Commission: Overview, definition, and example
What is commission?
Commission refers to a payment made to an individual or entity based on a percentage of the total value of a sale, transaction, or service provided. It is typically earned by salespeople, brokers, agents, or other intermediaries for facilitating a deal, transaction, or the completion of a specific task. Commission can be structured in various ways, such as a fixed percentage of sales, a tiered percentage based on sales performance, or a flat fee per transaction, depending on the terms of the agreement.
Why is commission important?
Commission is important because it serves as an incentive for individuals to generate sales or complete transactions. It aligns the interests of employees or agents with the business's success, as they are directly rewarded based on their performance. Commission-based compensation can motivate individuals to work harder, pursue more sales opportunities, and increase overall revenue. For employers, it provides a way to compensate employees or agents without committing to a fixed salary, allowing for more flexible and performance-based compensation structures.
Understanding commission through an example
Imagine a real estate agent who helps clients buy and sell homes. The agent earns a commission of 5% of the sale price of any property they sell. If the agent sells a home for $500,000, they would earn a commission of $25,000 (5% of $500,000). This commission motivates the agent to sell more properties because their earnings are directly tied to the number and value of the sales they complete.
In another example, a sales representative at a car dealership might earn a commission of 2% for each car sold. If the representative sells a car for $30,000, they would earn a commission of $600. The more cars the representative sells, the higher their overall commission and earnings.
An example of commission clause
Here’s how a commission clause might appear in a contract:
“The Agent shall receive a commission equal to [X]% of the total sale price for each sale completed by the Agent. The commission shall be paid within [Y] days of the sale closing and is contingent upon full payment being received from the buyer.”
Conclusion
Commission is a performance-based form of compensation that incentivizes individuals or entities to facilitate transactions, sales, or services. It rewards individuals for generating revenue and aligns their interests with those of the business or organization. By offering commission-based pay, businesses can encourage higher performance and reward individuals for their contributions to the company's success.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.