The Advantages of Paying Commission vs Salary

Since most companies do not have to offer overtime pay for their salaried workers, they may provide a range of benefits as an alternative. Most full-time salaried employees are offered paid vacations, health, dental, vision, 401(k), or even retirement plans. However, commission vs salary there are salaried, nonexempt workers who must be compensated by their employer for overtime work—if they exceed their 40 hours—as mandated by the FLSA. In a nutshell, hourly employees must be paid at least the federal minimum wage for each hour worked.

You might be offered a job with a bonus structure that pays you extra money if you, your department or the company hits certain goals. For example, if your department gets X number of customer compliments or if your group finishes a project by a specific date, you might receive a bonus. To motivate employees to sell more, some businesses increase commission percentages as employees reach certain milestones.

  1. When companies pay a base salary plus commission, they have more paperwork, might need to pay employees sooner and have higher payroll tax and benefit costs each quarter.
  2. If the company’s goals are focused on aggressive growth and maximizing sales revenue, a commission-based model may align better with those objectives.
  3. However, you may want to pay some employees on salary, such as those that work a fixed number of hours under a fluctuating workweek, or for jobs that don’t warrant a higher pay rate.
  4. As an employer, you decide what you want your commission structure, and commission-based pay for employees, to look like.

In this scenario, you’ll earn a full commission on any new clients you bring in, and/or a full commission on any increase in spending by previous clients. When you are developing new clients, this is often called “missionary” work because you are trying to “convert” non-customers into customers, rather than simply re-signing existing customers. Throughout her career, Heather has worked to help hundreds of small business owners in managing many aspects of their business, from bookkeeping to accounting to HR. Before joining Fit Small Business, Heather was the Payroll/HRS Manager for a top cloud accounting firm in the industry. Her experience has allowed her to learn first hand what the payroll needs are for small business owners. Sign up to receive more well-researched small business articles and topics in your inbox, personalized for you.

How to Choose Between Salary, Hourly & Commission

Many employees who are part of a sales department will more likely than not be on commission-based pay, though the pay tiers and structures do differ. Salary-based compensation can also provide employees with a stable foundation for financial planning, as they know the exact amount they will receive in their paycheck each period. Additionally, salary-based compensation can benefit organizations prioritizing stability and long-term customer relationships over short-term sales goals. The business goals and strategies of the organization should also be taken into account when determining the right compensation model. If the company’s goals are focused on aggressive growth and maximizing sales revenue, a commission-based model may align better with those objectives. On the other hand, if the company’s goals are centered on stability, customer retention, and long-term relationships, a salary-based model may be more suitable.

What does it mean to be commission-based?

When deciding between commission-based and salary-based compensation models, several factors need to be considered. The nature of the business and industry is an essential factor to assess. Some industries may be better suited for commission-based compensation, where sales performance is a significant driver of revenue, and employees have a direct impact on the company’s bottom line.

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And, commission-based jobs, such as in insurance or certain types of retail sales, may or may not have set hours. Commission-based pay is when an employee’s income is based on a percentage (or, in some cases, a flat rate) of goods or services sold. Whether you should pay your employees hourly vs salary, commission vs salary, or commission vs hourly depends on the flow and structure of your business. They all have pros and cons, and matching them with the right positions is essential so that you’re not paying money you don’t have to. Salaries are more suitable for established positions with a high level of schedule and work predictability, whereas hourly is great for fluctuating work demand. Meanwhile, commission is ideal for positions that directly impact sales.

There are a number of ways to keep employees engaged with their work. When a business has specific targets to hit or a revenue metric that needs to be met that day, week, or month, this can trickle down to employees. Even in the easiest example of a retail business that has a sales goal per day (think of a bookstore, for example), this is a broader goal that focuses your employees. Your employees, no matter your business’s industry, can develop goals around customer engagement and their own percentage of close/win sales to keep themselves on track. Fit Small Business says there are several ways to structure commission pay. You can offer a basic salary and pay a commission on top of that.

How to Set Goals for a Bonus Program

With salaried employees, it’s important to consider the compa (or compensation) ratio, allowing you to know whether you are paying them competitive salaries. For more information and help calculating it, check out our guide to compa ratios. The kind of workers you should employ depends on your business and how you plan to schedule your employees—flexibility is a big consideration. Service industries, such as retail and food, usually have hourly workers as the work schedule is rarely consistent. Some companies pay all staff members a company bonus, while others pay individual employees an annual bonus based on their performance. In some cases, the reward is a discretionary bonus, determined by your supervisor.

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