What type of compensation includes workers salaries incentive pays bonuses and commissions?

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Incentive pay motivates employees to meet targets and boost productivity.

Difference Between Incentive Pay and Merit Pay:

Incentive pay and merit pay are similar in that they are both used to reward individual employees for their performance. However, incentive pay may also be offered as an organizational incentive to all employees for meeting certain company goals.

Casual vs. Structured Incentives:

Employee incentives can be classified as casual or structured. Casual incentives can be given to an employee at any time as a reward for outstanding performance or to retain high-level executives. This can include a cash bonus or non-monetary items such as small gifts, lunches, or vouchers.

Structured incentives are usually cash-based but can also include stock options or paid holidays. Structured incentives, including commission and year-end bonuses, are set according to specific sales or production targets and paid at a percentage rate.

Types of Incentive Pay:

A company may choose to incentivize its employees with cash-based bonuses or non-monetary incentives. Examples of incentive pay include:

• Cash, including commission, year-end bonuses, sign-on bonuses, and performance bonuses.
• Shares or company stock options.
• A company car.
• Paid holidays.
• Gifts or vouchers.
• Health club membership.

When Should a Company Offer Incentive Pay?

Depending on the size and structure of the company, incentive pay may be used to boost productivity, retain key employees, increase sales, or boost employee morale.

• Companies with large sales teams may want to introduce a commission system to encourage employees to obtain higher sales figures.
• Companies that are production-based would benefit from an incentive pay system based on the amount of product produced.
• Performance-related pay can be offered to non-sales staff based on overall performance, improved performance, or consistency.
• Incentive bonuses may be offered to retain key employees or boost company morale.

Incentive pay should be customized to the size and function of the company.

Introducing Incentive Pay — The SMART System:

Companies thinking of introducing incentive pay should ensure that performance goals are SMART, i.e., specific, measurable, attainable, relevant, and timely.

Specific
Employees need to know the specific metrics by which their performance will be evaluated and the exact thresholds they will need to achieve to obtain incentive pay.

Measurable
The threshold for achieving a company incentive has to be measurable and recordable.

Attainable
Incentive goals and thresholds should be realistic and attainable for every employee and every department.

Relevant
The metrics used as the basis for incentive programs should be relevant to the type of work the employee or department is involved in.

Timely
Incentive goals and thresholds should be given meaningful and realistic time frames.

Pros and Cons of Offering Incentive Pay:

Pros

• Incentive pay effectively communicates the company's objectives and values to all employees.
• Incentive pay motivates employees to meet targets.
• Incentive pay boosts morale and increases employee retention.
• Offering incentive pay directly results in boosted productivity.
• Incentive pay provides recognition for hard work.
• Incentive pay can be used to reward individual performance or department/company performance.

Cons

• Incentive pay can create distrust and jealousy between employees.
• Incentive pay can result in employees only focusing on measurable incentive tasks.
• If targets are set too low, the company suffers financially. If targets are set too high, employees lose their motivation.
• It can be difficult to create clear and objective measurables for every department without causing employee distrust.
• Managers responsible for rating performance may be swayed by personal relationships.
• Rewarding staff financially may be a way of "buying compliance" rather than creating a healthy company culture.

Sales incentives drive behavior, but it can be difficult to find the most effective ways to motivate reps. Discover the best strategy for your company in this bonus vs. commission breakdown.

​Sales compensation is a balancing act between motivating reps and maximizing revenue. U.S. organizations spend more than $800 billion to manage their sales forces, with $200 billion devoted solely to compensation each year, according to Harvard Business School. Needless to say, sales incentives are a huge investment for companies.

Because of this, creating an effective sales incentive plan can be a difficult task. Many organizations struggle to identify which compensation method to use and whether or not a bonus structure or commission based pay is the best option for sales reps. To help, we’re breaking down the basics of bonuses vs. commission based pay structures, the pros and cons of each, and when to use each one.

Understanding Bonus vs. Commission Plans

Sales compensation plans should be tailored to your company’s needs in order to reach your business goals. When it comes to a bonus vs. commission pay structure, both are popular forms of incentives. 

Traditionally, salespeople earn commission based pay–an amount of money for meeting their quota. Bonuses are typically reserved for non-sales employees or used for sales reps in the form of a Sales Performance Incentive Fund (SPIF). Both can be extremely effective at motivating performance, but first, let’s break down the differences between the two.

Pay Structures

The biggest differences between a commission and bonus plan are the payment structure and how much sales reps earn.

Commission Based Pay

In commission plans, the total compensation amount will vary based on individual sales rep performance. Commission pay 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.

Bonus Structures

Bonuses are stated sales incentive amounts. They may vary for individual sales reps and are represented by a percentage or fixed amount (e.g., 4% of base salary or a fixed amount of $7,000). It’s important to note that companies do not have to structure bonuses as “all-or-nothing” payments. If the quota is not met, sales reps can potentially earn a percentage of their bonus, which helps keep morale up.

What Determines Compensation

Sales compensation can depend on several factors in your incentive plan. In most incentive structures, a quota is the sales goal reps should aim for in order to earn their compensation, but it doesn’t necessarily determine how much a rep will earn.

Commissions

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 rate tiers sometimes kick in to motivate them to over-perform.

Bonuses

For a bonus structure, quota and sales rep performance will be major factors in earning compensation. However, unlike commissions, bonuses are typically a set amount and rely on both corporate and individual goals. This helps incentivize employees in all departments.

Bonus vs. Commission: Choosing the Best Pay 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:

• Growing revenue teams
• Sales roles with more selling and prospecting responsibility
• Other customer-facing sales roles

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 bonus plan to maximize compensation for well-performing reps and stay within your company’s budget.

When to use Bonus Pay

A bonus plan pays reps a bonus with a base salary. They are usually more appropriate for:

• Larger, more established revenue teams
• Sales roles with more administrative responsibilities
• Other non-selling roles

Implement a bonus 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 bonus pay for non-sales employees may help inspire innovation and performance beyond closing sales deals.

Bonus vs. Commission: Final Thoughts

Both commission and bonus structures will allow you to compensate sales reps fairly and incentivize 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!

To discover how you can begin improving your compensation plan design and performance today, download our “2021 Guide to Successfully Managing Sales Compensation.”

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