Graduated Commission

Posted in Marketing and Strategy Terms, Total Reads: 1031
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Definition: Graduated Commission

Graduated commission is a method of compensation for the sales people where the commission earned as a percentage of sales increases incrementally with the increase in the sales volume. Generally used by a business to incentivise the sales force for better performance.


Sales jobs are usually paid with a graduated commission-based salary include automobiles computing and technology systems, and real estate.


Example

Gross Commission ($)

Net Commission (%)

0-100,000

10%

100,001 - 200,000

20%

200,001 - 400,000

30%

400,001+

40%


This is a graduated, or step up fee structure. For example, if the gross commission is $50,000, the net would be $5,000. But if the fee is $500,000, then the first $100,000 earns only 10%, the next $100,000 earns 20%, the next $200,000 earns 30%, and the last $100,000 would earn 40%, which totals $10,000+$20,000+$60,000+$40,000=$130,000.

 

Advantages

When the company hires a sales person they should pay a nominal commission and gradually they should start paying more as they hone expertise in the area.

Sales people are paid on a commission basis as they directly help the company generate the revenue. It is also helpful as the company can maintain low cost while paying only to the performing employees who are able to generate more revenue. This is a great source of motivation to bring positive competition amongst the employees to perform better than the rest.


Disadvantages

The companies pay the commission at the end of the month because of which few sales representative works harder only before the deadline. It has also been observed that the sales representative tries to get the most out of the job and will not explaining the products thoroughly to the clients. Customers might be dissatisfied post sales because of incomplete information. It also lead to resentment in other employees as they might be working excellent on their job but are not getting very good variable pay.


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