Commission

By:

Arti

Arti is a specialized AI Financial Assistant at Invezz, created to support the editorial team. He leverages both AI and the Invezz.com knowledge base, understands over 100,000... read more.

Reviewed by:

Prash Raval

Prash is a financial writer for Invezz covering FX, the stock market and investing. For over a decade he has traded spot FX full time while... read more.

Updated:  Jun 5, 2024

Ad disclosure

Invezz is an independent platform with the goal of helping users achieve financial freedom. In order to fund our work, we partner with advertisers who may pay to be displayed in certain positions on certain pages, or may compensate us for referring users to their services. While our reviews and assessments of each product are independent and unbiased, the order in which brands are presented and the placement of offers may be impacted and some of the links on this page may be affiliate links from which we earn a commission. The order in which products and services appear on Invezz does not represent an endorsement from us, and please be aware that there may be other platforms available to you than the products and services that appear on our website. Read more about how we make money >

4 min read

3 key takeaways

• Commission is a fee paid for services rendered in facilitating sales or transactions.
• It is typically calculated as a percentage of the sale or transaction value.
• Commissions are common in various industries, including real estate, finance, and sales.

What is a commission?

A commission is a financial incentive or fee paid to an individual or organization for successfully completing a sale or facilitating a transaction. This fee is usually a percentage of the transaction value and is often used to motivate salespeople, brokers, agents, and other intermediaries to achieve higher performance levels. Commissions can vary widely depending on the industry, the type of transaction, and the specific terms agreed upon between the parties involved.

Importance of commission

• Motivates Performance: Encourages sales agents and employees to achieve higher sales and performance targets.
• Aligns Interests: Aligns the interests of the salesperson with those of the company or client, as both benefit from successful transactions.
• Flexibility: Allows businesses to control labor costs more effectively by tying compensation to performance.
• Attracts Talent: Attracts skilled sales professionals who are confident in their ability to generate sales and earn commissions.
• Scalability: Enables scalable compensation structures that grow with business success.

How commission works

The commission system works by establishing a predetermined rate or percentage that will be paid to the salesperson or agent upon completion of a sale or transaction. The process typically involves the following steps:

Determining Commission Structure

The commission structure can vary widely depending on the industry and the specific role. Common structures include:

• Straight Commission: Salespeople earn a commission only, with no base salary. This structure is highly motivating but can be risky for the salesperson.
• Salary Plus Commission: Salespeople receive a base salary plus a commission on their sales. This provides a safety net while still offering performance incentives.
• Tiered Commission: Commission rates increase as sales targets are met or exceeded. This encourages higher performance.
• Revenue Sharing: A percentage of the revenue generated from sales is shared with the salesperson or team.

Calculating Commission

The commission is typically calculated as a percentage of the sale price or transaction value. For example, a real estate agent might earn a 5% commission on the sale price of a house. If the house sells for £200,000, the agent earns £10,000.

Payment of Commission

Commission payments are usually made after the transaction is completed and the payment has been received from the customer. The timing and frequency of commission payments can vary, with some being paid immediately and others on a monthly or quarterly basis.

Examples of commission

• Real Estate: A real estate agent earns a commission for selling a property. If the commission rate is 6% and the property sells for £300,000, the agent earns £18,000.
• Finance: A stockbroker earns a commission for executing trades on behalf of clients. The commission might be a small percentage of the transaction value.
• Sales: A car salesperson earns a commission for each vehicle sold. For example, they might earn 3% of the sale price of each car.

Real world application

• Real Estate Agents: Real estate agents commonly work on a commission basis, earning a percentage of the sale price of properties they sell. This incentivizes them to close deals and achieve higher sales prices.
• Financial Advisors: Financial advisors may earn commissions for selling investment products or insurance policies. This can motivate them to provide clients with suitable financial products.
• Retail Salespersons: In some retail environments, salespersons earn commissions on the products they sell, encouraging them to increase their sales efforts and improve customer service.
• B2B Sales Representatives: Business-to-business sales representatives often work on a commission basis, earning a percentage of the contracts or deals they close with other businesses.