Commission (remuneration)

The payment of commission as remuneration for services rendered or products sold is a common way to reward sales people. Payments often are calculated on the basis of a percentage of the goods sold, a way for firms to solve the principal–agent problem by attempting to realign employees' interests with those of the firm. Sales personnel are thus paid, in part of entirely, on the basis of products or services successfully sold rather than being paid by the hour, by attempted sales, or by any other measure. A common form of commission sales is real estate; in the United States, a real estate agent who successfully sells property will collect a commission of 6% of the sale price but a realtor who makes no sales will collect no salary or compensation whatsoever.

Although many types of commission systems exist, a common form is known as on-target earnings in which commission rates are based on the achievement of specific targets that have been agreed upon between management and the salesperson. Commissions are intended to create a strong incentive for employees to invest maximum effort into their work.

One of the most common means of attempting to align principal and agent interests is to design a contract with incentives that track agent performance. The principal–agent theory provides an explanation for the dissimilarities across the marketing firms in the types of compensation plans used by them, such as fixed salary, straight commission or a combination of both fixed salary and straight commissions.

Often, a firm embracing a commission structure may not involve employees, but may solely establish themselves using independent contractors. An example in the US could be a real estate agent.

Commission is not offered at most entities that receive donations or gifts. This is likely against the will of most donors. However, it is commonly argued that this would increase motivation and efficiency of those requesting donations.

Reward in the form of commission alone with no pay or salary is in the US known as straight commission. Reward may also take the form of commission plus a fixed salary. Industries where commission is commonly paid include car sales, property sales, insurance broking, and many other sales jobs.

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