Sales commission: Overview, definition, and example
What is a sales commission?
A sales commission is a payment made to a salesperson or sales representative as a reward for selling a product or service. Typically, the commission is a percentage of the sales price or a fixed amount per sale, and it is paid on top of or in lieu of a base salary. The purpose of a sales commission is to incentivize salespeople to increase their sales performance by directly linking their compensation to their success in closing deals or generating revenue for the business.
Sales commissions are commonly used in industries like real estate, retail, finance, and technology, where sales representatives or agents play a crucial role in driving the company’s revenue.
Why is a sales commission important?
A sales commission is important because it motivates salespeople to increase their efforts in generating business and closing sales. By tying a portion of their income to the performance of their sales, commissions create a direct incentive for salespeople to be more productive and successful. This compensation structure helps align the interests of the salesperson with the company’s goals, driving revenue growth.
For businesses, offering commissions is an effective way to attract talented salespeople, especially when offering performance-based rewards that can vary depending on the salesperson’s success. For employees, commissions can provide opportunities for higher earnings, especially if they perform well and close many sales.
Understanding sales commission through an example
Imagine a salesperson who works at a car dealership. The salesperson receives a base salary, but they also earn a commission for each car they sell. For example, the dealership may offer a 5% commission on each car sold. If the salesperson sells a car for $30,000, they would earn a $1,500 commission (5% of $30,000). The more cars the salesperson sells, the higher their earnings will be, as the commission is directly tied to sales performance.
In another example, a software company hires a salesperson to sell its subscription-based service. The salesperson’s commission is structured so they earn a percentage of each subscription sold. If they sell a one-year subscription for $1,000, they might receive a 10% commission, meaning they would earn $100 for each sale. The more subscriptions the salesperson sells, the more commission they earn.
An example of a sales commission clause
Here’s how a sales commission clause might appear in a sales contract or employment agreement:
"The Sales Representative shall receive a commission of 5% on all sales made during each calendar month. Commission payments will be made on the 15th of the following month and will be based on the total value of sales completed, less any returns or cancellations."
Conclusion
Sales commissions are a widely used compensation method that incentivizes salespeople to maximize their performance by directly tying their earnings to their sales results. For businesses, they help motivate sales teams to increase revenue and achieve company goals, while offering employees the potential for higher earnings based on their success. Understanding how sales commissions work and structuring them effectively can help businesses drive growth and reward their sales teams.
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.