Graduated Commission - Meaning, Importance & Example

Published by MBA Skool Team, Last Updated: September 23, 2021

What is 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 incentivize 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.

Importance of Graduated Commission

The overall objective of graduated commission is to increase sales. More a sales person sells, more is the ability to earn better commission rates. For sales person who can sell more, this proves to be a great incentive to increase compensation. Many companies go for a fixed rate of commission which remains same irrespective of sales value but in this method, it keeps increasing bringing higher returns to high selling sales team members. A company looking to increase sales or launch new and innovative products in a new market, graduated commission can be a good way to motivate the sales team and increase the probability of higher sales.


Advantages of Graduated Commission

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 of Graduated Commission

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.


Graduated Commission Example

Revenue Generated ($)

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 revenue generated is $50,000, the net commission 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.

Hence, this concludes the definition of Graduated Commission along with its overview.

This article has been researched & authored by the Business Concepts Team. It has been reviewed & published by the MBA Skool Team. The content on MBA Skool has been created for educational & academic purpose only.

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