Sales Commission is a standard way of compensating sales people in most businesses. Unlike standard compensation methods such as Hourly Salary or Exempt Salary, where employees are paid either by the hour or on an agreed upon rate per year, Sales Commissions are dynamically calculated based on the performance of the sales person. Sales Commissions are also variously known as Pay-for-performance, Sales Compensation, Incentive Compensation, Variable Pay, etc.
Salespeople are among the most important employees in any company and adequately compensating them for high performance becomes an important business activity for the company. In addition to Salespeople, Sales managers, technical support personnel and others may also be incented. Salespeople’s compensation can be a combination of Base Salary and Sales Commissions or can be pure Sales Commissions. Salespeople with pure Base Salary are rare. Salespeople take a risk with their compensation in a commission situation, but they typically have an upside where they could make far more than the average employee, if their performance is high.
Sales commission programs are possibly the most variable programs conducted by a firm. These programs tend to vary significantly from industry to industry, and many times within companies in an industry. Sales commission programs tend to be different by employees even within a single firm. Unlike regular salary programs, Sales Commissions tend not to be governed by a lot of laws and rules, and this adds further variability to the programs. Variations can include the kind of performance being incented (Revenue Vs Gross Profit), the frequency of calculation (Monthly Vs Quarterly), the type of transactions being incented (Sales orders Vs Invoices Vs Payments), the level of salespeople being incented (Salesrep Vs Sales Manager), whether Draw or Cap is being used, and so on.
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