Being a sales leader, you must decide on a suitable compensation plan for your sales reps. The compensation plan must strike the perfect balance between maximizing revenue and motivating them. Every year, companies in the US spend over $200 billion on employee compensation, wherein incentives form a core part. Hence, it is safe to state that incentives require huge investments from companies.
This makes it tough for you to create an effective incentive plan, as here, you must choose between commission pay or bonus pay. Companies leverage commissions and bonuses to motivate sales reps to deliver the best results. Read on to learn more about the difference between bonus and commission and how they can impact the growth prospects of your company.
What is Bonus Pay?
Bonus pay is defined as the additional payment given to salespersons on top of their basic pay. Sales leaders use it as a motivational tool to recognize a rep on the achievement of given targets. As per experts, when you integrate bonuses into the payment structure and tie them to performance, they are motivated to reach their quotas. This approach, in turn, helps the business attain its goals. The other notable benefits of bonus pay are improved motivation, morale, and productivity. Based on the company policy, bonus payments can be discretionary or non-discretionary. A discretionary bonus is paid at the discretion of the management, while a non-discretionary bonus is known and expected by the salesperson.
What is a Commission Pay?
Commission pay is defined as the additional amount that a salesperson can make as a percentage of the total sales during a period. Herein, sales reps can make more money whenever they make a sale. In a compensation plan, commission pay is usually accompanied by a base salary. Based on company policy, commissions can be capped or uncapped, though most enterprises opt for uncapped commissions to further motivate the salespersons to close more deals. The rationale behind having a mix of base salary and commissions is to ensure that the basic needs of the rep are taken care of while he or she pushes hard to land more accounts and maximise the commission payment. One of the noteworthy benefits of having commission pay is that the company can keep its payroll expenses under control as the money paid to the salesperson is directly associated with the revenue inflows.
Choosing the "best" Pay Structure: Bonus vs Commission
While creating a compensation plan, you need to select whether to include a bonus or commission as a part of the package. To make this decision, you need to understand the difference between bonus and commission. Here are some of the questions that you must focus on while creating your incentive plan:
- What is the best way to motivate your salespersons to achieve the sales goals as per the defined budgetary constraints?
- How do you quantify the performance of your sales team? What are the metrics that you must focus on?
- Do you want to create an incentive-only compensation plan, or do you want to offer a base salary as a part of the compensation plan?
- Are you interested in offering your salespersons any form of non-financial compensation?
When you answer these questions and determine how they align with the goals, you will be able to define your sales needs. This will help you further identify how much you are willing to pay as commission or bonus. You can then curate a suitable incentive plan to boost your employees' motivation levels and encourage them to achieve the stated goals.
When to use commission pay?
Commissions are the most common and popular form of the compensation plan. You may offer commissions to the salespersons with or without a base salary. Though, in most cases, companies do offer a base salary along with a commission to ensure that the basic needs are taken care of. There are certain situations where using commission pay as a part of the compensation plan is suitable. This includes situations-
- Where you have a growing revenue team
- Where the sales process involves direct interaction with customers.
- Where the sales role involves additional responsibility for prospecting and selling.
You can use commission pay when there is clarity on the money that the business can afford to pay for every incremental sale. Another factor that you may focus on is maximizing the remuneration for the best salespersons, which will encourage them to stay longer with the company.
Here are a few of the commission pay examples for your reference:
- If you have a commission-only plan in place, then a salesperson will not get a base salary.
For example, if the commission is fixed at 30% for every sale, then if the salesperson sells 50 products in a quarter worth $2,000 each, then the total compensation for the quarter will be $30,000 (50 x $2,000 x 0.30) or $10,000 in a month. - If the same employee had a base salary + commission plan in place, the compensation would differ.
Let's assume a base salary of $48,000 per annum and a 5% commission on sales of every product worth $2,000 each. If the salesperson sells 100 products in a year, then the annual compensation will be $48,000 plus $10,000 as a commission ($2,000 x 100 x 0.05). Hence the total compensation will be $58,000 per annum or $4,833 every month.
When to use Bonus Pay?
Other than commission pay, bonus pay is also a popular option amongst companies. A bonus pay plan includes paying a base salary to the sales rep along with a bonus. The bonus in this situation can be discretionary or non-discretionary. Some of the situations when bonus pay is more suitable as a compensation plan are,
- Professionals engaged in alternate non-selling roles.
- Sales profiles that entail considerable administrative responsibilities.
- Companies with larger and established revenue teams.
If you are unsure about when to opt for a bonus plan, then you should ideally select this plan when you have an established company. When your focus is on compensating the sales rep as per the market norms, then a bonus pay plan would work. Though, it is pertinent that your compensation plan accurately matches the importance of every salesperson for the company.
Here are a few bonus pay examples,
- You have a salesperson with a base salary of $60,000 and a 10% bonus for meeting the stated goals. In such a situation, the annual pay for the salesperson will be $66,000, i.e., $60,000 (base pay) plus $6,000 (10% of $60,000).
- You hire a star salesperson with a base salary of $80,000, a 10% sign-on bonus, and a 20% performance bonus. If the salesperson meets all the stated goals, the compensation will be $104,000, i.e., $80,000 plus $8,000 (10% of $80,000) plus $16,000 (20% of $80,000).
Bonus vs Commission
In several cases, you may also offer a combination of commission and bonus pay. Though, such a pay structure is more suitable for professionals working outside the core sales team. It is entirely your prerogative whether you want to use commission pay, bonus pay, or a combination of both. Your focus must be on ensuring that the compensation plan boosts the motivation and productivity of the sales rep. Another aspect that you must pay attention towards is ensuring periodic review of the compensation plan. You would not want to lose a star salesperson just because the payment plan did not align with his or her expectations. This will help you finalize a compensation strategy that can take you closer to your business goals.
