Commission
A commission is a fee or payment calculated as a percentage of a sale or transaction, earned by a salesperson or agent.
Formula
\text{commission} = \text{sales amount} \times \text{commission rate}
Definition
A commission is money earned as a percent of the total sales you make; salespeople often earn a commission instead of, or in addition to, a flat salary, so the more you sell, the more you earn. Formally, commission $C = Sr$ (where $S$ is the sales amount and $r$ the commission rate); total earnings may combine a base salary plus commission, and tiered commissions apply different rates at different sales levels, similar to progressive tax brackets. As a piecewise-linear function of sales, commission structures are studied in principal-agent theory, where they are designed to align a salesperson's incentives with the employer's goals despite the employer being unable to observe effort directly, the "moral hazard" problem in information economics.
Example
A car salesperson earning a $5\%$ commission on a $\$20{,}000$ sale takes home $\$20{,}000 \times 0.05 = \$1{,}000$. A realtor earning $3\%$ on the first $\$200{,}000$ of a sale and $2.5\%$ on the amount above that, for a $\$350{,}000$ house, earns $0.03 \times 200{,}000 + 0.025 \times 150{,}000 = \$9{,}750$. In a simple principal-agent model where effort cost is $C(e) = e^2/2$ and sales include noise, a risk-neutral salesperson's optimal commission rate is $r^* = 1$ (bearing all the risk), while a risk-averse salesperson's optimal rate is lower, balancing incentive against risk.
Key Insight
Commission ties pay directly to performance, the bigger the sale, the bigger the paycheck, a real-world application of percent that motivates understanding exactly how percentage calculations work. Tiered commission structures create different incentives at different sales levels, and understanding the "breakpoints" helps salespeople plan effort and employers design better incentive structures. Commission contract design is a classic problem in information economics: the optimal contract must be "incentive-compatible," making honest effort the salesperson's best strategy, connecting elementary percent arithmetic to mechanism design and the revelation principle in game theory.