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The commission is one of the many ways companies reward employees for their work. Its calculation depends on various determinants and understanding the factors that influence your commission can help you negotiate a fair rate. In this article, we explain what a commission is, how to calculate it, and various types of commissions.
What is the commission?
The commission is a form of payment to employees that is based on the number and value of the product or service they sell. Employers can offer a commission as an additional reward or a commission-based salary only. Commissions are an excellent tool to motivate employees to work harder and meet performance objectives in terms of sales and profit growth.
For a small business, commission-based salaries offer flexibility because they vary with the number of sales, so the expense employers pay for wages is proportional to the results of their employees.
Related: Learn About Being a Sales Representative
What to know before you calculate commission
To accurately calculate your commission, you need to know the particulars of your agreement with your employer. You should consider the below factors before you make your calculation, as they influence commission payments:
Commission basis: The commission basis is the dollar amount on which the calculation is based. The commission basis is usually the total amount of sales, and can also be the gross margin or net profit. It can even be the inventory value.
Commission rate: This is the fixed number or percentage connected to the sales amount.
Override: The commission rate may change according to the result.
Commission period: The period over which you will calculate the sales amount and apply a commission is called the commission period.
Split: The commission can be split if several people contributed to the sales. There can also be an agreement stating that the area manager earns a percentage of the sales results achieved by the employees in this region.
Commission tier: A policy can apply one rate on a certain amount of the commission base and a different rate on the remainder.
Related: 15 Sales Jobs That Pay Well
How to calculate commission
You can use these steps to calculate your commission:
Determine the commission period.
Identify the commission base.
Multiply the commission base by the commission rate.
Consider the various commission rate.
Apply the tier if necessary.
Calculate override if it applies.
Deduct returns, if necessary.
Split the commission, if necessary.
Calculate the manager's portion, if it applies.
1. Determine the commission period
Commissions can be paid on a weekly, biweekly, or monthly basis. The commission will be paid at the end of the period but can be delayed if employers need to receive payments from clients before paying you.
Example: If the commission period is a month, you need to consider all sales concluded during each month to calculate your commission, and you will receive a monthly payment.
2. Identify the commission base
The commission base is usually the purchase price of products sold. Determine the total dollar amount of sales concluded during your commission period.
Example: If during February you sold products for a value of $10,000, your commission base is $10,000.
3. Multiply the commission base by the commission rate
To calculate the amount of commission you will receive, multiply your rate by your commission base.
Example: If the commission rate is 5% and your commission base is $10,000, then multiply $10,000 by 5%: $10,000 x 5% (or 0.05) = $500
4. Consider the various commission rate
In some cases, the employer can apply a different rate according to the product. To calculate with various rates, identify the various commission bases and multiply each one by the correct rate.
Example: Product A has a 5% commission rate, and product B has an 8% commission rate. You sold $10,000 of product A and $5,000 of product B.
($10,000 x 0.05) + ($5,000 x 0.08) = $500 + $400 = $900
Your total commission payment is $900.
5. Apply the tier if necessary
If the commission rate varies with the dollar amount of sales for the same product, this is a tier system, and you need to calculate the commission for each tier using the appropriate rate.
Example: You sold product C for a total of $40,000, and the tier commission rate applies as follows: product C has a 5% commission rate for the first $25,000 sales and 3% above $25,000. Here is how to calculate:
