What are the advantages and disadvantages of compensating salespeople by salary by commissions?

1. Pay & salary
2. Salary Plus Commission: Advantages and Disadvantages

By Indeed Editorial Team

Published March 15, 2021

Sales industry professionals often earn their salaries through commission-based payment systems. One such system is salary plus commission, which determines your income based on the quality and quantity of your sales performance. As you search for sales jobs, understanding the benefits of salary plus commission can help you select a job offer with the right compensation plan for you. In this article, we explain how salary plus commission works and its advantages and disadvantages.

How does salary plus commission work?

A salary is a fixed income that an employee typically receives on a weekly, biweekly or monthly basis. A commission is extra income an employee earns when they sell goods or services. The standard salary to commission ratio for sales companies is 60-40, where 60% is an employee's base salary or hourly wage and 40% is their commission-based pay. The more you sell in a salary plus commission system, the more money you make through commission, and employers add your additional earnings to your paycheck.

Your potential to earn commission may depend on:

• Your experience level: Employers may offer more commission opportunities if you've worked longer than if you're new to the profession.

• The product you sell: Sales professionals who sell more expensive products may be eligible for more commission than those who sell inexpensive products.

• Your industry: Some industries, such as real estate, operate on commission-based systems more often than others.

• How often you sell: If you sell products five times a week, you may increase your chances of earning more commission for certain companies than if you sold products twice a week.

Related: What Is Commission Pay and How Does It Work?

Advantages of salary plus commission

The benefits of a salary plus commission plan include:

1. Guaranteed income

With a salary plus commission plan, you still earn a base salary regardless of how many products you sell. Your base pay provides a steady income during seasons where commission may be more difficult to earn.

For example, you make $10 per hour plus commission selling bathing suits for a major retailer. Business is infrequent during the colder months, but your salary plus commission status still allows you to earn your base salary, even though you haven't sold enough swimwear to qualify for much commission during the winter.

2. Performance rewards

While base salary provides stability, commission rewards you when you meet or exceed sales targets. Some employers may grant you the opportunity to earn a higher commission as you continue to perform well. For instance, if your commission rate is 10% and you consistently exceed sales targets, the company may increase your commission rate to 20%, providing a greater potential to earn more income.

3. Opportunities for professional growth and motivation

Salary plus commission may be ideal if you're new to a profession. Sales positions often allow you to build your selling and public speaking skills while still earning a stable paycheck.

Commission-based payment systems may also encourage you to persevere through challenges you face in your industry. For example, a local business owner denies your sales pitch to invest in a website program, which puts you one sale behind meeting your target. With the goal of commission motivating you, you change your pitch and try again, this time appealing to the owner and successfully selling the service. Now, you've earned your commission and strengthened your skills.

Related: What Does It Mean To Earn Sales Commission? Definition, Types and Examples

Disadvantages of salary plus commission

The drawbacks to a salary plus commission plan include:

1. Minimal base salary or hourly wage

Although it's guaranteed, your base pay may be minimal because you can earn extra money with a salary plus commission structure. Some employers may only compensate you more when your sales increase. To help ease financial stress, pay attention to the times of the year when your sales are highest and save commission earnings for seasons when sales are more infrequent.

2. Lack of incentive

The extra income from a commission-based structure is an incentive to sell more products, but some commission rates may be too limited to motivate you to reach your sales goal. For example, if you have a base salary of $40,000 and a commission rate of 1%, your commission earnings contribute little to the income you already earn. However, compensation plans with minimal commission rates may have higher base salaries.

3. Complicated guidelines

A salary plus commission structure that is too complex can make it challenging for you to predict your total income. Consider asking for clarification on the quality and quantity of sales required to earn a commission.

Sales contracts may also exacerbate complicated pay plans. Some business owners may administer commission earnings at the end of a month, while others may wait until they receive payment from their clients. To clarify, try asking your employer how long it may take to receive your commission so you can organize your finances accordingly.

Read more: Understanding Commission Structure for Sales (With FAQs)

Tips for deciding whether salary plus commission is right for you

You may find that salary plus commission aligns with your interest or that you're better suited for a different type of compensation. Use the following techniques to guide you:

Evaluate your finances

It's important to consider your budget as you study which compensation plan is right for you. Estimate how much money you need to support your lifestyle and determine if the base pay is reliable enough to cover most, if not all, of your basic needs. You can then examine commission rates to calculate whether they meet excess goals.

Compare compensation plans

As you search for a sales job, it may be helpful to research multiple companies and compare how they structure their salary plus commission plans. You can make a spreadsheet of prospective employers and include details about their industry and the value of the products they sell, which can help you identify the right option for you.

Ask questions

Guidelines for salary plus commission plans differ depending on the company you work for. Before accepting a job offer, consider asking an employer the following questions:

• How many products do I need to sell to earn commission?

• When would I receive my commission earnings?

• Which company products have the highest value?

• Does the commission rate increase if I consistently exceed sales targets? If so, by how much?

• What is the highest commission rate I can earn?

• What other qualifications do I need to earn a higher commission rate?