Commission can be a confusing topic for anyone, whether you’re great with money or not. Maybe you’re considering a job with a commission structure or are currently in a field where commission is a big chunk of your compensation. If you’re not sure how it all works in the business world, we’ll break down the concept so you come out a little wiser than you were before.
What Is Commission?
Commission is additional compensation that’s earned based on job performance. When you agree to a commission-based role or commission structure (often by signing an agreement), you agree to be paid a certain amount of money that’s dependent on hitting some goal—goods sold, meetings closed, hires placed, to name a few examples.
What Kinds of Jobs Work Under a Commission Structure?
When you think of commission, your mind immediately goes to a sales-type role (think of a retail salesperson trying to get you to buy that extra pair of jeans). Commission is popular in most sales jobs because their responsibilities are heavily tied to a company’s revenue goals. Having the opportunity to earn commission—sometimes a hefty amount—motivates those individuals to hit or get close to their quarterly or yearly goals.
But commission can pop up in other places, too. In recruiting, you’re often provided a commission on each candidate you successfully place—usually a percentage of their annual salary. As an account manager, you can earn commission on clients you upsell or renew for the year. And in real estate you can get a cut of the money you make selling a property. In fact, in some roles commission makes up almost all of your compensation, meaning your income is variable and highly dependent on your output.
When Is Commission Paid Out?
It works differently at every company, but in general commission payment can be distributed monthly, quarterly, or yearly, depending on a company’s structure and when commission is considered “earned.”
For example, a company may define commission “earned” for a salesperson as when the new client signs a contract. This means that the employee who sold the deal won’t get their commission until a signature is collected and the deal is verified (which usually means they double check to ensure the right salesperson is compensated and the overall transaction is clean and accurate).
Another example: In recruiting, typically commission is earned when someone is hired and stays at the company for a period of time, maybe three or four months. If the new hire leaves before then, the recruiter doesn’t get the commission.
How Is Commission Calculated?
Commissions can be calculated by a set percentage or by a formula. As mentioned above, a recruiter generally gets a percentage of the new hire’s starting salary (usually 10 to 20%), while sales people may have a formula-based commission structure.
Take this scenario. In sales, your total compensation could be 50% base salary and 50% commission. So if your total yearly compensation agreement is for $100,000, $50,000 of that is guaranteed for the year and $50,000 is based on how well you perform. You may earn less than the $100,000 if you don’t reach your goal, but you may also be able to earn more than that number as long as your company doesn’t have a cap or “ceiling”—meaning the point at which an employer stops paying you more commission.
The commission calculation could look one of three ways (or a combination of these):
The straight line shows what it would look like if you were to make your percentage to goal equal to the percentage of your commission—otherwise known as a standard commission rate. So if you’re 60% to goal, you’d earn 60% of your commission.
But a company may use an upward sloping curve to decide commission (where you’d earn less than 60%) because they want to really incentivize employees to get as close to their goal as possible—and to even exceed it and make a lot more money. What can be frustrating about this, of course, is that it’s not an easy formula to follow, so it’s not entirely clear what your commission will look like until you receive your paycheck.
They could also use a tiered model (the staircase line). This means you earn the same dollar amount of commission until you reach a certain percentage of your quota, where it jumps up in amount.
There may be other exceptions when you can earn more than the formula typically allows. If you sell a deal where the customer signs on for two years or a special kind of product, for instance, you may earn extra commission for that.
There’s also a concept called a “minimum performance threshold” or “floor,” which is common for more senior-level employees. This basically means that the person must get some percentage to goal in order to start earning any commission—the understanding being that a certain level of underperformance is unacceptable.
If you’re unclear as to how your commission is calculated, talk to your HR or finance departments, or your boss or team lead.
What Happens if I Leave a Job Before Getting My Commission Check?
Whether or not commission is owed to an employee after they’ve been terminated or left a role depends on a number of factors, including what’s defined as “earned” between the company and the employee and state wage law (you can see your state’s rules and regulations around wages here).
Some states consider “earned” commission mandatory wages and thus require employers to pay up even after the person has left the role, but because your company decides what constitutes commission “earned,” things can get a bit murky. For example, says employment attorney Brian Heller, a partner at Schwartz Perry & Heller, LLP, suppose “a company has a policy that commission is due when the new client pays its first invoice.” So if a salesperson spent months wooing a client, but got fired the day before that client was expected to sign and pay its first fee, “that salesperson has not earned any commission yet” because of the way the policy is structured.
Generally speaking, if you don’t have anything in writing, there’s no guarantee you’ll get your commission. You can check out this section of the Workplace Fairness website on what to do if your employer won’t pay you your earned commissions.
If you’re concerned about a company’s commission structure, make sure in your interviews and when networking to ask thoughtful questions—such as “What is the commission structure like for this role?” or “How do you measure success?” or “How have you received commission in the past?” (and read this article outlining all you need to know about receiving fair bonuses, too).
But on the flip side, companies also have the right to protect themselves from employees who may try to rig the system to earn more commission.
Let’s say a salesperson closes a deal and then leaves the company right after receiving their commission check, and that client ends up backing out later on and not paying up. That’s a big loss for the company that could have been prevented by redefining the terms of their commission structure.
As a result, companies will often have what’s called a “clawback” to encourage employees to see deals through to the end. A clawback means that if revenue isn’t collected or a deal falls through, the employer has the right to collect that commission from the employee, or deduct that portion from future commissions the employee earns.
Can Commission Be Negotiated?
Muse career coach Theresa Merrill explains that commission is harder to negotiate than other types of compensation—like a signing bonus—because it’s less discretionary and usually a set standard across the company.
But that shouldn’t stop you from trying anyway: “[A] good negotiation has both sides making concessions. So if you don’t get the base salary you expected, then push for a higher commission,” she says. She adds that proving you know how to effectively negotiate shows you’re a great salesperson—which only makes you look better when applying and interviewing for sales-oriented roles.
Merrill was able to do this with one of her coaching clients. “We negotiated a sliding scale where the commission percentage adjusts based on performance,” she recalls. “Which is a win-win situation. Higher revenue for the salesperson drives them to produce more.” If you can tie your commission plan back to your ability to overperform and produce, you’re more likely to convince the hiring manager to be more flexible.
If nothing else, agree to revisit the commission structure after you’ve been working at the company for a while, she suggests, and get it in writing.
Remember though, as a general rule it’s always smart to negotiate your base salary first. Because this is the part of your income that you can always count on year after year—and won’t fluctuate with performance—it’s worth trying to increase that number before arguing for a higher commission.
Will My Commission Change When I Get Promoted or Change Roles?
Your commission can change one of two ways while in a job. If you’re promoted or shift into a slightly different role, your commission plan may change completely. For example, if you become a manager of a sales team, your company could institute a floor to your commission structure, or shift your commission to more of a bonus plan. But what’s usually more common when you move up within your role or get a raise is that your base salary and variable salary (in other words, the amount of money you can make in commission) increases but your commission percentage or plan doesn’t change—unless you have an agreement otherwise to revisit it.
Let’s say you get promoted from sales associate to sales executive. You were originally earning $40,000 in base salary and up to $40,000 in commission a year (a 50/50 split). Now as a sales executive your base salary is $60,000 and you’re able to earn up to $60,000 in commission for the year. Yay, more money!
But with all promotions comes more responsibility, too. In sales, for example, your sales goal or quota is often some multiple of your base salary. So if at your company your yearly quota is 10 times your base salary, as a sales associate you’d need to bring in $400,000 in order to earn 100% of your commission, or the full $40,000. But now as a sales executive you’d have to shoot to bring in $600,000 to earn your whole commission.
The basic idea is that when you move up, you’re expected to produce more—with the understanding that you’ll earn more as a result.
Is Commission Taxed?
Yep, like all good things in life! (Sorry.) If you’re wondering how (and how much) bonuses and commission get taxed, read this.
How Do I Know if a Commission-Based Job Is Right for Me?
Like anything, a commission-based role has its perks and downsides. The biggest benefit is clear: the opportunity to earn more money. The harder you work and the more you accomplish, the more you’re rewarded. This can be incredibly motivating for driven, competitive, and goal-oriented people.
For others, working under commission can be stressful. If you underperform or struggle to hit goal, your income takes a hit. As a result, people who like structure or need a more stable source of income may not like working under this kind of pressure.
There are also in-between scenarios. Many individuals thrive on salaries that are almost entirely made up of commission, while others love working under a plan where only 30% of their income is variable while the other 70% is base salary. The beauty of this is that the job market really provides both kinds of options—so you can take your pick.
Remember: Your success in a commission-based role is also dependent on the team you join, the company you work for, the product you’re selling, and the job requirements you have to fill. So know that going in and feel out the situation before deciding.
Does your potential manager seem to support their direct reports in finding and landing deals? Is the product in demand and easily marketable, and the sales pitch around it sound? Do the company’s and role’s revenue goals seem reasonable and realistic? If you’re not sure, ask the experts in and around your network.
Photo of person taking picture of paycheck courtesy of RyanJLane/Getty Images.
As Editor for The Muse, Alyse is proud to prove that yes, English majors can change the world. Her work has been featured in Fast Company, Forbes, Inc., Motto, CNBC's Make It, USA Today College, Lifehacker, Mashable, and more. She calls many places home, including Illinois where she grew up and the small town of Hamilton where she attended Colgate University, but she was born to be a New Yorker. In addition to being an avid writer, Alyse loves to dance, both professionally and while waiting for the subway.More from this Author