In the business world, you might have come across the term “tiền hoa hồng” or commission. It refers to the amount of money that a salesperson earns as an intermediary, acting as a distributor or broker for suppliers, service providers, or agencies, based on the number of products or services sold. Nowadays, this term is commonly used in daily life when referring to someone who plays a middleman role between buyers and sellers, and deserves to receive a fair amount of compensation. This commission is calculated as a percentage of the completed transaction value, based on the number of products or services sold. Many stores and businesses apply this commission to their employees in addition to a fixed monthly, quarterly, or yearly salary, while others solely rely on commission as a form of payment.
Commission in English is “Commission”
How to calculate the commission percentage for salespeople:
Method 1: Fixed commission percentage
This method is usually used when a business’s products have similar prices and market development strategies, with no significant price differences or variations. This calculation method ensures that employees receive the most fair commission rate.
For example, Company X stipulates that for every Hyundai car sold in the market, the employee will receive a 2% commission based on the payment value. Let’s say Employee A sells a car worth 850,000,000 VND, then the commission earned by Employee A for this product would be: 850,000,000 VND x 2% = 17,000,000 VND.
Method 2: Commission rate by stages
This is the most commonly used method nowadays as it ensures fairness and motivates employees’ work productivity. In this method, the contracting party divides the invoice into corresponding stages, then multiplies the value and adds them up.
- From 0 to 300,000 VND => 3%
- From 300,000 to 500,000 VND => 4%
- Above 500,000 VND => 6%
With these percentages, we can calculate the commission for each product as follows:
Employee A sells a moisturizing cream for 365,000 VND, a makeup remover for 35,000 VND, and a lipstick for 500,000 VND each. The total value of the order is 900,000 VND. Therefore, the commission received by Employee A would be:
300,000 VND x 3% + (500,000 VND – 300,000 VND) x 4% + (900,000 VND – 500,000 VND) x 6% = 41,000 VND.
This means that for higher-value products, the employee will receive a higher percentage, thus encouraging them to increase work productivity and convince customers to purchase higher-value orders.
Method 3: Commission based on conditions
One way to calculate the commission for salespeople is by applying certain conditions. The commission percentage is determined based on the sales volume that the company specifies. Typically, the commission percentage is a range of a few percentages of the total revenue. Another condition-based commission approach is when an employee achieves monthly revenue earlier than expected, the company will allocate a certain amount as a bonus.
This method serves as a motivation for employees to work harder, as exceeding the sales threshold will result in higher commission earnings.
For example, if Employee A achieves a revenue of 300,000,000 VND for the company in one month, they will receive a 5% commission on the total revenue. Therefore, Employee A will receive an additional commission of 6,000,000 VND.
Method 4: Commission based on work experience
This method is used by businesses to retain outstanding employees. The longer an employee works, the higher their commission rate. It is a strategy that both motivates employees to increase their work productivity and attracts talented individuals to stay with the company. In this method, veteran employees will receive a higher commission rate compared to new employees, while still ensuring the total amount deducted from the revenue remains the same. The lower commission rate for new employees encourages them to strive for a higher profit-sharing ratio.
Method 5: Commission based on each business project
This commission calculation method is particularly suitable for companies that work on project-based assignments. Whenever a project is successful, the salesperson will receive a corresponding commission. The commission policy for salespeople is determined based on the value of the contract they secured for the project. The scale and nature of each project may vary, so the commission amount for each salesperson will also differ.
Regardless of the commission calculation method used by a company or business, it is essential not only for the employees but also for the reputation and image of the company. It not only impacts the company’s profitability but also influences its reputation and trustworthiness.
Pros and Cons of commission in sales:
- Increased sales: Using commissions for employees is one of the incentives and motivational factors for them to work harder. They will strive to learn and improve their sales skills to be able to sell higher-value products. Additionally, using commissions helps employees earn additional income on top of their regular salary, which is a reward proportional to their efforts. This leads to a sense of satisfaction and pride in themselves, the company, and their achievements. Furthermore, it creates healthy competition among employees, encouraging them to work harder, enhance their skills, and persuade customers to purchase higher-value orders, thereby increasing productivity and revenue for the company.
- Payment tied to revenue: Commission provides financial benefits to businesses as they only have to pay employees based on the revenue they generate. They don’t have to worry about paying employees if they fail to sell products, unlike with a salary. Therefore, you are only responsible for paying the “commission” after the employee has generated revenue. This flexibility is favored by many strong-selling stores as it allows the business owner to effectively control labor costs while optimizing sales effectiveness by paying the salesperson based on their performance.
- Negative impact on salespeople’s attitude: When a business pays a low fixed monthly salary, it means that the employee’s salary depends on the products sold. This aspect has both advantages and disadvantages. The essence of commission is that selling more products will earn the employee more money, which creates pressure on salespeople to sell products by any means necessary. Consequently, salespeople may resort to aggressive sales tactics without considering the true needs and benefits of customers. However, coercing customers to purchase products or services can unintentionally make them feel uncomfortable, leading to a negative perception of the company’s products. Over time, customers may no longer recognize the value of the products or services they purchase from your store and will look for alternatives from other brands.
Difference between bonus and commission
One of the concerns for employees is apart from commission, the additional bonus they may receive. Therefore, the bonus amount is equivalent to a reward, exceeding the basic salary threshold.
Many people often confuse these two concepts; however, they have fundamental differences:
- Bonus and commission both serve as rewards, but they are entirely different concepts. Commission is the amount paid based on work performance, the number of products sold, or the achieved revenue for individual employees. This commission is usually received monthly and is stable because it is calculated based on the sold goods or revenue, which is agreed upon and stated in the labor contract. On the contrary, a bonus is a discretionary amount that the business owner can reward to employees if the monthly sales increase or specific service, partnership, or high-value products are closed.