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What’s the difference between commission and bonus and which one is best?

What’s the difference between commission and bonus and which one is best?

11 months ago

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Employers use commission and bonus schemes to incentivise their sales teams and build attractive packages that can help often make all the difference when they’re attracting high performers to work for them. In this article we’ll look at the differences between these incentive structures – often referred to as Sales Incentive Plans (SIPs) - and some of the things salespeople and employers have told us about which work best for them.

Commission v bonus – what is the difference?

Commission is most commonly calculated as a percentage of sales achieved. Depending on the way the scheme is structured, the commission can be paid when the deal is signed, when the project is completed or at some other agreed point in the process.

Heavily commission-based salaries are used by organisations that want to generate consistently high volumes of sales. This attracts salespeople who are very deal driven as their commission is solely down to their own performance, and typically paid on a monthly basis. It can be a good way to encourage competition between salespeople but it can backfire if one or two people are always getting the commission, demotivating those who are not doing as well. For that reason, people sometimes tell us they experience less team spirit when commission is a big part of the package. Some Area Sales Managers, for example, will creep into other colleagues’ patches to make a claim on a project even when they haven’t influenced the sale, putting pressure on National Sales Managers to be on the ball and nip infighting in the bud.

Commission payments vary, but are normally paid as a percentage of sales. This can range from 0.5% of sales to 5% of sales depending on the size of the patch and the brand name of the company. Typically, larger companies with bigger volumes of sales going through on the patch will pay a lower percentage. Some incentive systems tier their commissions so lower levels of sales receive a smaller commission, and higher levels of sales receive larger commissions.

Bonus payments are very similar to commission schemes, although they are more likely to be paid quarterly, bi-annually or at the end of the year and depend on an individual hitting their target. Bonuses can also be associated with a company target as well as other personal KPIs such as filling out a CRM.

Other types of commission and bonus that might form part of the sales incentive scheme can be paid on company turnover and may be dependent on margin and payment terms. They might also be calculated depending on company performance as a percentage of EBITDA, for example.  

What makes a Sales Incentive Plan attractive?

Commission and bonus schemes are used by employers to attract good people to work for them and to keep them engaged with the business.

So which is best, commission or bonus?

This is a tough question to answer because everyone is motivated by different things. Generally speaking, salespeople prefer commission systems and companies prefer bonus systems, because payments can be linked to other criteria like company profit or certain types of products that have been sold.

The best forms of commission and bonus systems are uncapped, so if the salesperson does well one year they’re rewarded for it.

Sales incentives can dramatically increase earning potential. Most of the salespeople we speak to tell us that this is a key driver when they are looking to move job or remain in their current role. People with a strong track record in sales are excellent at building relationships and generally highly motivated by the salary uplift that can be achieved through bonus and commission.

It isn’t the only motivating factor, of course. Car schemes, healthcare, pensions and other benefits all contribute to the overall feelgood factor when candidates are looking for a new job. The company’s reputation, culture and opportunities for career progression factor into the decision making process too.

As we’ve already mentioned above, the balance between bonus or commission and basic salary will vary and this is another important consideration for career movers. We talk about this in more detail in our blog Bonus v basic

You might also be interested in reading our article sales bonus packages explained.

If you are looking for your next career move and want to find a company that offers an incentive programme that suits the way you work, contact us on 0115 871 4777 or check out our latest HVAC sales jobs.