The pros and cons of commission structures

It goes without saying that you want your business to grow and prosper. So how do you pay your staff in a way that motivates and rewards them for helping you achieve your business goals, and tap into additional revenue streams? Commissions could be the answer to both questions.


Let’s take the issue of staff commissions first. These are typically paid to employees in sales roles, because the more sales they make, the more your company makes. However, there’s nothing stopping you from adopting some form of commission, bonus or incentive payment for other staff too.

How are commissions calculated?

There are two main ways of structuring commissions:

  1. As a percentage of the employee’s total sales, on either a commission-only basis or base salary plus commission;
  2. As a set amount of pay when specified sales targets are met. For example, Jane gets a commission of $10,000 if she meets a quarterly sales target of $500,000. If she misses the target by 10%, she only gets $9,000, and so on.

Whichever way you choose to pay a commission, your employee’s total pay can’t be less than the minimum wage. This is currently $672.70 a week before tax.

Likewise, be careful not to overlook tax. Commissions and bonuses need to be included in employee earnings and PAYG tax withheld. The ATO has a guide to help you calculate withholding amounts, but you should also seek advice from your accountant. 

Commissions also need to be included when you calculate your workers’ compensation premiums. Workers’ compensation is a legal requirement for most employers; it provides cover for the cost of benefits paid to employees for work-related injury or illness. For further information and to seek the advice of an expert, speak to a Steadfast insurance broker.

Salary, bonus or commission?

Before you let the commission genie out of the bottle, it’s important to be clear about what you’re wishing for. There are pros and cons for each payment structure. If the one you choose doesn’t align with your company’s objectives, it can lead to some unintended consequences.

  • Commission-only, or pay plus commission. This is a good way to encourage staff to work harder. It also means you pay more in the good times when you can afford it, and less when sales are down or an employee isn’t pulling their weight. The downside of commission-only pay in particular is that it offers less income security for employees. In some cases, it may even lead to aggressive behaviour that could land your company in hot water. This was the experience of private vocational education providers who paid agents by commission to sign up students. A senate inquiry found that some agents were signing up people with little hope of completing their course, putting the entire sector in the media glare for all the wrong reasons. Your general liability insurance may cover this risk, but speak to your Steadfast insurance broker to be sure.

    Note: If your staff do abuse the system, you should have a right to claw back commission (or set off against future commission or salary). Similarly, you should have a right to discipline or even terminate staff, for poor behaviour.[1]

  • Salary with bonus. A pre-determined bonus for reaching certain company targets can be a good way of recognising team effort and collaboration rather than individual risk-taking. You need to take care though, to tie the bonus to clear targets, such as project completion or contribution to the team. If an employee can’t see how they personally contributed to the company’s performance, they may not feel the need to work harder or take any personal initiative.
     
    Other things to watch out for;
    • Disclosure - Depending on the nature of your business, you may need to let customers know that you are paying your staff commissions. For example, a financial services organisation where staff can earn commission by selling one product over another, so that customers are aware of anything that could be influencing their decision.
    • Discretion - If you have discretion on commission payments, (as opposed to a hard and fast criteria), any exercise of discretion has to be reasonable, in order to prevent disputes with staff.
    • Document - You should have staff sign a document setting out the rules, as to how much and when commissions are payable. This will help ensure rules are communicated clearly and minimise arguments in the future.

Why pay third parties?

Commissions can also help you grow your business by tapping into new sales channels. If you’re in the tourist accommodation business, for example, you might pay commissions to tourism wholesalers, travel agents and inbound tour operators. In the sharing economy, it’s also becoming increasingly common to list goods and services on digital platforms in return for a commission payment.

Even though it’s tempting to avoid paying commissions to keep a lid on costs, this can be a false economy. The more sales channels you can draw on, the easier it will be to protect your cash flow from the loss of a particular client or revenue stream.

The level of commission you pay will depend on things like the level of service provided and industry standards. You will also need to build any commissions into your prices. To do this, it’s important to calculate the average commissions you will pay over a year.

 

Whether your focus is on growing the business with the help of external service providers, or by motivating and rewarding your staff, or both, a well-designed commission structure can help you achieve your targets.

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