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Commissions are a form of variable-pay
remuneration Remuneration is the pay or other financial compensation provided in exchange for an employee's ''services performed'' (not to be confused with giving (away), or donating, or the act of providing to). A number of complementary Employee benefit, ben ...

remuneration
for services rendered or products sold. Commissions are a common way to motivate and reward
sales Sales are activities related to selling or the number of goods sold in a given targeted time period. The delivery of a service for a cost is also considered a sale. The seller, or the provider of the goods or services, completes a sale in ...

sales
people. 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 In mathematics Mathematics (from Greek: ) includes the study of such topics as numbers (arithmetic and number theory), formulas and related structures (algebra), shapes and spaces in which they are contained (geometry), and quantities a ...

percentage
of revenue, a way for firms to solve the
principal–agent problem The principal–agent problem, in political science Political science is the scientific study of politics Politics (from , ) is the set of activities that are associated with making decisions In psychology, decision-making (also sp ...
by attempting to realign employees' interests with those of the firm. 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. 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. 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 A real estate broker, real estate agent or realtor is a person who represents sellers or buyers of real estate Real estate is property consisting of land and the buildings on it, along with its natural resource , Malaysia Malaysia ...
who successfully sells a property might collect a commission of 6% of the sale price.


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 The New York Court of Appeals is the highest court in the Unified Court System of the State of New York New York is a state in the Mid-Atlantic and Northeastern regions of the United States The United States of America (USA), com ...
held that under New York's
faithless servantThe faithless servant doctrine is a Legal doctrine, doctrine under the laws of a number of states in the United States, and most notably Law of New York (state), New York State law, pursuant to which employees who act unfaithfully towards their emplo ...
doctrine a disloyal broker could not recover commissions from his employer, holding that "An agent is held to ''
uberrima fides ''Uberrima fides'' (sometimes seen in its genitive form ''uberrimae fidei'') is a Latin Latin (, or , ) is a classical language belonging to the Italic languages, Italic branch of the Indo-European languages. Latin was originally spoken in the ...
'' 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)
"Equitable Clawback: An Essay on Restoration of Executive Compensation,"
12 ''University of Pennsylvania Journal of Business Law'' 1135.
In 2011,
California California is a state State may refer to: Arts, entertainment, and media Literature * ''State Magazine'', a monthly magazine published by the U.S. Department of State * The State (newspaper), ''The State'' (newspaper), a daily newspaper i ...

California
Governor
Jerry Brown Edmund Gerald Brown Jr. (born April 7, 1938) is an American lawyer, author, and politician who served as the 34th and 39th governor of California The governor of California is the head of government of the U.S. state of California. The gover ...

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. 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".


Trail commission

Trail commission (TC) is commission paid by
investment management Investment management is the professional asset management Asset management refers to a systematic approach to the governance and realization of value from the things that a group or entity is responsible for, over their whole life cycles. It ...
companies to
financial adviser A financial adviser or financial advisor is a professional who provides financial services to clients based on their financial situation. In many countries, financial advisors must complete specific training and be registered with a regulatory b ...
s. It is generally around 0.1% to 0.9% p.a. of the value invested by a
client
client
. If an investment is made directly through a financial adviser, TC is generally kept by the adviser. However, some agencies (for example
Commsec CommSec is Australia's largest online stockbroking firm. It is a subsidiary of the Commonwealth Bank The Commonwealth Bank of Australia (CBA), or CommBank, is an Australia Australia, officially the Commonwealth of Australia, is a So ...
) return half of the TC to the client. 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 An incentive is something that motivates or drives one to do something or behave in a certain way. There are two types of incentives that affect human decision making. These are: intrinsic and extrinsic incentives. Intrinsic incentives are ...
. Following the
Retail Distribution Review The Financial Services Authority (FSA) was a quasi-judicial body A quasi-judicial body is a non-judicial body which can interpret law. It is an entity such as an Arbitration panel or tribunal board, that can be a public administrative agency bu ...
in the
United Kingdom The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain,Usage is mixed. The Guardian' and Telegraph' use Britain as a synonym for the United Kingdom. Some prefer to use Britain as shorth ...

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.


UK

In the
financial services Financial services are the economic services provided by the finance Finance is a term for the management, creation, and study of money In a 1786 James Gillray caricature, the plentiful money bags handed to King George III are contra ...
industry in the UK, rules set out in the Retail Distribution Review of December 31, 2012 mean that an
independent financial adviser Independent financial advisers (IFAs) are professionals who offer independent financial advice, advice on financial matters to their clients and recommend suitable financial products from the ''whole of the market''. The term was developed to refle ...
cannot take commission in the management of their client's wealth. As set out by the
Financial Conduct Authority The Financial Conduct Authority (FCA) is a financial regulatory body in the United Kingdom The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain,Usage is mixed. The Guardian' and Tel ...
, 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.


See also

* Soft dollar * Kickback (dealing with illegal commissions)


Further reading


Article in ''The Observer'' (Britain) warning investors.



References

{{DEFAULTSORT:Commission (Remuneration) Contract law Employment compensation Financial economics Sales