Rewarding and encouraging sales activities is the most common reason for commissions and bonuses. More companies every day are turning to variable pay to show their employees appreciation and retain top talent.
For many companies, it is crucial to find the right balance between motivating employees and maximizing revenue. According to Harvard Business School, U.S. companies spend more than $800 billion to manage their sales teams, with $200 billion devoted just to compensation each year!
The two most common forms of variable pay are commission and bonuses, but what’s the difference? Which will be the best fit for your company and the greatest motivator?
Let’s explore the differences between commissions and bonuses and how both can be a powerful tool for your business’ growth.
Commissions vs. Bonuses
Both commissions and bonuses are variable pay – part of an employee’s pay based on how well they do their job on top of their fixed (base) pay. Both commission and bonuses are tied to an employee completing a specific goal or a predetermined quota.
The biggest difference between commission and bonuses are the pay structure and how much an employee earns.
Commissions Based Pay
In a commission plan, the total pay depends on the employee’s individual performance and the commission rate (percentage) for reaching their quota or goal.
An employee earns commission as a percentage (let’s say 6%) for every sale they make, and once they’ve reached their quota, that rate usually increases to encourage performance above and beyond the minimum.
Since the commission is a percentage of the sale being made, the amount will vary depending on your company’s industry, the size of the sale, or employee’s seniority or historical sales performance with the company.
A bonus is awarded when an employee meets specific individual and company goals, instead of just meeting quota. The amount can also be a percentage (5% of base pay), or more commonly a fixed amount ($7,000 on top of base pay).
Goals to earn a bonus can also be tied to sales, like a commission, but don’t have to be “all-or-nothing.” An employee can earn a percentage of the proposed bonus even if they didn’t meet their quota. This can boost morale and recognizes the employee’s effort even though they came up short.
Bonuses unlike commission can include many other types of goals to earn a reward for loyalty and performance. Staying with the company for a set amount of time, helping the company as a whole reach an improvement goal, or referring a new hire to the company are common ways to earn a bonus.
Since bonuses can be based on any type of goal, they can help incentivize employees in all departments, not just sales.
Commissions vs. Bonuses: Which is best for your business?
Every business is different and needs a compensation plan that fits your needs, so begin by asking yourself the following questions:
- What are your expectations for your sales team when it comes to performance?
- Will sales reps earn a base pay in addition to incentive pay?
- Will you be offering your employees any non-financial compensation?
- What’s your budget for incentivizing your employees?
Answering these questions and knowing your goals, you’ll be better equipped to identify what your business can offer to incentivize your employees. Any variable pay structure can get complicated if you’re processing your business’ payroll yourself.
Navrae offers a managed payroll service to help your business cut overhead costs and eliminate the 5 hours every pay period (that’s 21 days a year!) most business owners spend just calculating payroll. A streamlined payroll process that takes the work off your hands means you can afford to offer your employees more pay incentives with less headache.
When to use Commission
Commissions can be offered with or without a base salary, though a base salary is most often included. As the most common type of variable pay, commission makes the most sense for businesses that have sales teams with more selling and prospecting responsibility.
Use a commission plan if you have a fixed amount your business can affordably budget for incentive pay for your sales employees. Design your compensation plan to maximize your best performing employees within your budget.
When to use Bonuses
A bonus plan pays employees a bonus with a base salary. Choose a bonus plan if your sales reps have more administrative responsibility or you have employees you want to incentivize who are not in sales. Larger, well-established businesses or businesses that aren’t focused on growing sales will find a bonus plan more accommodating for compensating employees at market value and retaining top talent.
Should I use both?
Using commission and bonus compensation together can be a great option for businesses who want to incentivize non-sales employees as well as sales reps to meet company goals. Incentive pay is a great motivator no matter the employee’s role in your business.
No matter your compensation strategy, choose a plan that boosts morale and encourages your employees to take an invested role in your business’ growth. Creating an incentive pay plan with specific goals in mind for your business will help you achieve success.