Set the right pay rates

Commission, bonuses, tips and gratuities

Guide

When you choose a pay system for your business that pays - or partly pays - by results, you will need to consider what form those payments will take.

Commission

Commission is a payment based on the individual worker's or team's performance. It is common among sales workers to provide an incentive to sell. Because they earn commission, they often have lower basic salaries than other workers.

Some workers are paid by commission only. If you choose purely commission-based pay, or pay which is part basic pay, part commission, you must ensure that a worker is always paid at least the national minimum wage.

Bonuses

Bonuses are generally linked to performance.

They can be based on one or more performance measures such as financial results of a business, team and/or individual.

Tips and gratuities

Tips and gratuities are commonly paid to workers in the hotel and catering trade. There are some circumstances when tips and gratuities can count towards the national minimum wage. For further advice on this, you may wish to contact HM Revenue and Customs (HMRC).

These payments can be distributed to workers in a number of ways:

  • directly from customers
  • as a share of a pooling arrangement
  • as a share of service charges paid by customers to the employer

Most money payments that are similar to salaries or wages must have income tax and National Insurance contributions deducted. See pay: employer obligations.

If you choose any of these methods of payment, you should also make sure that the system boosts performance and effective teamwork and does not lead to harmful rivalry between workers.

National Minimum Wage: code of best practice on service charges, tips, gratuities and cover charges.