Sales Commission

Definition

The term sales commission refers to an agreed-to sum of money that an employee receives after reaching a certain level of sales.  Sales commissions are usually a percentage of sales, or they can be a flat dollar amount that is triggered when the employee reaches certain sales thresholds.

Explanation

In addition to a salary or hourly wage, employees may also be eligible to receive incentives in the form of sales commissions.  Normally, this form of compensation will be a percentage of revenue, or a flat dollar amount may be paid as the employee reaches pre-established targets.  Payment may be included in the employee's regular paycheck or the company may issue sales commission checks each month, quarter, or annually.

The dollar amount received may be calculated in a number of ways, including:

  • Revenue Commission:  the incentive received is based on the price of the items sold.  For example, if the associate sells $500,000 worth of product, and they are entitled to receive a 2.0% commission on all sales, they would receive an incentive payment of $500,000 x 0.02, or $10,000.
  • Gate Commissions:  the incentive received depends on the associate reaching certain performance gates, or thresholds.  For example, an associate might receive a 2.0% commission on sales under $50,000, and a 5.0% commission on sales over $50,000.
  • Gross Profit Commission:  the incentive received is based on the gross profit of the items sold.  For example, an associate sells $500,000 worth of product with a gross profit of $100,000.  If the employee is entitled to receive a 10.0% gross profit commission, they would receive an incentive payment of $100,000 x 0.10, or $10,000.

Sales commissions are typically paid to employees that are directly involved in these transactions. This includes retail associates, in addition to both inside and outside sales personnel.  Generally, sales personnel can expect to generate between 10 and 50% of their total compensation through commissions.

Related Terms

total compensation, incentive compensation, benefits, base salary, compensatory time, signing bonus