money you don’t have to.

During the course of your career, you might be offered the opportunity to earn commissions, either in addition to your base pay or as your entire compensation. Different businesses use different formulas and different terminologies to use commissions as part of employee compensation. Employees may like that their pay isn’t based on just being on the clock. If they earn a big commission, they can take a break with no loss of income. Generally, if you’re an independent contractor or self-employed, you’ll be responsible for paying quarterly estimated taxes to the IRS on your own. For questions about tax payments or preparation, consult with a tax professional for advice.

Benefits of Commission-Based Compensation

For example, an experienced salesperson or manager might ask for a higher base salary, while a new recruit could accept a salary based almost exclusively on commission. With this type of remuneration, the reward for performance needs to be clear and financially attractive. Many organizations tier the sales goals with bonuses given for achieving quarterly or team goals. When salary is the main compensation method for your sales team, it is a good idea to establish performance standards for both customer service and sales targets.

You may feel less motivated, challenged, and rewarded, as you don’t have a clear incentive to improve your sales skills or results. You may also miss out on opportunities, as you don’t have a reason to pursue new leads, upsell existing customers, or negotiate better deals. Salary-based compensation may suit you if you value consistency, safety, and balance.

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