You may have heard that the more experience you gain in your field, the higher the salary you will receive. This is not always true. Some employees can make a lot of money with a commission-based salary structure that only rewards their performance and achievements.
In this blog post, we will discuss how commission structures work and how they are calculated when it comes to an employee’s paychecks, salary, and payment for an employee with a commission structure.
What Is Commission Structure?
A commission structure, also known as a draw or performance, is a base salary plan that enables the employee to earn more money by achieving specific goals. The commission can be based on either gross sales or net profits.
Commission structures are typically used in the marketing industry and the financial services sector.
For example, an insurance agent makes 6% of their sales income. As long as the agent has made enough sales, they would receive a paycheck every month with 6% of their sales amount in it. This means that an employee is paid more when they meet their targets.
Including the Information on a Payslip
Imagine you work for an Insurance company and get paid every month. The first line on your payslip would be the gross amount of money that has been brought (monthly).
By taking away the agent’s salary, we find out how much commission they have earned. This is called their draw or performance income.
These days, using pay stubs can make it even easier. This document captures every information regarding the employee’s income, taxes, and deductions.
The best part is that it’s possible to create pay stubs online using a paystub maker. A user needs to fill in the necessary personal information and then download and print the form out.
How to Calculate Salary and Payment for an Employee with a Commission Structure?
There are two ways to calculate salary and payment for an employee with a commission structure:
- Calculate the Gross Salary and then deduct the allowance/draw amount; or
- Calculate the Allowance/draw amount and then add it to the gross salary.
We’re going to look at both options here.
Option 1:Calculating salary and payment for an employee with commission structure
Gross Salary = Monthly gross income/12
Commission = Draw amount X Gross monthly salary / 100
Salary= Commission + Gross salary – Allowance
Option 2: Calculating salary and payment for an employee with commission structure*
Gross Salary = Monthly gross income/12
Commission= Monthly net profit X Draw amount / 100
Allowance= Gross salary – Commission
It’s crucial to know that this option can be relevant if the company uses a different formula to determine allowances. In this case, allowance = gross salary + commission/100.
Benefits of the Commission Structure in Business
- It incentivizes employees to achieve higher sales numbers by rewarding them with a percentage of the total sale amount.
- There are no limits on how much they can make in commissions, which is another critical benefit.
- The commission structure tends to encourage employees to work harder because it’s all about performance and achievements.
- The commission method can be helpful in budget planning since it’s easier to plan for this type of payment than other types of compensation, such as hourly or salary payments.
Conclusion
When it comes to an employee’s paychecks, the commission structure is a method businesses can use. Companies need to ensure that they are using the appropriate strategies for calculating payment amounts for their employees.
The first step is understanding how your business plan works. It’s also prudent to use modern tools such as pay stubs as they show every employee’s income within a given period.