Commission

HR Glossary for HR Professionals

Glossary of the most common HR terms and acronyms to assist professionals navigating the ever-growing and ever-changing world of HR terminology.

Commission

Commission Definition

A commission is a fee paid to an employee for performing a service or selling a product.

How Does Commission Pay Work and Why Offer it?

Commissions are most commonly seen in sales environments, when a salesperson successfully brings on a new client for a service—such as using an HRIS platform—or sells goods to a customer, as demonstrated in car dealerships and some retail stores. 

As an incentive for successfully landing a client, the salesperson is rewarded with a percentage of the business in the form of a commission. In a successful sales environment, commissions drive employee engagement, productivity, and motivation.

Types of Commission Pay

  • Gross Profit: A salesperson earns a percentage of the product or service sold.
  • Revenue Commission: Salespeople earn a fixed percentage of a company’s revenue. 
  • Revenue Gates: Commission percentages increase according to the size of sales made.
  • Placement Fee: A fixed amount of money awarded for a completed sale. 

How Are Commissions Taxed?

Much like other sources of income, commissions are subject to taxes state and federal taxes. 

If your commissions are distributed separately from regular pay, the amount is subject to a flat percentage deduction, which varies depending on the size of the payment. If they’re included in an employee’s regular pay, taxes are withheld according to normal state and federal income rates.

When Are Commissions Paid Out?

Commissions can be distributed in addition to a salary or instead of a salary. They can be paid out in a variety of different ways, from including them in an employee’s typical paycheck to monthly distributions—and even as quarterly bonuses, depending on the structure of the business. Regardless, it’s up to the employer to determine when and how they are paid out.

Pros and Cons of Commission Pay

As mentioned above, commission pay can provide significant incentives for employees to work harder, be more engaged in day-to-day work, and be more motivated to help the company reach its goals by boosting sales. 

However, commission pay structures can also be unpredictable and some sales tactics can also discourage prospects if they don’t respond well to aggressive or pushy salespeople.

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