COMMISSION COMPUTATION

INTRODUCTION. When business owners hire salespeople, they may use one of several compensation techniques. Some receive a salary, others a commission based on the sales they make, and some are paid through a combination of both salary and commission.

HOW IS IT COMPUTED? A commission is a fee paid for a service rendered and is usually expressed as a percentage of the sales revenue received by the business. If the commission is based on a single percentage, it is called straight commission. In variable, or sliding-scale commission, two or more percentages are used. A draw, or advance against future commissions may also be used. By using this method, an employer allows a salesperson to draw a regular amount of money each week to help the employee get through "slow" sales period. The formula for computing the amount of commission earned is:

Commission rate x sales = commission earned

Example 1. Suppose that an employee of Drake Stationary Store works on a 25 percent commission basis. The commission rate multiplied by the sales in dollar equals the amount of commission earned. Thus the commission on $800 of sales is 4200, computed as follows:

Commission rate x sales = commission earned

25% x $800 = $200.

Example 2. An employer pays 25 percent commission on sales up to $1000 and 10 percent on the amount of sales above $1000. The commission on $1400 of sales is $290, computed as follows:

Commission rate x sales = commission earned

0.25 x $1000 = $250

0.10 x $400* = 40

Total earned = $290

*The amount above $1000 is $400 ($1400 - $1,000).

Example 3. An employee of Olden Sales draws $200 at the beginning of a week and earns a commission of $240 by the end of the week. The employee collects a commission of $40 at the end of the week, computed as follows:

Commission rate - draw = difference paid to employee

$240 - $200 = $40

Example 4. Belle Music pays its salespeople the following commission on all sales:

2 percent on the first $1000 in sales.

5 percent on the next $1000 in sales.

8 percent on any sales over $2000.

Commissions are paid monthly. Determine to the nearest cent the commissions earned by the following employees:

Employee

Sales

Commissions

P. Latch

2% x

$,1000

=

$ 20.00

5% x

569.80

=

28.49

Total

$1,569.80

=

$ 48.49

E. Marks

2% x

$1,000

=

$ 20.00

5% x

1,000

=

50.00

8% x

1,49

=

118.88

Total

$3,486

$188.88

HOW IS IT USED AND APPLIED? Paying a salesperson a commission based on his or her results is an effective and equitable method of rewarding an employee`s performance. Under this system, ambitious and successful salespeople are rewarded with high compensation for their efforts. At the same time, a practice of allowing employees a draw gives them a salary during periods of slow sales. The draw can also be used to monitor employee performance. Under this procedure, employees who fail to earn their draw for a stated period of time can be terminated for low productivity.

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