Commissions are a form of variable-pay remuneration for services rendered or products sold. Commissions are a common way to motivate and reward salespeople. Commissions can also be designed to encourage specific sales behaviors. For example, commissions may be reduced when granting large discounts. Or commissions may be increased when selling certain products the organization wants to promote. Commissions are usually implemented within the framework on a sales incentive program, which can include one or multiple commission plans (each typically based on a combination of territory, position, or products).
Payments are often calculated using a percentage of revenue, a way for firms to solve the principal–agent problem by attempting to realign employees' interests with those of the firm. However, models other than percentages are possible, such as profit-based approaches, or bonus-based approaches. Commissions allow sales personnel to be paid (in part or entirely) based on products or services sold, rather than just hourly or based on attempted sales. Although many types of commission systems exist, a common methodology to manage total spend is known as on-target earnings. On-target earnings represent a salesperson's base pay, plus expected commissions (assuming the salesperson meets a quota). On-target earnings help salespersons estimate their expected total compensation, should they meet company-specified goals.
One of the most common means of attempting to align principal and agent interests is to design incentives tracking agent performance. There is a high degree of variability in terms of types of compensation plans, such as fixed salary, straight commissions, or a combination of both. Often, commissions are awarded for reaching a sales goal called a quota. Also, commission structures can include multiple levels of attainments, each with a different threshold and associated rewards.
A commission structure can apply to employees or independent contractors. Industries where commissions are common include car sales, property sales, insurance booking, and most sales jobs. In the United States, a real estate broker who successfully sells a property might collect a commission of 6% of the sale price.
Legal implications
In a case from the 19th century that is still referred to today, Murray v. Beard, 7 N.E. 553, 554-55 (N.Y. 1886), the New York Court of Appeals held that under New York's faithless servant doctrine a disloyal broker could not recover commissions from his employer, holding that "An agent is held to uberrima fides in his dealings with his principal; and if he acts adversely to his employer in any part of the transaction ... it amounts to such a fraud upon the principal, as to forfeit any right to compensation for services."
In 2011, California Governor Jerry Brown signed into law AB 1396 amending the California Labor Code requiring all employers who pay commissions to enter into written contracts with their employees regarding how commissions will be earned, computed and paid. The new law, effective on January 1, 2013, further states that commission excludes "short-term productivity bonuses such as those paid to retail clerks" and "bonus and profit-sharing plans, unless there has been an offer by the employer to pay a fixed percentage of sales or profits as compensation for work to be performed".
Trail commission
Trail commission (TC) is commission paid by investment management companies to financial advisers. It is generally around 0.1% to 0.9% p.a. of the value invested by a client.
If an investment is made directly through a financial adviser, TC is generally kept by the adviser.
A financial adviser should act purely in the investors' best interests. However, it is possible that the financial adviser may direct the investment towards funds that are most profitable in terms of TC. Supporters of the directing of investments into funds benefiting the financial adviser claim that it encourages the adviser to maintain the value of the portfolio, thus aligning their interests with those of their clients. Detractors suggest that investors are usually unaware of the practice and that it is ineffective as an incentive.
Following the Retail Distribution Review in the United Kingdom, trail commission is banned on sales of new investment products as of April 6, 2014 and will required to be completely phased out by April 6, 2016.
UK
In the financial services industry in the UK, rules set out in the Retail Distribution Review of December 31, 2012 mean that an independent financial adviser cannot take commission in the management of their client's wealth. As set out by the Financial Conduct Authority, advisers must now agree an upfront charging structure in advance to a client before advice is given.
For customers who do not want to pay a separate upfront fee, there is an option to have payment of the charges deducted from the investment held by the product provider. These new measures have been applauded by many, particularly in the financial services industry. This has led to changes in the direct to consumer, non-advised sector, with some companies now charging upfront fees to customers for financial products rather than taking commission on policies and investments.
See also
- Soft dollar
- Kickback (dealing with illegal commission)
Further reading
- Article in The Observer (Britain) warning investors.
- Article in www.theage.com.au (Australia) calling for an end to trail commissions.
References
- "Back To Basics – What is a Sales Commission? - QCommission is a powerful, flexible Sales Commission Software". www.qcommission.com. Retrieved 2023-03-31.
- McConnell, Campbell R.; Brue, Stanley L. (2008). Economics (17th ed.). New York, NY: McGraw-Hill/Irwin. ISBN 978-0-07-329392-9.
- "What is Sales Incentive Compensation? - QCommission is a powerful, flexible Sales Commission Software". www.qcommission.com. Retrieved 2023-03-31.
- Madhani, P. M. (2009). "Sales Employees Compensation: An Optimal Balance Between Fixed and Variable Pay". Compensation & Benefits Review. 41 (4): 44–51. doi:10.1177/0886368709331449. S2CID 150568922.
- Sivits, Clare (September 9, 2020). "How to Pay Straight Commission Only -- Core Commissions". Core Commissions - Commission Management Software.
- Sivits, Clare (September 16, 2020). "Implement Salary Plus Commission Plan - Core Commissions". Core Commissions - Commission Management Software.
- Lerner, Michele (15 April 2016). "Commissions of 6 percent for home sales once were the norm. That's changing". The Washington Post. Retrieved 3 April 2018.
- Manning Gilbert Warren III (2010). "Equitable Clawback: An Essay on Restoration of Executive Compensation," Archived 2021-03-07 at the Wayback Machine 12 University of Pennsylvania Journal of Business Law 1135.
- Bonell, Michael Joachim; Meyer, Olaf (2015). The Impact of Corruption on International Commercial Contracts. Springer. ISBN 9783319190549 – via Google Books.
- Chaya F. Weinberg-Brodt (April 3, 2009). "The Faithless Servant Doctrine in New York State". www.martindale.com.
- Sullivan, Charles A. (March 4, 2011). "Mastering the Faithless Servant? Reconciling Employment Law, Contract Law, and Fiduciary Duty". Seton Hall Public Law Research Paper No. 1777082. SSRN 1777082.
- "Labor & Employment Law: Looking Forward to 2012" (PDF). Buchalter Nemer. December 2011. Retrieved 2013-08-13.[permanent dead link]
- Richter, Sheppard Mullin; Redmond, Hampton LLP-Jennifer G.; Forsey, Morgan (19 March 2012). "New California commission contract rules - it is not too early to get ready! | Lexology". www.lexology.com.
- "FCA platform paper deals fatal blow to adviser trail - FTAdviser.com".
- "Retail Distribution Review". Financial Services Authority. February 17, 2009. Archived from the original on August 1, 2011. Retrieved January 13, 2015.
- "Retail Distribution Review: Adviser Charging". Financial Conduct Authority. September 12, 2014. Archived from the original on December 5, 2014. Retrieved January 13, 2015.
- "Compare Life Insurance: Commission-Free versus Commission-Based". May 12, 2014. Retrieved January 13, 2015.
Commissions are a form of variable pay remuneration for services rendered or products sold Commissions are a common way to motivate and reward salespeople Commissions can also be designed to encourage specific sales behaviors For example commissions may be reduced when granting large discounts Or commissions may be increased when selling certain products the organization wants to promote Commissions are usually implemented within the framework on a sales incentive program which can include one or multiple commission plans each typically based on a combination of territory position or products Payments are often calculated using a percentage of revenue a way for firms to solve the principal agent problem by attempting to realign employees interests with those of the firm However models other than percentages are possible such as profit based approaches or bonus based approaches Commissions allow sales personnel to be paid in part or entirely based on products or services sold rather than just hourly or based on attempted sales Although many types of commission systems exist a common methodology to manage total spend is known as on target earnings On target earnings represent a salesperson s base pay plus expected commissions assuming the salesperson meets a quota On target earnings help salespersons estimate their expected total compensation should they meet company specified goals One of the most common means of attempting to align principal and agent interests is to design incentives tracking agent performance There is a high degree of variability in terms of types of compensation plans such as fixed salary straight commissions or a combination of both Often commissions are awarded for reaching a sales goal called a quota Also commission structures can include multiple levels of attainments each with a different threshold and associated rewards A commission structure can apply to employees or independent contractors Industries where commissions are common include car sales property sales insurance booking and most sales jobs In the United States a real estate broker who successfully sells a property might collect a commission of 6 of the sale price Legal implicationsIn a case from the 19th century that is still referred to today Murray v Beard 7 N E 553 554 55 N Y 1886 the New York Court of Appeals held that under New York s faithless servant doctrine a disloyal broker could not recover commissions from his employer holding that An agent is held to uberrima fides in his dealings with his principal and if he acts adversely to his employer in any part of the transaction it amounts to such a fraud upon the principal as to forfeit any right to compensation for services In 2011 California Governor Jerry Brown signed into law AB 1396 amending the California Labor Code requiring all employers who pay commissions to enter into written contracts with their employees regarding how commissions will be earned computed and paid The new law effective on January 1 2013 further states that commission excludes short term productivity bonuses such as those paid to retail clerks and bonus and profit sharing plans unless there has been an offer by the employer to pay a fixed percentage of sales or profits as compensation for work to be performed Trail commissionTrail commission TC is commission paid by investment management companies to financial advisers It is generally around 0 1 to 0 9 p a of the value invested by a client If an investment is made directly through a financial adviser TC is generally kept by the adviser A financial adviser should act purely in the investors best interests However it is possible that the financial adviser may direct the investment towards funds that are most profitable in terms of TC Supporters of the directing of investments into funds benefiting the financial adviser claim that it encourages the adviser to maintain the value of the portfolio thus aligning their interests with those of their clients Detractors suggest that investors are usually unaware of the practice and that it is ineffective as an incentive Following the Retail Distribution Review in the United Kingdom trail commission is banned on sales of new investment products as of April 6 2014 and will required to be completely phased out by April 6 2016 UKIn the financial services industry in the UK rules set out in the Retail Distribution Review of December 31 2012 mean that an independent financial adviser cannot take commission in the management of their client s wealth As set out by the Financial Conduct Authority advisers must now agree an upfront charging structure in advance to a client before advice is given For customers who do not want to pay a separate upfront fee there is an option to have payment of the charges deducted from the investment held by the product provider These new measures have been applauded by many particularly in the financial services industry This has led to changes in the direct to consumer non advised sector with some companies now charging upfront fees to customers for financial products rather than taking commission on policies and investments See alsoSoft dollar Kickback dealing with illegal commission Further readingArticle in The Observer Britain warning investors Article in www theage com au Australia calling for an end to trail commissions References Back To Basics What is a Sales Commission QCommission is a powerful flexible Sales Commission Software www qcommission com Retrieved 2023 03 31 McConnell Campbell R Brue Stanley L 2008 Economics 17th ed New York NY McGraw Hill Irwin ISBN 978 0 07 329392 9 What is Sales Incentive Compensation QCommission is a powerful flexible Sales Commission Software www qcommission com Retrieved 2023 03 31 Madhani P M 2009 Sales Employees Compensation An Optimal Balance Between Fixed and Variable Pay Compensation amp Benefits Review 41 4 44 51 doi 10 1177 0886368709331449 S2CID 150568922 Sivits Clare September 9 2020 How to Pay Straight Commission Only Core Commissions Core Commissions Commission Management Software Sivits Clare September 16 2020 Implement Salary Plus Commission Plan Core Commissions Core Commissions Commission Management Software Lerner Michele 15 April 2016 Commissions of 6 percent for home sales once were the norm That s changing The Washington Post Retrieved 3 April 2018 Manning Gilbert Warren III 2010 Equitable Clawback An Essay on Restoration of Executive Compensation Archived 2021 03 07 at the Wayback Machine 12 University of Pennsylvania Journal of Business Law 1135 Bonell Michael Joachim Meyer Olaf 2015 The Impact of Corruption on International Commercial Contracts Springer ISBN 9783319190549 via Google Books Chaya F Weinberg Brodt April 3 2009 The Faithless Servant Doctrine in New York State www martindale com Sullivan Charles A March 4 2011 Mastering the Faithless Servant Reconciling Employment Law Contract Law and Fiduciary Duty Seton Hall Public Law Research Paper No 1777082 SSRN 1777082 Labor amp Employment Law Looking Forward to 2012 PDF Buchalter Nemer December 2011 Retrieved 2013 08 13 permanent dead link Richter Sheppard Mullin Redmond Hampton LLP Jennifer G Forsey Morgan 19 March 2012 New California commission contract rules it is not too early to get ready Lexology www lexology com FCA platform paper deals fatal blow to adviser trail FTAdviser com Retail Distribution Review Financial Services Authority February 17 2009 Archived from the original on August 1 2011 Retrieved January 13 2015 Retail Distribution Review Adviser Charging Financial Conduct Authority September 12 2014 Archived from the original on December 5 2014 Retrieved January 13 2015 Compare Life Insurance Commission Free versus Commission Based May 12 2014 Retrieved January 13 2015
