Bonus and commissions are terms that are often used interchangeably. However, a bonus is given after achieving a particular goal set by the organization while a commission is an incentive percentage that is given on top of the sale made. In this piece, I’ll highlight the differences and similarities between the two.
Bonuses and commissions are given to reward and motivate employees. According to this Harvard study, organizations in the U.S. spend $800 billion to manage their sales teams, with $200 billion solely going into compensating their reps.
So what are bonus and commission and how are they different?
Read on for a head-to-head comparison of sales bonuses and commissions, how they differ, and when they’re applicable.
Let’s dive in!
Understanding Commission Vs. Bonus
Bonuses and commissions are used interchangeably and often confused with one another. Let's see the difference between bonus and commission.
A sales bonus is a one-time payment and can be a fixed amount or a percentage of the salesperson's earnings. On the other hand, a sales commission is a recurring payment made by the salesperson on each sale.
Sales Bonus
A sales bonus is the money sales representatives receive once they reach their individual goals and/or corporate goals. It’s a fixed amount that is given during a specific time of the year.
For instance, all reps are required to bring 5 enterprise clients. If everyone in a team achieve the target, everyone will get a bonus of $3000.
Sales Commission
Commission is the extra money or percentage that you might give the representative based on predetermined agreements.
For example, if your representative earns 5% commission on a sale for a $10000 item and makes six sales, they might give away $3000 as commission.
The commission earned can vary from item to item and sale to sale.
Difference Between Sales Bonus and Commission
| Aspect | Sales Bonus | Sales Commission |
|---|---|---|
| Definition | Fixed amount awarded for reaching specific goals (individual/team). | Percentage or fixed amount earned per sale made. |
| Types | Performance bonus, Volume bonus, Quota reached or exceeded bonus, Spiff bonus. | Flat-rate, tiers, commission on revenue, commission on profit. |
| Examples | $5000 bonus for hitting $50,000 in sales or 2x bonus for exceeding target. | 5% of revenue/profit, or flat $1 for every sale (works for fixed pricing) |
| Determining Factors | Quotas, targets, past performance | Sales made and quota requirements; high-performers earn more. |
| When to Use | One-off achievements and can be any employee from any team | Throughout the year commonly with sales, SDR and CS teams |
| Frequency | Typically yearly. Varies based on goals | Typically monthly along with fixed salary. Varies based on sales cycle. |
Let's understand the table in detail with examples.
Types
A. Sales bonus
Here are a few types of sales bonuses:
- Performance bonus: Awarded for sustained sales performance over a longer period of time.
- Volume bonuses: The total number of sales made by the salesperson within a specific time frame.
- Quota bonuses: Awarded when a salesperson reaches a specific sales target.
- Spiff bonuses: Sales Performance Incentive Fund is a one-time bonuses offered as incentives for specific sales activities.
B. Sales commission
Some commission types include:
- Tier commission: Higher commission rates when sales reps reach defined targets.
- Revenue-based commission: Get a commission percentage on the revenue closed.
- Profit-based commission: Get a commission percentage on the profit generated.
- Flat-rate commission: Get a fixed amount as commission for every sale closed.
Determining factors
Both these payouts are determined and considered on different bases. Here are the determining factors:
A. Sales bonus
Employers consider sales quotas and performance when awarding sales bonuses. A comparison is made between the goals of the company and the individual. Then it is benchmarked against the rep's past performance in order to measure their progress.
Here are some scenarios where you can provide a bonus:
- 2x of quota/target
- Exceed quota of a new product line or exceed in a difficult region.
- Retain 95% of your accounts
- Up-sell/cross-sell to 60% of your accounts
B. Sales commission
Commissions are paid out on the basis of the sales made and quota requirements that should be met. For commissions, the quota or the sales made alone is the determining factor. Quota and sales can be in volume, revenue, or profit.
As a result, high performers will earn a higher percentage of sales commissions.
When to Use Commission vs Bonus?
A. Sales commission
Commissions are used for revenue-generating teams such as sales, SDRs, and Customer Success.
You can use a commission structure anytime. It is applicable for organisations of all sizes; start-up to enterprise, 1 or 1000s of sales reps. Any company that wants to incentivize revenue generation can implement commission structure at any point.
B. Sales bonus
When you feel you need to promote healthy competition or promote the selling of a particular product or in a specific region, you can offer a bonus. Bonus is generally offered in organizations that have a structured compensation plan.
Bonuses are relevant for:
- Teams that are more established and have a steady revenue generation.
- Sales roles that include admin responsibilities and cross-functional collaboration.
- Non-selling and client management roles.
- Managerial and people management roles.
Payment Frequency
Bonuses and commissions are paid out at different intervals:
A. Sales bonus
Bonuses can be paid out either yearly or half yearly, depending on the goals and determining factors.
For example, if retention is the dertermining factor and your customers renew yearly, then bonus will be paid yearly after understanding a rep's performance in customer retention for a year.
B. Sales commission
Commissions are usually given at regular intervals, typically monthly. However, if your sales cycle is short, you can also do it bi-weekly or weekly, and if it is very long, then you can do it quarterly or half-yearly or yearly.
2 Key Similarities Between Bonus and Commission
Even though bonuses and commissions differ greatly, they’re also similar in certain aspects like the following:
1. Meeting Conditions Laid Out
As an organization, you should pay the representatives bonuses or commissions only after they’ve met the criteria to receive them.
It is important for you to lay out the conditions and define all the determining factors in writing for transparency and accurate calculation.
2. Commission and Bonus are Income
Both bonuses and commissions are add-on payouts on top of your base salary (unless you are a channel partner where you work only on commissions) They come as a result of the performance in a specific time period. As both are income, employees are liable to pay tax on it.
Note: Commissions and bonuses are based on pay periods that are preset by the organization.
Choosing the best Pay Structure: Bonus and Commission
While creating a compensation plan, you need to select whether to include a bonus or commission as a part of the package. 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 or both. You can then curate a suitable incentive plan to boost your employees' motivation levels.
Conclusion
Sales bonuses and commissions have a direct impact on how your sales teams’ perform. It provides a tangible reward for hard work and helps align the interests of salespeople with those of the company.
When designed and implemented effectively, they can lead to increased revenue and overall success for the business. Depending on the selling environment, location, tax implications, and team dynamics, you should define a model that best suits your people and bottom lines.
Use the above-discussed scenarios to design a unique bonus and commission structure that is relevant to your organization.
