Page 132 - CalcBus_Flipbook

14-6 Payrolls, Wages and Commissions CH 14]

Commission Earnings
Commissions are earned by people engaged in sales: Real Estate, Insurance, Retail,
Automobile, and other such occupations. No pay is earned without making a sale, thus
there is an incentive to sell. The incentive is similar to though greater than piecework
production. There are simply three types of commissions, 1) straight commission, (2) salary
and commission, and (3) graduated commission.

Straight Commission. A commission is a sum of money that is paid to an employee
upon completion of a task, usually the task of selling a certain amount of goods or services.
It can be paid as a percentage of the sale or as a flat dollar amount based on sales volume.
Being paid on straight commission, the wage earned is a percentage of the dollar value of
each sale with no guarantee of salary, or as a commissions minus draws against
commission. A Draw against commission is a salary plan based completely on an
employee's earned commissions. An employee is advanced a set amount of money as a
paycheck at the start of a pay period. At the end of the pay period or sales period, depending
on the agreement, the draw is deducted from the employee's commission.
To calculate the amount of the commission when the rate is a percent of sales, multiply
the amount of sales (the base) by the percent (the rate).

Sales x Commission Rate = Amount of Commission

Example A: Beatrice Russell receives a straight commission of 6% on her monthly sales.
During January she sold $225,000 worth of goods. How much commission
did she earn in January?

Solution algorithm: $225,000 x 0.06 = $13,500

Example B: Nancy Pelosi receives a commission of 8% monthly on sales against draws
on commission. In February she drew $3,500 against her commissions.
During February she sold $100,000 worth of goods. How much was her net
check for February?

Solution algorithm:
Commission: $100,000 x 0.08 = $8,000
Less draw: − $3,500
Net Check: $4,500

Salary and Commission. In many retail merchandising companies, sales people can be
paid a base salary plus a percent of their total sales or a percent of sales that exceed the
quota of sales, which acts as a draw against sales.

Example: Ian Stewart, who works in the Wilmington Department Store, is paid $600 a
week plus 7% commission on his sales in excess of $5,000. If his sales
during the past week amounted to $8,400, how much did he earn?

Solution algorithm: $8,400 — $5,000 = $3,400 sales above quota

Salary: $600
Commission: 238 (7% of $3,400)
Total earnings: $838

Note: as Stewart’s sales exceeded the $600 draw, he covered his base salary, and shares in
the profit of his sales.

Graduated Commission: The graduated commission is a compensation method for
sales whereby the commission earned as a percentage of sales increases incrementally with
the increase in the sales volume. Generally this method of compensation is used by a
business to incentivize the sales force for better performance. Commissions on sales
increase as sales volume increases. A graduated commission may provide a commission of
5% on the first $8,000, and 7% on the next $12,000 and 9% on the all sales over $20,000.
The total commission under this plan is the sum of the commissions obtained by
multiplying the appropriate sales basis by the individual rates.

Example: Crista Keller receives 5% commission on the first $8,000 worth of goods that
she sells each month, 7% on the next $12,000, and 9% on sales in excess of
$20,000. How much commission did she earn during a month in which she
sold $55,000 worth of goods?

Solution algorithm:
$8,000 x 0.05 = $400 commission on first $8,000
$12,000 x 0.07 = 840 commission on next $12,000
($55,000 — $20,000 =) $35,000 x 0.09 = 3,150 commission on amount over $20,000
$55,000 $4,390 total commission
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