Commission (remuneration)

A commission is a type of variable-pay remuneration. This means the amount of money a person earns changes based on their performance. It is a common way to reward salespeople for the products they sell. Companies use these systems to motivate their staff. They can also use commissions to encourage specific sales behaviors. For example, a company might pay less if a worker gives a large discount. They might pay more if a worker sells a specific product the company wants to promote.

Commissions work through a system called a sales incentive program. This program may use one or many different commission plans. These plans are often based on a worker's territory or their specific position. They can also be based on the specific products being sold. A common way to calculate these payments is through a percentage of revenue. Using a percentage helps solve the principal-agent problem. This is a situation where a worker's interests might not match the firm's interests. By using commissions, the firm tries to align those interests together.

There are several different models used to calculate these payments. Some firms use a percentage of the total sales revenue. Other models might use a profit-based approach. Some companies use bonus-based approaches instead. A salesperson might receive a fixed salary plus commissions. This is often called a combination plan. Another common method is a straight commission plan. In these plans, the worker is paid entirely based on what they sell. This is different from being paid for every hour worked.

To manage spending, many companies use a concept called on-target earnings. On-target earnings represent a salesperson's base pay plus their expected commissions. These expected commissions assume the salesperson meets a specific quota. A quota is a sales goal set by the company. On-target earnings help workers estimate their total compensation. This allows them to plan for what they will earn if they meet their goals. Some commission structures also include multiple levels of attainment. Each level has a different threshold and a different reward.

Many different industries use commission structures for employees or contractors. These include car sales, property sales, and insurance booking. In the United States, real estate brokers often use this system. A broker who sells a property might collect a commission of 6% of the sale price. However, there are legal rules to ensure these payments are fair. In 1886, the New York Court of Appeals decided a case called Murray v. Beard. The court used the faithless servant doctrine. It held that a disloyal broker could not collect commissions. If an agent acts against their employer, they forfeit their right to pay.

Modern laws also help define how commissions work. In 2011, California Governor Jerry Brown signed AB 1396. This law amended the California Labor Code. It requires employers to use written contracts for commissions. These contracts must explain how commissions are earned, computed, and paid. The law became effective on January 1, 2013. It specifies that commissions are different from short-term productivity bonuses. It also distinguishes them from certain profit-sharing plans. This ensures that both the employer and the worker understand the agreement clearly.

A specific type of payment is called a trail commission. This is paid by investment management companies to financial advisers. It is usually between 0.1% and 0.9% per year of the invested value. If a client invests directly through an adviser, the adviser usually keeps this money. Some people say this encourages advisers to maintain the value of a portfolio. Others argue that advisers might pick funds just to increase their own profit. This is a major concern for investors who may not know about the practice.

Because of these concerns, rules have changed in the United Kingdom. The Retail Distribution Review was set on December 31, 2012. This review decided that independent financial advisers cannot take commissions on client wealth management. Advisers must now agree on an upfront charging structure before giving advice. Customers can choose to have these charges deducted from their investments. This has led to changes in the non-advised sector. Many companies now charge upfront fees instead of taking commissions. This helps create more transparency in the financial services industry.