Sales commission definition
/What is a Sales Commission?
A sales commission is the amount of compensation paid to a person based on the amount of sales generated. This is typically a percentage of sales, which is paid on top of a base salary. A high proportion of sales commission to base pay is intended to draw the attention of the sales staff most forcefully to the need to generate sales. A sales commission may be paid when a sale is generated, or when cash is received from the customer. The latter payment system is the wiser course of action, since it forces salespeople to pay attention to the creditworthiness of customers.
How to Calculate Sales Commission
Several different incentives can go into the calculation of a sales commission. For example, the sales manager might require that a basic sales threshold be surpassed before any commission percentage is applied. On top of this commission may be layered a bonus for selling certain products or services (perhaps because they are unusually high margin), and another bonus for selling into a specific sales region or to certain customers. Commissions may also be split when more than one person is involved in a sale.
Examples of Sales Commissions
Here are several examples of sales commission structures:
Straight commission. Salespeople earn a percentage of the sales they make, with no base salary. For example, a real estate agent earns a 5% commission on the sale price of a home. If the home sells for $400,000, the agent earns $20,000.
Base salary plus commission. Salespeople receive a fixed base salary and a commission for every sale. For example, a car salesperson has a base salary of $3,000 per month and earns a 3% commission on sales. If they sell $50,000 worth of cars in a month, they make $1,500 in commission, for a total of $4,500.
Tiered commission. Commission rates increase as salespeople hit certain sales thresholds. For example, an employer pays a 5% commission on sales up to $10,000, a 7% commission on sales from $10,001 to $20,000, and a 10% commission on sales above $20,000.
Flat rate commission. Salespeople earn a fixed dollar amount per sale, regardless of the sale's value. For example, a telemarketer earns $50 for every subscription they sell, whether the subscription costs $500 or $5,000.
Revenue-based commission. Salespeople earn a percentage of the company's total revenue from their accounts. For example, a corporate sales manager earns 2% of the annual revenue generated by their clients. If their accounts generate $1 million in revenue, they earn $20,000 in commission.
Gross profit commission. Salespeople earn a percentage of the profit (not the total sale price). For example, a salesperson sells a product for $2,000 that costs the company $1,200. If they earn 10% of the profit, they make $80.
Residual commission. Salespeople earn a recurring commission on ongoing customer accounts or subscriptions. For example, a salesperson earns 10% of monthly subscription fees for each client they sign up. If they sign up 10 clients paying $100/month, they earn $100/month indefinitely as long as the clients remain subscribed.
Draw against commission. Salespeople receive an advance (draw) against future commissions and repay it with earned commissions. For example, a company provides a $2,000 monthly draw. If a salesperson earns $3,000 in commissions that month, they keep $1,000 after repaying the draw. If they earn only $1,500, they owe $500 to be deducted from future earnings.
Team-based commission. A team shares a commission based on collective sales efforts. For example, a sales team collectively earns 10% of their total sales. If the team sells $100,000 worth of products, the $10,000 commission is split equally or proportionally among team members.
These structures are often tailored to the company's goals and the specific incentives they want to create for their sales team.
Accounting for Sales Commissions
Sales commissions are normally included directly into the periodic payroll calculations, so they are accounted for within the periodic payroll journal entry. If a business is using the accrual basis of accounting, it might also record a sales commission accrual if there are any commissions at the end of a reporting period that have been earned but not yet paid. This is recorded as a debit to the commissions expense account and a credit to the accruals liability account. This entry is set up as a reversing entry, so it is automatically reversed by the accounting software at the beginning of the next reporting period.