Sales compensation is a balancing act. First and foremost, you need to incent your sales team to close deals. Without the right incentives and fair pay, performance will suffer. But you also must pay reps at an affordable cost to your company. Because of this, creating a strong sales incentive plan can be a difficult task. Many companies struggle to identify which compensation method is best. In this post, we’re tackling a bonus vs. commission compensation plan for sales reps.
Regardless of your incentive strategy, all compensation plans run on the belief that money drives behavior. Your sales team must see the value in making a sale. In almost all cases, this value comes in the form of sales compensation, usually as a commission or bonus.
Understanding Bonus vs. Commission Plans
Compensation plans should contain key elements, tailored to your company’s needs, to help reach your business goals. When it comes to a bonus vs. commission structure, both are popular forms of sales compensation. However, they are not the same.
According to WorldatWork:
- a commission is “communicated as a piece of action (e.g., 2% of revenue, $5 per unit sold, 6% of margin dollars).”
- a bonus is “a fixed incentive amount offered for achieving a specific objective”
However, the two compensation methods differ on more than just their definitions.
The Payment Structure
The biggest differences between commission and bonus plans are the payment structure and how much sales reps earn.
In commission plans, the total compensation amount will vary based on individual sales rep performance. Commission rates dictate how reps earn their compensation. Reps earn commission as a percentage (e.g., 6% of sales revenue), for every sale they make. Once they’ve reached their sales quota, or sales goal, this rate often increases to encourage over-performance. Commission plans require strong sales commission structures to motivate reps to achieve and exceed quota.
Bonuses are stated compensation amounts. They may vary for individual sales reps and are represented by a percentage or fixed amount (e.g., 4% of base salary or $10,000). It’s important to note that companies do not have to structure bonuses as “all-or-nothing” payments. If quota is not met, sales reps can potentially earn a percentage of their bonus, which helps keep morale up.
What Determines Compensation
Compensation can depend on several factors in your incentive plan. In most compensation structures, quota is the sales goal reps should aim for in order to receive compensation, but it might not determine how much a rep will earn.
Quota guides sales reps towards their potential earnings, but ultimately, the amount they are compensated depends on each individual rep’s performance. Once reps hit quota, higher commission rates kick in to motivate them to over-perform.
For a bonus structure, quota and sales rep performance will be major factors in earning compensation. However, unlike commissions, bonuses typically rely on both corporate and individual goals. This helps incent employees in all departments.
Bonus vs. Commission: Choosing the Best Compensation Structure
The fact of the matter is different businesses need different compensation plans. Before putting together your incentive strategy, you should first ask yourself the following questions:
- What do we expect from sales teams in terms of performance (i.e., quota, revenue, etc.)?
- Will we be paying sales reps a base salary in addition to compensation?
- Will we be offering sales reps additional non-financial compensation?
- How can we motivate reps to achieve all of our goals within budget?
Knowing your goals and the answers to these questions, you can piece together your sales needs and ensure sales forecasting accuracy. This helps you then identify what your company can afford to pay reps (based on expected revenue) and craft incentives that will motivate reps.
When to use a Commission
Commissions, the most common type of compensation plan, can be offered with or without a base salary. However, most companies pair commissions with a base salary. They are more typical in businesses that are:
- in earlier stages of business
- introducing new business roles
- launching new products
Use a commission when you know the fixed amount of the money your business can reasonably afford to pay sales reps to sell your offering. Design your plan to maximize compensation for well-performing reps and stay within your company’s budget.
When to use a Bonus
A bonus compensation plan pay reps a bonus with a base salary. They are usually more appropriate for:
- more mature businesses
- complex selling organizations
- account management roles
Implement a bonus compensation plan when you have a more established business and want to focus on the idea of compensating sales reps at market value. Then build your plan to reflect the needs for each individual sales rep’s market value.
When to Consider Both
In certain situations, companies may benefit from a combination of commission and bonus compensation. This can be an obvious choice for companies that want to incentivize employees outside the sales team. In fact, regardless of the role, compensation motivates behavior. So a bonus for non-sales employees may help inspire innovation and performance beyond closing sales deals.
Bonus vs. Commission: Final Thoughts
Both commission and bonus plans will allow you to compensate sales reps fairly and incent them to perform well in the future. Regardless of your compensation method, ensure that your plan boosts sales team productivity and moves you closer to achieving your business goals. Creating a compensation strategy with those goals in mind is the first step towards a successful business plan!
Learn how Xactly can help you improve your compensation plan design and performance with a FREE trial of SimplyComp.