commission (remuneration)

{{Short description|Form of variable-pay remuneration for services rendered or products sold}}

Commissions are a form of variable-pay remuneration for services rendered or products sold. Commissions are a common way to motivate and reward salespeople.{{Cite web |title=Back To Basics – What is a Sales Commission? - QCommission is a powerful, flexible Sales Commission Software |url=https://www.qcommission.com/blog/back-to-basics-what-is-a-sales-commission.html |access-date=2023-03-31 |website=www.qcommission.com}} 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.{{cite book |last1=McConnell |first1=Campbell R. |last2=Brue |first2=Stanley L. |year=2008 |title=Economics |edition=17th |location=New York, NY |publisher=McGraw-Hill/Irwin |isbn=978-0-07-329392-9}} 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.{{Cite web |title=What is Sales Incentive Compensation? - QCommission is a powerful, flexible Sales Commission Software |url=https://www.qcommission.com/blog/what-is-incentive-compensation.html |access-date=2023-03-31 |website=www.qcommission.com}} 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.{{cite journal |last=Madhani |first=P. M. |year=2009 |title=Sales Employees Compensation: An Optimal Balance Between Fixed and Variable Pay |journal=Compensation & Benefits Review |volume=41 |issue=4 |pages=44–51|doi=10.1177/0886368709331449 |s2cid=150568922 }}{{Cite web|url=https://corecommissions.com/how-to-pay-straight-commission-only/|title=How to Pay Straight Commission Only -- Core Commissions|first=Clare|last=Sivits|date=September 9, 2020|website=Core Commissions - Commission Management Software}}{{Cite web|url=https://corecommissions.com/base_salary_plus_commission/|title=Implement Salary Plus Commission Plan - Core Commissions|first=Clare|last=Sivits|date=September 16, 2020|website=Core Commissions - Commission Management Software}} 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.{{cite news|date=15 April 2016|newspaper=The Washington Post|title=Commissions of 6 percent for home sales once were the norm. That's changing|url=https://www.washingtonpost.com/realestate/commissions-of-6-percent-for-home-sales-are-the-norm-but-that-is-changing/2016/04/13/91bb758c-fb55-11e5-886f-a037dba38301_story.html|access-date=3 April 2018|first=Michele|last=Lerner}}

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."Manning Gilbert Warren III (2010). [https://www.law.upenn.edu/journals/jbl/articles/volume12/issue4/Warren12U.Pa.J.Bus.L.1135%282010%29.pdf "Equitable Clawback: An Essay on Restoration of Executive Compensation,"] {{Webarchive|url=https://web.archive.org/web/20210307020150/https://www.law.upenn.edu/journals/jbl/articles/volume12/issue4/Warren12U.Pa.J.Bus.L.1135(2010).pdf |date=2021-03-07 }} 12 University of Pennsylvania Journal of Business Law 1135.{{Cite book|url=https://books.google.com/books?id=61l4CgAAQBAJ&q=%22faithless+servant%22+murray+beard&pg=PA424|title=The Impact of Corruption on International Commercial Contracts|first1=Michael Joachim|last1=Bonell|first2=Olaf|last2=Meyer|date=2015|publisher=Springer|via=Google Books|isbn=9783319190549}}{{Cite web|url=https://www.martindale.com/labor-employment-law/article_Withers-Bergman-LLP-Withers-LLP_661798.htm|author=Chaya F. Weinberg-Brodt|date=April 3, 2009|title=The Faithless Servant Doctrine in New York State|website=www.martindale.com}}{{Cite journal|title=Mastering the Faithless Servant? Reconciling Employment Law, Contract Law, and Fiduciary Duty|first=Charles A.|last=Sullivan|date=March 4, 2011|journal=Seton Hall Public Law Research Paper No. 1777082|ssrn = 1777082}}

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.{{cite web |url=http://www.buchalter.com/bt/images/stories/Client_Alerts/l&e%20law%202012.pdf |title=Labor & Employment Law: Looking Forward to 2012 |publisher=Buchalter Nemer |date=December 2011 |access-date=2013-08-13 }}{{Dead link|date=July 2019 |bot=InternetArchiveBot |fix-attempted=yes }} 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".{{Cite web|url=https://www.lexology.com/library/detail.aspx?g=82ec8b04-28b0-46c9-bac2-991a61d20c39|title=New California commission contract rules - it is not too early to get ready! | Lexology|first1=Sheppard Mullin|last1=Richter|first2=Hampton LLP-Jennifer G.|last2=Redmond|first3=Morgan|last3=Forsey|website=www.lexology.com|date=19 March 2012 }}

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.{{Cite web|url=http://www.ftadviser.com/2013/04/29/investments/wraps-and-platforms/fca-platform-paper-deals-fatal-blow-to-adviser-trail-23EHoFMbEkAPNe0MKSfBRP/article.html|title=FCA platform paper deals fatal blow to adviser trail - FTAdviser.com}}

UK

In the financial services industry in the UK, rules set out in the Retail Distribution Review of December 31, 2012{{cite web|url=http://www.fsa.gov.uk/pages/about/what/rdr/index.shtml|title=Retail Distribution Review|date=February 17, 2009|access-date=January 13, 2015|publisher=Financial Services Authority|archive-date=August 1, 2011|archive-url=https://web.archive.org/web/20110801143653/http://www.fsa.gov.uk/Pages/About/What/rdr/index.shtml|url-status=dead}} 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,{{cite web|url=http://www.fca.org.uk/firms/being-regulated/meeting-your-obligations/firm-guides/guide-financial-advisers/rdr-adviser-charging|title=Retail Distribution Review: Adviser Charging|date=September 12, 2014|access-date=January 13, 2015|publisher=Financial Conduct Authority|archive-url=https://web.archive.org/web/20141205051611/http://www.fca.org.uk/firms/being-regulated/meeting-your-obligations/firm-guides/guide-financial-advisers/rdr-adviser-charging|archive-date=December 5, 2014|url-status=dead}} 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.{{cite web|url=https://www.bestpricefs.co.uk/life-insurance/compare-life-insurance|title=Compare Life Insurance: Commission-Free versus Commission-Based|date=May 12, 2014|access-date=January 13, 2015 }}

References

Category:Contract law

Category:Employment compensation

Category:Financial economics

Category:Sales

commission (remuneration)

Legal implications

Trail commission

UK

See also

Further reading

References