Sales Compensation: Should I Pay Commission or Bonus?

October 24, 2011 at 7:00 AM

There are about 75 days until the end of the year, which means many sales leaders are reviewing their FY12 sales compensation models. If your incentive plans didn’t deliver the desired results in 2011, don’t expect anything different next year if you don’t act now. Results here would be defined as 65-75% of your team hitting quota and you making your annual number as a sales leader.

One question you might be asking yourself is: Should I be paying my sales team commissions or bonuses? The terms commission and bonus are often used interchangeably, but in fact, they are quite different. So, what is the difference between a commission and a bonus and are your sales compensation models out of alignment?sales compensation commission vs. bonus

Commission

By definition, commission is a percentage of a sale that is measured in either units or dollars of revenue. In other words, for every $1 the sales person delivers in revenue, they earn X%. This model is often deployed for sales hunters (100% new logo acquisitions), contract sales reps and broker models. Payouts are typically distributed monthly. The right time to deploy a commission-based sales compensation model would be when:

  • A company is in high growth mode
  • The company goal is heavily revenue-driven
  • There are no assigned territories
  • The sales cycle is short
  • No base salary is paid (or it is very low)
  • Setting clear quotas is not possible

Bonus

A bonus is an incentive that is paid when an individual meets performance criteria against a specific goal. In this case, someone achieves a revenue milestone of $10,000 and is paid $1000 as a result. Examples of roles where bonuses are paid might be Account Managers, Portfolio-base sales roles and Key Account roles. Situations when you would deploy a bonus-based sales compensation model would be:

  • A company with moderate or slow growth
  • Sales’ focus is based on more than net new revenue, like preserving an existing revenue base
  • Other Management by Objective (MBO) goals exist (gross margin, customer satisfaction, customer churn)
  • Territories exist, but are unbalanced in terms of potential
  • The sales person’s influence in the sale is not directly tied to closing it
  • There are multiple people on the “selling team” who contribute to the end result

Even though commissions and bonuses are very different, they are not mutually exclusive. There are situations where applying both to your sales compensation model makes sense. For example, a company that has reps managing a base of legacy revenue while selling new products and services to new markets might deploy a bonus for the legacy revenue and commissions or SPIFs on revenue in the new markets. One thing is for sure: If you are out of alignment with your incentive models, you will not meet your goals.

Are you deploying the appropriate incentives to achieve results with your sales force? Please send me your feedback in the comments area below.  In my next two posts, I will explore different payout options for commissions and bonuses and how you might evaluate each when designing your FY12 sales compensation models.

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Topics: Compensation Planning, Quota Setting, Sales Compensation Planning, Sales Compensation

Posted by Ryan Tognazzini

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