What You Should Know About Commission-based Jobs
When managers want to motivate their sales staff, they pay them by commission. Instead of earning a straight salary or hourly rate, commissioned sales professionals earn their pay by keeping a certain percentage of every sale they make. Land a large customer, or exceed their quota, and commission-based workers can take home far more money than they would earn on a set salary.
Commission-based jobs exist in every corner of the economy, from real estate agents and stock brokers to automobile salesperson and construction contractors.
Companies often choose to pay their staff solely through commission when they want to push their sales staff to work hard to drive sales for the company. It's a classic strategy, and it works, says Jim Peduto, the president of Matrix Integrated Facility Management and a columnist for
Contracting Profits magazine.
But a straight commission pay scale has a downside - when sales get scarce during an economic downturn, staff may leave their company for other jobs with more secure income, Peduto writes.
Another downside to commission-only pay is that workers are under such intense pressure to make the next sale that they may begin to ignore some tasks that are not directly sales-related. When workers forego necessary administrative work or customer support tasks, the whole company can suffer.
Salary-based compensation also has its own drawbacks, as it can remove the reward for ambitious employees to go beyond their basic job description. That's why the best compensation package includes a balance of salary and commission.
"Developing a compensation plan with the right pay mix is the best approach for weathering any market condition. A set salary guarantees a minimum level of pay for employees, which shows that you're invested in them for the long haul, and the added commission incentive rewards employees for high levels of performance, making their hard work worthwhile," Peduto says.
Workers who are paid by commission may also face a challenge when customers question their motives. People know exactly what they're buying when they purchase a house or a car through a commission-based salesperson. But most customers rely heavily on their broker's advice when buying complex products like an insurance policy or stock market investment.
And when that advice is tied directly to the sales person's compensation, some customers get nervous, according to Jane Bryant Quinn, a personal finance columnist for the Washington Post. They may question whether the broker is selling them the best product available or merely the one that pays him or her the highest commission.
Another drawback of commission-based pay is that it's a poor motivational tool when a company sells products that take a long time to deliver, according to Construction Marketing Ideas magazine.
A salesperson selling new homes in a housing development would have to wait months or even years after closing a deal to claim his or her cut of the purchase price. A better solution for paying fair wages on these large jobs is to establish a type of profit-sharing plan, sharing the commission as a group, said Michael Wong, a business manager quoted in the article. He works for a construction company in Austin, Texas.
"The best way to address this issue is that the whole firm comes up with a formula for incentive pay based on profitability of the company. That way, the company acts as a team for all project efforts," said Wong.
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