Commission pay: how to incentivise your employees

Paying your employees is one of the most important aspects of any business – but if you truly want to find (and keep) the brightest and best talent, you should know that high-performers are often driven by the desire for more than just your average paycheck. 

Studies such as the 2021 report by McKinsey & Company on the future of work indicate a growing disconnect between employees and traditional fixed salaries, leading to feelings of monotony, a lack of ownership and autonomy, and ultimately, a decline in motivation and performance. 

Millennials and Gen Z, now the two largest generations in the workplace, are leaning further and further into the desire for meaningful work, and the potential opportunity to directly influence their earnings and see a clear correlation between their effort and reward. 

This is where commission pay steps in, offering a great way for you as a business owner to boost employee morale, retention, and ultimately, your bottom line.

What is commission pay?

Commission pay is a performance-based incentive that rewards employees for exceeding targets or achieving specific goals. 

Unlike a fixed salary or overtime pay, where everyone is paid the same regardless of performance and there is no advantage to going above and beyond (especially since the newer generations don’t want to be promoted to managers), a commission allows employees to influence their earnings directly, and allows them to work harder and receive results-based compensation.

How does commission pay work?

Here are two of the most common commission plans:

• Straight commission: employees only earn income based on their commission rate multiplied by their achieved results. This high-risk, high-reward approach incentivises maximum effort, and may be a good option if you’re employing contractors.
• Base salary + commission: this combines a fixed salary with commission earnings, providing a safety net while motivating achievement.

The value of the commission can be a percentage of the sale value, new customer acquisition, or project completion for example, or an employee bonus at the end of a set period. 

The specific commission rate and structure will vary depending on your industry, the role, and your company’s goals.

How is commission taxed?

Commission is considered earnings in the UK and is subject to income tax and National Insurance contributions. Employers are responsible for deducting these taxes at source through the PAYE system.

3 examples of commission pay (with pros & cons)

1. Sales commission

Sales commission directly rewards salespeople for reaching and exceeding sales targets. Offering a clear link between effort and reward, this commission structure motivates individuals to push for higher sales volume, which translates to increased revenue and market share for businesses. 

There are also potential drawbacks, however. Personal sales commissions can foster unhealthy competition among team members and have the potential to hinder collaboration on complex sales that require a team effort.  Therefore, this structure is best suited for roles focused on individual performance and high-volume transactions, where salespeople operate more independently.

• Pros: motivates high sales volume; clear link between effort and reward.
• Cons: can foster unhealthy competition, and discourage teamwork on complex sales.
• Best for: sales roles focused on individual performance and high-volume transactions.

2. Tiered commission

A popular option is the tiered commission structure. With this approach, commission rates increase as employees achieve progressively higher performance levels. This incentivises exceeding minimum targets and provides employees with a visual reward progression they can see and aspire to achieve. For example, a salesperson might earn a 5% commission on all sales up to £10,000, but for sales between £10,000 and £20,000, their commission jumps up to 7%. 

This structure can be highly motivating, but it requires careful planning. Setting achievable yet challenging tiers is crucial to ensure employees feel the system is fair and attainable. 

This type of commission plan is best suited for roles where exceeding basic targets translates to significant benefits for the company, such as acquiring high-value clients or opening new markets.

• Pros: encourages exceeding minimum targets, rewards exceptional performance.
• Cons: requires careful planning to set achievable yet challenging tiers.
• Best for: roles where exceeding basic targets significantly benefits the company.

3. Team commission

Team commission structures share the commission pool amongst a group of employees based on their collective performance. This approach fosters a strong sense of collaboration and teamwork, as individual success becomes intertwined with the overall success of the team. Employees are more likely to support each other, share knowledge and resources, and celebrate collective achievements.  

However, if a team member underperforms, it can drag down the overall performance and demotivate high performers who consistently contribute significantly. Team commission is best suited for roles where teamwork is crucial.

• Pros: promotes collaboration and teamwork, aligns individual goals with team success.
• Cons: may demotivate high performers if team performance suffers due to others.
• Best for: roles where teamwork is crucial and team success directly impacts revenue.

Commission pay: do’s and don’ts

✅ Do: clearly define expectations and commission structures in writing to avoid pay disputes

✅ Do: set achievable yet challenging targets to motivate top performance.

✅ Do: provide ongoing support and training to equip employees for success.

❌ Don’t: change commission structures unexpectedly.

❌ Don’t: make targets unrealistic, leading to employee frustration.

❌ Don’t: offer commission as a replacement for competitive base salaries.

Legal considerations for commission pay in the UK

It’s important to be aware of the legal requirements surrounding commission pay in the UK.  Here are some key points to consider:

• National minimum wage: even with commission, employees must still receive at least the national minimum wage for the hours they work.
• Written agreements: it’s advisable to have a written agreement outlining the commission structure, including calculation methods, targets, and payment schedules.
• Holiday pay: commission may also need to be factored into holiday pay calculations.

Conclusion

In today’s market, the competition for high-performers is fierce and maintaining a workforce that merely “acts their wage” can be a recipe for disaster. Businesses need a team that’s actively engaged, motivated to excel, and constantly striving to push boundaries. 

When implemented strategically, commission pay can be the spark that ignites this kind of dedication. By directly linking effort and reward, commission structures create a powerful incentive for employees to go the extra mile. This translates into increased sales, improved customer service, and ultimately, a stronger, more profitable business.