Bonus. Commission. Incentive.
Salary. Benefits. Variable pay. Stock options. Profit sharing.
There are many ways to compensate employees for their hard work and results. Further, fundamental differences exist between these compensation methods that you should consider before deciding which one(s) is right for your business.
After all, compensation is one of the most crucial factors in hiring and retaining employees. According to our State of Sales Compensation Report, 95% of sales reps say their total compensation package is important when deciding their next role.
Additionally, a Payscale study found a correlation between engagement and fair pay — employees were more engaged with their work if they perceived their pay as fair.
So it's no surprise that “U.S. organizations spend more than $800 billion to manage their sales force, with $200 billion devoted solely to compensation.”
Because companies are investing so much in their compensation packages, it's essential to make well-informed decisions — and this starts with having a basic understanding of the different types of pay and when to use each.
What is a bonus? And what is commission pay?
In the world of sales, there are two main types of pay aside from base salary: bonus and commission.
A bonus is a fixed or lump sum reward for hitting a goal or exceptional performance. Sales representatives may earn bonuses that vary depending on individual or team performance. Bonuses also might be represented by a percentage or flat amount.
By contrast, commission pay is rewarded to salespeople based on the number of sales they make. A commission is directly tied to sales; bonus pay is not.
While commission plans offer a variable income based on sales activity, bonus plans provide a set payment that reps can receive regardless of sales results (though there may still be a minimum level of sales required for the bonus).
But what is the “best” way to structure sales compensation plans?
Choosing the “best” pay structure: bonus vs. commission
It's a question that arises repeatedly: should my organization go for a commission-based or bonus-based pay structure?
Before deciding on the best compensation structure, you should figure out how to best support broader financial goals and business objectives, for example:
- What performance metrics make the most sense for the business (i.e., quota or revenue targets),
- Whether you're going to offer sales reps a base salary plus commission and/or additional non-financial rewards,
- What the total budget and sales-generated revenue is expected to be so you can determine the ideal payment rate (the higher the percentage, the better you can incentivize reps), and
- How to effectively motivate your sales team without exceeding budget or sacrificing quality.
A few other factors to think about:
- Number of years of experience: More experience = higher compensation
- Education level (though this is becoming less important these days)
- Location: Cost of living factors (though again, with the massive shift to remote/hybrid work, this is becoming less relevant)
- How “in-demand” this skill set is: This changes over time
When to use commission pay (plus examples)
Most companies choose to provide employees with a base salary when using a commission pay structure. But this isn’t always the case.
Salespeople generally prefer this approach as it guarantees them a monthly income (creates a floor, as they say), and they can bump up their total earnings if they hit/exceed the various sales goals.
Using a commission structure for your sales team is quickly becoming the “go-to” in many industries, including retail, real estate, and insurance — primarily driven by sales. However, commissions are also typical for salespeople who sell products or services directly to customers and those with more responsibility for prospecting and selling.
In general, consider using a commission structure if you:
- Know the fixed budget your company can pay reps.
- Want to incentivize employees to sell more and move up the ladder quickly. Salespeople on commission are motivated to sell as much as possible, so they will naturally try to close deals from higher-level accounts that pay more per sale. These bigger deals will also come with additional prestige and an opportunity for advancement within the organization — a good combination that can lead to results!
- Want to empower the sales team to have lots of autonomy.
Recruiting a team with experience in commission-based sales roles or who are well-versed in the art of cold-calling or door-to-door selling? A commission structure will be an excellent fit.
When to use bonus pay (plus examples)
Bonuses are offered to employees performing well and meeting (or exceeding) goals.
There are many different types of bonuses depending on sales organization size and employee position. (Smaller teams and entry-level positions generally are less likely to be eligible for bonuses).
Bonus plans are generally more appropriate for larger and more established sales teams that have set quotas.
Bonuses can be a great motivator for sales reps to exceed quota. For example, some companies structure bonus pay based on a particular sales bonus percentage. Most sales-based bonus pay ranges from 5% to 30% of total sales revenue.
Bonus-based plans are often tied to individual performance rather than the output of the team or department, allowing the company to reward its top performers without paying everyone at a similar level.
Note: Sometimes, these bonuses are coupled with commission.
The difference between non-discretionary and discretionary bonuses
A non-discretionary bonus is a bonus that’s guaranteed based on specific criteria. They are similar to commission pay in that they are earned.
A discretionary bonus is offered at the employer’s preference and isn’t necessarily tied to predetermined criteria. The result is greater flexibility for the employer.
It should be noted that it’s important to be careful with discretionary bonuses, as they can also be seen as “unfair” or motivated by individual relationships.
What are the key differences between bonus, commission, and incentive pay?
Knowing how to best incentivize your team is important, especially considering the “incentives industry now being valued at over $100 billion.” Of which, an estimated $46 billion is attributable to non-cash incentives.
And there are many ways to incentivize an employee to meet — or ideally, exceed — their goals, including:
- Flexible Schedule
- Rewards and referral programs
- Profit sharing
- Tuition reimbursement
- Mental health and wellness (gym memberships)
What’s the difference between an incentive and a commission?
While often used interchangeably, the key is remembering that a commission is a type of incentive.
Commissions are based on performance and follow a set structure (i.e., a percentage of sales above goal). Incentives may be awarded spontaneously and for whatever reason employers choose.
Bonus vs. incentive
Again, while often used interchangeably, a bonus is a type of incentive.
Bonuses — like all incentives — are separate from salary and commissions. They are awarded at the employer’s will and decided upon once reps have hit their targets.
The primary difference between bonuses vs. incentives is that incentives are decided upon ahead of time, while bonuses are granted after goals are met.
Building a solid sales compensation strategy
To sum it up: Compensation can come in many forms. But, no matter what method you use, be sure it’s tied to sales performance and business objectives. A compensation strategy rooted in these goals will help drive a successful business plan.
Download our State of Sales Compensation Report to learn more about how today’s incentive compensation leaders are building and managing plans that motivate teams and drive business success.