What is a Commission?

There can be several possible definitions for the term commission. It can be a specially organized group that may have been put together in order to solve some issues or look into a particular matter. In finance, the term usually means something quite different. It is a payment, often expressed in percentage, for some type of service that is frequently sales oriented.

A number of workers receive part or all of their pay by earning a commission on their work. Stockbrokers, insurance brokers, salespeople, real estate agents, bankers, and many others may be entitled to a percentage of what they sell. This is sometimes the only salary a person receives or it may be a percentage of sales/deals, on top of a straight salary.

Frequently, percentage has a set amount, though this can vary by business. People who work only on commission tend to have higher percent reimbursements than those who work with some form of underlying salary. A retail salesperson might earn a small percent of sales, perhaps one to two percent, while the real estate agent or insurance broker could earn a higher percent. In certain instances commission percentages are evaluated by quality or quantity of merchandise. The auto salesperson might earn more for selling a new car than he would for selling a used one, or could have a higher commission reimbursement rate for selling a particular model of car during special sales events.

One common payment strategy is to assign people to work on a draw versus commission basis. When sales are low, the person receives a minimum salary, but as sales increase, they may receive part percentage of sales and part salary. Alternately they may greatly exceed draw and be paid only in percentage of sales. Occasionally people have the choice between draw with small percentages or sole commission with much larger percentages. Of course, being paid by percentage of sales only can be risky if demand or price sharply declines, but gifted salespeople or other agents may find this reimbursement strategy well worth it because of the extra money they make when they sell something.

A certain set of considerations applies for those employees who make commissions. Sales work typically means lean times and anyone in sales, investment or related businesses has to know how to handle salary when less salary is earned. Those who regularly live by percentage of sales are advised to create budgets that include putting part of their money away for low sales months. Most salespeople and agents know the inherent risk of making commissions instead of a salary, and celebrate their big sales by banking or investing some of their money for those periods where no commissions are earned.

For the buyer, it’s sometimes useful to know what amount of money paid goes directly to a seller or agent’s salary. Some people, for example, don’t want to have real estate agent sell their homes because they know that agent gets to keep a certain amount of the proceeds. Companies usually need to be direct about the percentage of a sale employees are paid, and some businesses make this a selling point. A number of online stock companies now allow people to trade at a per trade fee that is clearly advertised or other businesses brag their employees are not on commission and thus won’t subject customers to high pressure sales tactics.