Calculate the commission amount or percentage using the calculator below.
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How to Calculate Commission
There are many different industries that are heavily reliant on the use of commission pay. In fact, some industries are very sales intensive, and commission may account for the entirety of a worker’s earnings in any given year.
Some of the most common industries that are commission-focused include the real estate industry, the car industry, and many other types of sales-based industries. In these industries, the use of commission creates clear incentives: the more a person is able to sell, the more they will earn.
Calculating commission pay is actually pretty easy.
What is Commission Pay?
The term “commission” can be used to describe any earnings that are paid as a result of making a sale. But when a salesperson sells a widget for $10, it is very unlikely that they will get to keep all $10 (unless they are working for themselves and have not accrued any expenses).
Instead, the amount they get to keep will usually be determined by a set commission percentage. Typical commission percentages will vary by industry and will also vary by employers within each industry.
Each employer that offers commission pay should have a sales compensation package for workers to easily understand how their commission is paid, including if there is a commission cap that limits potential earnings.
Sales commissions are one part of the markup in a product or service.
To calculate commission, you need to identify the value of the sale (sale price) as well as the commission percentage that applies to the sale. Then you can plug these figures into the following formula:
commission amount = sale price × commission percentage
The commission is equal to the sales price multiplied bu the commission percentage.
For example, suppose a realtor sells a $400,000 home, and the commission percentage they collect for selling the home is 3%. In this example:
commission amount = $400,000 × 0.03
commission amount = $12,000
Average Sales Compensation Package
Sales compensation packages vary tremendously by industry. Realtors typically make about 3% for closing a sale, but because the products they are selling (homes) are very expensive, they can still earn a decent commission.
Other industries selling less expensive items, such as retail, might end up paying 20% commissions or more. In an industry such as retail, the worker typically has a small base salary in addition to the commission they earn.
Working on commission will have its fair share of pros and cons. The benefit of working on commission is that your earnings potential could be unlimited as long as you keep making sales. Typically, commission-based jobs also have a more flexible schedule and allow the worker to work more independently.
The main drawback, on the other hand, is that this money is not guaranteed, which can be stressful in certain situations. In addition, lenders may see commission-based employees as high-risk when trying to make large purchases, such as a home or car purchase.
This could lead to higher interest rates on loans for commission-based employees. Nevertheless, it is still very useful to know how to calculate commission.
Frequently Asked Questions
What is a good commission percentage?
Commission pay varies greatly by industry and company. It also depends on if the worker has a base salary or if commission accounts for the entirety of a worker’s earnings in any given year. Sales commission percentages can range from 3% – 50%, but 20% – 30% is most common.
Is commission better than salary?
Whether commission pay is better than salary pay is a personal decision for each worker. Commission pay usually offers a higher earning potential than a salaried position, but a salary provides stability.
Some workers prefer a pay raise each year over the potential of commission earnings. Overall, commission pay has its various pros and cons.
Whether a commission-based job is right for you is a personal decision based on your goals and risk aversion. This is why it’s very important to understand how to calculate commission pay and what type of commission pay a potential employer is offering.
How do you calculate a commission split?
Some industries, such as real estate, have a commission split between the seller’s realtor and the buyer’s realtor.
So, suppose a realtor sells a $400,000 home and the commission percentage for selling the home is 6%. In this example:
commission amount = $400,000 × 0.06
commission amount = $24,000
commission split per realtor = $24,000 ÷ 2 = $12,000
When a commission is split, it’s not always split evenly. It could also be split 70%/30% or in a varying number of other ways.