4 Ways to Calculate Commission

Salespeople are a different breed of worker, and that’s particularly true when it comes to running their payroll. In addition to a base salary, most individuals in the profession might be paid what’s called commission, or an amount directly tied to the amount or value of a sale they’ve made.
 

Commission, which comes with its own unique tax rules, can be calculated in a number of different ways. We’ll go through four common ways companies reward their sales employees for a job well done.

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1. Straight Commission

 

Under the straight commission model, sales employees are compensated just for the sales they make. Unlike some of the other models we’ll discuss, workers are not entitled to a base salary. Companies may take this approach in order to reduce overhead costs or because they believe it serves to better motivate their salespeople.

Formula:

Earnings = Sale x Commission Rate

As a compensation model, straight commission is polarizing. While it may make sense for high yield sales roles like real estate, it’s an unforgiving model in industries where the buying process can extend over several months. Additionally, because it can take several weeks to prepare new employees for selling, individuals with a straight commission may struggle to make ends meet in the short term.

 

2. Base Plus Commission

 

Call it the closest thing to a “happy medium” when it comes to paying sales employees. The base plus commission approach involves paying workers a minimum salary and then additional payments for each subsequent sale. By offering both stability and incentives for performance, this model is particularly well-suited in industries where it takes longer to “ramp up” employees or where deals can take months to close.

Formula:

Earnings = Base Salary + (Sale x Commission Rate)

The ideal ratio of guaranteed compensation to commission remains a subject of debate. If salaries are too high, will that simply demotivate employees? Get a pulse on regional and industry wages by using compensation benchmarking tools that take both base salary and commission into consideration.

 

3. Draw Against Commission

 

Similar to the straight commission model, employee earnings under this approach are based entirely on what the employee wins in sales. That said, this model takes an unconventional approach. Employers make an advance payment to the individual, and then deduct that amount from any subsequent commission. In effect, salespeople are lent funds from their company, which they then pay back through their commission. Any leftover funds are kept by the employee.

Formula:

Earnings = (Sale x Commission Rate) - Advance Payment

While this approach isn’t as unforgiving as straight commission, it still poses significant risks. If a salesperson can’t close a deal for a prolonged period of time, they can accumulate heavy debts to their employer.

 

4. Graduated Commission

 

The graduated commission approach involves setting up “tiers” where past a predetermined threshold of sales, an individual’s commission rate goes up. For example, individuals may earn 10 percent on their first $10,000 in sales, 20 percent in their next $20,000, and so forth.
 

Adopting a graduated commission model is a great way to incentivize sales employees to increase sales volume, and is especially popular in automobile and real estate sales. It may also be combined with the approaches described above. Below is a sample structure a company might use:

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The above serves as a primer on some of the more common ways employers compensate sales employees. Payroll administrators processing commission should keep in mind that these payments, similar to bonuses, are considered “supplemental wages” by tax authorities. To learn more about how these payments are taxed, read our free Definitive Guide to Payroll by clicking below.