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Commission: Definition, Example and Related Terms

What is a Commission ?

A commission is a form of compensation where payment is made to an individual or entity based on a percentage of the value of goods or services sold, or a fixed fee per transaction. It's essentially a payment for services rendered, particularly common in sales and business transactions.

In contract law, commission structures are carefully defined to specify exactly when and how much payment will be made. For example, a real estate agent's commission might be 6% of the final sale price of a property, or a sales representative might earn 10% commission on all products they sell.

Commissions can be structured in various ways: - Flat-rate commission: A fixed amount per sale - Percentage-based commission: A percentage of the sale value - Tiered commission: Different rates based on sales volumes - Split commission: Shared between multiple parties

It's crucial for contracts to clearly specify several key elements of commission arrangements: - The exact percentage or amount - When the commission is considered earned - Payment timing and frequency - Any conditions that must be met - How disputes will be handled

Example(s)

  • Scenario Description
    Real Estate Agent Commission A real estate agent's contract specifies a 6% commission on home sales. When they sell a $500,000 house, they earn $30,000 in commission. The contract clearly states that commission is earned only upon successful closing of the sale.
    Sales Representative Agreement A sales rep has a tiered commission structure: 5% on sales up to $100,000 per month, 7% on sales between $100,000 and $250,000, and 10% on sales above $250,000. This incentivizes higher sales volumes.

Related terms