Commission pay: What it is, how it works, and when to use it

Not every employee gets paid the same way, and not every business uses the same compensation plan. A company might use an hourly rate, fixed annual salary, commission structures, or a combination of all three. 

Commission pay is a popular compensation option in sales-driven industries. If you’re not already familiar with it, you might be wondering, “What does commission pay mean?” or “What is a commission-based job?”

This article answers those questions and more. We’ll dive into everything you need to know about commission pay, common structures, and the pros and cons. Plus, we’ll explain how Rippling can help your business simplify tracking, payout, and compliance. 

What is a commission pay?

Commission pay compensates employees based on the sales or performance goals they achieve. It can be strictly performance-based or combined with a base salary. It is a popular form of payment for those working in sales, financial services, and real estate. 

Commission pay differs from hourly wages and salaries in these key ways: 

• Performance-based: Unlike compensation methods that are tied to a fixed schedule or actual hours worked, commission pay is based on results. The better the performance, the higher the pay, while the driver of salary/hourly pay is attendance and logged hours.

• Variable Income: Commission pay varies depending on sales or meeting goals, whereas other forms of compensation are predictable. 

• Increased earning potential: Top talent has the potential to make more than they otherwise would under a structured salary system. 

• Risk and stability: Wages aren’t guaranteed under a commission compensation structure, unless combined with a base salary. Even so, there is less stability compared to fixed wages. 

Commission pay doesn’t work for every organization, but if your company is sales-based, it may drive results better than hourly and salary-based compensation structures.

How commission pay works

Commission pay is a method of compensation where employees earn their wages based on the completion of a sales task or goal. The amount of pay is usually a percentage of their sales. Unlike a fixed salary, commission pay is directly tied to performance, motivating the employee to close more sales.

Because straight commission pay can be volatile and unpredictable, many salespeople receive a base salary in addition to their commission-based earnings. This helps provide financial stability during slow periods or market downturns. 

How does a company define its commission structure? It’s a team effort:

• Executive and sales leadership outline strategic goals

• Sales leadership defines commission rates, quotas, and goals

• Finance validates the integrity of the commission plan

• HR takes care of communication and compliance tasks

• Payroll oversees the distribution of payments

• Sales and finance monitor effectiveness and make any required changes

In a commission pay structure, earnings and performance are linked, which aligns employee efforts with your company's goals. The direct connection between effort and revenue results in a driven, sales-focused culture with a greater sense of ownership among employees. 

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Common types of commission pay structures

Companies in the U.S. use a range of commission pay structures. Which is best? It depends on your goals and the employee’s role. Below are the most common structures, along with commission pay examples for each.

Straight commission

In a straight commission scenario, employees are compensated according to what they sell. If they don’t sell, they’re not due any payment. 

How it’s calculated 

Sales x commission percentage

Example

A salesperson on a straight commission plan earns 15% of their sales. If they sell $275,000 worth of product during a given period, their total pay is $275,000 × 0.15 = $41,250.

Benefits

Unless there is a cap on straight commission earnings, there is unlimited earning potential. A straight commission structure motivates your sales team to work hard and sell more. 

Drawbacks

Straight commission works well, until there's a market downturn or seasonal dip in sales. Without proactive saving, reps can end up in a cash crunch through no fault of their own. If the instability is severe or prolonged, they may start looking for companies with more predictable pay structures.

Base salary plus commission

Base salary plus commission is a common compensation structure in the U.S. In addition to performance-based earnings, the salesperson receives a reliable salary they can count on. This model is especially popular in industries with cyclical sales patterns.

How it’s calculated 

Base salary + commission sales (sales x commission percentage)

Example

The salesperson earns a base salary of $50,000 per year plus a 15% commission on their sales. If they sell $200,000 worth of goods in one year, their total annual compensation is $50,000 + $30,000 ($200,000 x 0.15) = $80,000.

Benefits

Under this structure, your salesperson is guaranteed a base salary. This provides stability during slow sales periods, as they continue to earn income regardless of performance. The commission component still drives motivation and encourages stronger sales results.

Drawbacks 

Setting an appropriate base salary can be tricky. It needs to be high enough to support your team during low-revenue periods, but not so generous that it weakens the incentive to produce. Finding the right balance is essential to making the base salary plus commission model work effectively.

Tiered commission

A tiered commission structure is similar to straight commission, but with progressive rates based on performance. The salesperson earns a higher commission percentage as their sales increase. Lower tiers offer smaller rates, while higher tiers reward top performers with larger commissions. This structure encourages performance and rewards consistent effort.

How it’s calculated

Multiply sales in each tier by that tier’s rate, then add the results

Example

Acme Corporation uses a 4-tier commission plan:

• Tier 1: Sales up to $100,000 earn 15%

• Tier 2: $100,000 to $200,000 earn 17%

• Tier 3: $200,000 to $300,000 earn 20%

• Tier 4: Sales above $300,000 earn 23%

If an employee makes $350,000 in sales in various tiers, their commission is calculated as follows:

• Tier 1: $100,000 × 15% = $15,000

• Tier 2: $100,000 × 17% = $17,000

• Tier 3: $100,000 × 20% = $20,000

• Tier 4: $50,000 × 23% = $11,500

The employee’s total commission = $15,000 + $17,000 + $20,000 + $11,500 = $63,500

Benefits

In a tiered commission structure, your sales team earns more as they move into higher tiers. It pushes the team to meet and surpass sales goals.

Drawbacks 

When the jump between tiers feels out of reach, average performers may lose motivation.

Revenue-based commission

In a revenue-based commission structure, sales reps earn a fixed percentage of each sale’s total revenue, not the profit. The full commission applies regardless of what the company actually makes. While revenue-based commission and straight commission may sound similar, there is a difference. Revenue-based commission determines how you calculate payouts (as a percentage of sales), while straight commission defines how you pay reps (entirely through commission, with no base salary).

How it’s calculated

Revenue x commission percentage

Example

Based on a 7% commission rate, a $10,000 sale would earn the salesperson $700.

Benefits

This model motivates your sales team to sell more since they earn only when they make sales. Their compensation aligns pay directly with results.

Drawbacks 

This structure can make your sales team’s income unpredictable. When sales slow, your reps may find it difficult to cover their bills. The pressure to perform at a high level can take a toll, and when reps are concerned with their numbers, team morale can suffer.

Profit margin commission

Similar to other straight commission structures (i.e., no base salary), in a profit margin commission model, your sales personnel are paid a percentage of the profit earned from each sale, rather than the total amount of the sale. 

How it’s calculated

Profit x commission percentage 

Example

Your sales rep sells an industrial widget for $8,500. If it costs $5,500 to manufacture, the profit is $3,000. At a 15% commission rate on profit, the rep earns $450 ($3,000 × 0.15).

Benefits

A profit margin commission model encourages reps to focus on higher-quality deals, not just volume. It helps reduce over-discounting and keeps payouts aligned with real profit instead of just revenue.

Drawbacks 

With the profit margin structure, your reps earn based on the profit generated by a deal, not just the volume. That can mean smaller payouts when costs are high or discounts reduce margins. It also makes commission calculations harder.

Pros and cons of commission-based pay

If you’re considering implementing commission-based pay in your organization, it’s important to be aware of the pros and cons of these structures. While they’re popular and work well, they’re not for every business. Let’s take a look at the pros and cons of offering commission-based compensation. 

Benefits of commission pay

• Boosts motivation and productivity: Regardless of the structure, commission pay is a powerful incentive for encouraging performance and driving results.

• Aligns pay with business outcomes: Commission pay links employee earnings with your bottom line, ensuring the entire organization benefits from your sales team’s success. 

• Attracts high-performers: Commission pay appeals to sales pros who want more control over their earnings and value compensation that rewards their efforts.

• Provides flexibility during downtimes: When sales slow, commission costs drop too, so you can control expenses without cutting hours or letting people go.

• Scales with performance: Commission earnings grow directly in line with individual achievements. As performance increases, your employees’ pay grows proportionally.

Disadvantages of commission pay

• Income unpredictability for employees: Commission pay makes earnings unpredictable for your team, which can lead to financial stress for employees during slow periods and market downturns.

• Undermined collaboration: You want your employees battling the competition, not each other. Commission pay can pit employees against each other, discouraging teamwork and cooperation on overall objectives.

• Risk of unethical behavior: High-pressure commission structures can tempt employees to cut corners or bend the rules to hit their goals. This can erode trust and hurt your reputation and your business relationships. 

• Complex tracking and reporting: Managing commissions means tracking sales closely and calculating payouts accurately. It adds extra steps to your compensation process, but modern payroll software can help keep everything organized and significantly reduce or eliminate mistakes.

• Internal competition or burnout: Aggressive commission plans can create intense competition or pressure, sometimes leading to burnout or a toxic work environment where teamwork is an afterthought.

When should employers offer commission pay?

The commission pay model doesn’t work for every industry or every employee. But there are sectors where commission pay is highly beneficial for the employer and the employee. Here are several scenarios where commission-based pay is an effective compensation option. 

Sales and business development

Because it links compensation directly to performance, commission pay is well-suited for sales and business development. Without a regular paycheck at the end of the month, your sales team is acutely aware that their earnings are based on their ability to close deals. This helps them focus on getting the job done by doubling down on their efforts. 

For companies, commission pay structures help them balance cost control with performance-based rewards. Commission pay is a great fit for roles that attract ambitious, independent performers who are at their best in high-pressure environments.

Real estate and insurance

In the real estate and insurance sectors, agents can go for weeks and even months between making a big sale. For many companies, especially smaller enterprises, standard salaries or hourly wages are inefficient and hard to maintain. With a commission pay structure, sales leaders achieve big payouts when they’re productive. They’ll also realize the importance of building relationships, following up with clients, and always be closing. It’s not just a line from a movie; it’s their economic well-being. 

Freelancers and contractors

Commission pay is helpful if you’re hiring for project-based roles, giving you flexibility and helping to ensure quality work. For freelancers and contractors, commission pay encourages them to complete their tasks efficiently. At the same time, employers avoid upfront labor costs and surprises from contractors who bill by the hour. Commission pay ensures you’re paying for results. This is especially useful for creative projects. And when the project is done, you get what you paid for, and high-performing contractors are properly compensated. 

Call centers and customer service

For call centres and customer service operations, commission pay helps boost workforce motivation, which results in higher conversions. Like other sectors in this group, basing pay on performance directly connects employee effort with your sales targets. Because activities like sales calls are trackable, you can calculate commissions fairly and accurately.

Recruiting and staffing

In a sense, recruiters are part of your sales team. They’re not selling products, but they are pitching jobs to candidates. And a skilled recruiter can help you assemble a team of outstanding talent. Commission pay is a good fit in this scenario because it incentivizes the recruiter to find the best people for your company. And you pay for the results: great hires, not the time it took to find and employ them. 

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Best practices for managing commission pay

If you’re planning on implementing commission-based pay in your organization, you want to do it right. A well-structured plan builds trust, motivates employees, and drives results. Here are six best practices that help ensure your commission pay program is not only effective, but also legally compliant. 

1. Set clear, achievable targets

Outline the ins and outs of your plan so that you don’t leave people guessing. Be clear about the main components of your compensation program, including what counts towards earning commission, how you set targets, and your payment schedule. Ensure your team knows what your (and their) goals are. When everyone is on the same page, you’ll see immediate impact and experience fewer misunderstandings and disputes. 

2. Put commission terms in writing

It’s one thing for your team to understand your commission pay program in broad strokes, but for legal and compliance reasons, everything needs to be in writing. Clearly explain your commission pay structure, how you pay commissions, and any relevant eligibility criteria. Have your legal team review the document and ensure employees sign to acknowledge receipt and understanding of the terms. A signed agreement protects all parties in the case of a dispute. 

3. Stay compliant with wage laws

Even though commission pay is different from a salary or hourly pay, it’s still considered compensation, and that means it’s subject to federal and state wage laws and taxes. You’re responsible for paying commission wages in a reasonable timeframe, and you must also factor in rules covering employee classification, minimum wage, and overtime. Check for updates in relevant labor laws to ensure your company stays compliant. 

4. Use payroll tools to track commissions

Manually tracking commission pay on messy spreadsheets invites payroll mistakes. To ensure accuracy and compliance, invest in dependable HRIS or compensation management software that can automate commission calculations, sync with your customer relationship management system (CRM), and generate reports and payroll records that are easy to audit and understand. Automation helps prevent errors and can help save your finance and HR teams a significant amount of time. 

5. Audit and adjust plans regularly

Setting up a commission compensation plan isn’t a one-time thing. It requires regular reviews and audits to make sure you’re hitting your targets and payouts. Is your commission pay still syncing with your organization’s goals? Is it the proper structure for the current market? Does it maximize your team's performance? Quarterly or annual assessments reveal what’s working and what isn’t, allowing you to tweak the plan as needed. 

6. Communicate commission details with your team

Keep your employees informed. Cover commission structures, changes, and results in team meetings and one-on-ones. Let people ask questions and share their feedback. This shows that you’re listening and helps avoid misunderstandings in the future.

How Rippling simplifies commission pay management

Thinking about rolling out commission pay in your company? Consider these two key stats first:

• 72% of companies struggle with manual commission inefficiencies

• 75% of sales reps don’t trust that they’re paid fairly

The result? Delays and frustration for both teams and employers. The solution? Rippling. 

With Rippling payroll software, you can automate commission calculations, sync with payroll in real time, and ensure legal compliance for your commission-based compensation programs. 

Rippling gives you full-service payroll built on top of a single source of truth for employee data. That means your employee data isn’t tied to one specific app — it’s the same across payroll, time and attendance, onboarding, performance management, headcount planning, and any other apps you use within our unified platform.

Rippling Payroll is intuitive, easy to use. It also offers 600+ integrations, automatic and accurate tax registration and filing, and a dedicated mobile app where your employees can view their W-2s and paystubs, submit expenses directly, and more. 

And if you’re using QuotaPath, their new integration with Rippling simplifies and streamlines the end-to-end compensation process for sales teams, helping finance and HR leaders save time, reduce mistakes, and work more efficiently. 

The key benefits for Rippling users:

• Increased accuracy and time savings: Automate commission calculations to reduce errors and manual work.

• Streamlined collaboration: Give finance and HR shared visibility into commissions.

• Empowered employees: Let sales reps track earnings in real time to build trust and motivation.

If you want payroll so powerful it runs itself, you want Rippling.

FAQs about commission pay

What is a job that pays through commission?

Many jobs pay through a commission structure, including real estate agents, salespeople (e.g., cars, consumer goods), and financial services advisors. 

Is commission pay better than hourly?

It depends. By its nature, commission pay is variable, making it difficult for employees to plan and budget. Some commission pay structures include a base salary, which provides the employee with predictable income. Hourly wages are far more stable and ensure employees are paid for every hour worked, whereas an employee on commission may put in far more hours for far less compensation. It depends on the efficiency of the employee. 

Is commission pay paid daily or weekly?

It depends on the employer. In the U.S., commission pay is typically paid according to the employer’s payroll schedule, which could be weekly, bi-weekly, or monthly. However, commission pay may be paid separately, usually on a monthly or quarterly basis. Some companies delay commission pay to verify sales, make allowances for returns, or process customer payments.

What are on-target earnings?

On-target earnings (OTE) combine base pay with expected commissions or bonuses when a rep hits their goals. It’s common in roles tied to sales cycles, new business, and closing deals — where hitting quota is the goal. A well-structured OTE keeps pay aligned with performance and rewards reps for the revenue they generate. OTE is often part of broader employee incentive programs designed to motivate and retain high-performing teams.

This blog is based on information available to Rippling as of August 4, 2025.