Commission (remuneration)

Lore & Background

Commissions are a common method to solve the principal–agent problem by realigning employees' interests with those of the firm. Payments are often calculated as a percentage of revenue, but profit-based or bonus-based models also exist. On-target earnings represent a salesperson's base pay plus expected commissions assuming a quota is met, helping estimate total compensation. Commission structures can include multiple levels of attainments, each with different thresholds and rewards, and can apply to employees or independent contractors.

Reader's Guide

Commissions serve as a key mechanism in sales compensation, designed to motivate and reward performance while aligning employee behavior with company goals. Commissions can be structured to encourage specific actions, such as selling certain products or avoiding large discounts. Legal implications are significant: the 1886 New York case Murray v. Beard established that a disloyal broker forfeits commission rights under the faithless servant doctrine.

In California, AB 1396 (effective 2013) requires written contracts detailing how commissions are earned, computed, and paid, excluding short-term productivity bonuses and profit-sharing plans unless a fixed percentage of sales or profits is offered. The article also discusses trail commission in the UK, where it was banned on new investment products as of April 2014 and phased out by April 2016, following the Retail Distribution Review. This reflects ongoing regulatory efforts to address conflicts of interest in commission-based compensation.