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 a 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. And 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.
However, both of these terms are separate from the base pay and are different. Plus figuring out the pay can be challenging for employers. It is usually complex and sometimes you end up compensating more than needed or less than needed.
So what’s bonus vs commission?
In this blog, I’ll be doing a head-to-head comparison of sales bonuses and commissions, how they differ, and when they’re applicable. I’ll also highlight how these two terms are similar.
Let’s dive in!
Sales Bonus Vs. Commission: A Head-to-Head Comparison
Bonuses and commissions are used interchangeably and often confused with one another. Let's see the difference between bonus and commission.
Overview
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 that is paid on each sale made by the salesperson.
Here’s an overview of sales bonus vs. sales commission:
A. Sales Bonus
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, if they sell $50,000 then the representative will be able to receive $5000 as a bonus for the sale made. Else if their goal is to get 5 new enterprise clients and they’ve got 8 - they’ll be getting a 2x bonus for crushing their goals.
Here are a few types of sales bonuses:
- Long-term bonuses: 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: One-time bonuses offered as incentives for specific sales activities.
B. 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 6 sales, they might give away $3000 as commission.
The commission earned can vary from item to item and sale to sale.
- Straight Commission: This commission is nothing but the number of sales generated and the threshold your employer sets for each sale.
- Variable Commission: Variable commission is where you pay your reps based on the number of sales for a particular payout period.
- Salary plus Commission: In this type representatives receive a commission plus base pay during every payout period.
Payment Structure
Here’s how bonus and commission differ from each other in payouts:
A. Sales bonus
Bonuses are fixed components that representatives receive for achieving or almost achieving a certain sales goal the organization has set.
Bonuses are based more on performance and improvement rather than sales made. They’re not an “all-or-nothing structure”. Bonuses keep motivating representatives to perform better and crush their future goals.
B. Sales commission
Commissions on the other hand dictate how much representatives earn on every sale made. It will vary on the performance of the representative. A high-performing representative will receive 2x more commissions than an average or low-performance.
Commission payouts depend on the type of commission structure adopted by your organization. Here are a few examples:
- Straight Commission: Every $10,000 sale will receive a 5% commission, whereas every $5000 sale will receive a 2% commission.
- Variable Commission: For each sale, the representative is paid $100 and if the representative makes 5 sales, then the total payout will be $500.
- Salary plus Commission: If you have a salary of $30,000 and you receive a base pay of $2500 + your commission on the sales made.
Commission-based structures need to be higher and strong enough to motivate the representative to close and generate more sales.
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.
Bonus payouts are higher if goals are met and performance is satisfactory compared to previous evaluation cycles.
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.
As a result, high-performers will make a higher percentage in their sales commissions.
When to Use Commission vs Bonus?
Commissions are payouts as is, they can be offered on top of a base salary or without one.
Most organizations couple base salary and commissions. But if you’re still figuring it out, here’s where to use commissions vs bonuses.
A. Sales commission
Commissions are used for:
- High-growth revenue-generating teams.
- Sales roles that involve prospecting and selling.
- Customer-facing roles.
- Higher performing reps to create a highly motivated team.
Additionally, commission plans should be designed in such a way that they’re within the organization’s budget.
B. Sales bonus
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.
Bonuses are designed individually and differ from one representative to another. This helps build your representatives' market value and to reflect their needs to grow.
Timing
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 progress of the representatives’ performance and goals.
B. Sales commission
Commissions are usually coupled within a particular payout period that is either bi-weekly, weekly, or quarterly. Commissions are also handed out in advance in particular amounts to help encourage you to sell more.
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. Frequency
The frequency for both the bonus and commission depends on when you complete the work or quota to receive the payment.
As an organization, you should pay the representative bonuses and commissions only after they’ve met the criteria to receive them.
2. Income
Both bonuses and commissions are add-on payouts on top of your base salary. They come as a result of the performance in a specific time period. The sooner your people crush their quotas the sooner the payout happens.
Note: Both sales commissions and bonuses are based on pay periods that are preset by the organization.
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.
