What does commission refer to in a sales compensation plan?

Commission in a sales compensation plan typically refers to a financial incentive based on a percentage of sales. This means that sales representatives earn a certain percentage of the revenue they generate through their sales, which directly ties their earnings to their performance. This system is designed to motivate sales personnel to increase their sales volume, as higher sales lead to greater commissions. Such a structure encourages a competitive environment, driving sales representatives to enhance their selling efforts, thereby benefiting both themselves and the organization.

In contrast, a fixed salary provides assurance and stability but does not incentivize sales performance in the same way. Likewise, a type of sales incentive paid periodically does not specifically relate to sales figures—it may not directly link the compensation to actual sales made. Bonuses for meeting annual sales goals offer rewards for overall achievements but differ from commission, as commission is earned continuously, typically calculated per transaction or sale made.