What's the Difference Between Payroll, Commissions, and Bonuses?
Written by Complete Payroll
Offering employees sales compensation on top of their regular wages is a common practice throughout the world. These incentives are offered by employers as a way of attracting the top talent to their company and generating high performance from their employees.
Two of the most used forms of sales compensation are commission and bonuses. While both terms are often used interchangeably, there are actually a lot of differences between the two. In fact, both commissions and bonuses can be offered simultaneously to employees.
In this article, we will explore what it means when employers offer their workforce commission versus bonuses.
Commission vs. Bonus
Both commission and bonuses are forms of what's called “variable pay” - compensation that is determined by sales activities that are paid on top of an employee’s base pay. As such, both commission and bonuses are attached to achieving something whether it’s a company goal or a predetermined quota.
To earn a commission, an employee must reach a certain quota as set by the company. Meeting quota is the bare minimum that needs to be done in order to receive a commission. However, once an employee begins to go over their quota, the employee generally receives a higher percentage of their sales as commission.
The pay structure for commission is a percentage of the sale being made. This amount varies depending on variables such as the size of the sale in question and the industry in which the employee is operating. In some cases, the percentage of sales commission that is received may increase the more the employee’s performance increases.
Earning a bonus is a different process entirely. Instead of simply meeting quota, earning a bonus means you also met both individual and company goals that have been set. Some goals include staying with the company for a set amount of time, helping reach a company-wide improvement goal, or referring someone else to the company. Earning a bonus is contingent on reaching these types of goals.
The biggest way bonuses and commissions differ is their pay structure. Unlike commission, bonuses are a predetermined amount you receive as payment for meeting set goals. This amount is determined by either a percentage of the employee’s salary or a fixed dollar amount.
What’s the Best Compensation Plan?
Before deciding if commission or bonuses are the way your company should go to incentivize your employees, you need to take into account some of the following factors:
- Your expectations from your sales team when it comes to performance
- Whether you’re paying employees base salary on top of additional compensation
- Any non-financial incentives you may offer employees
- What your budget can accommodate
Determining both your sales needs and your overall budget can be a balancing act. However, when you understand the direction of your sales, you will be better equipped to identify what your company can offer to incentivize your employees.
Here are a few ways you can determine if commission or bonuses are the direction you should take:
As the most common type of compensation, commission makes the most sense for companies that have sales roles with more selling and prospecting responsibility. While commission can be offered with or without a base salary, the majority of companies provide employees with both.
If you can determine the amount of money your budget can support to pay sales employees to close the deal, a commission plan may be the best fit for you.
Unlike commission, bonuses require a base salary. Bonuses make sense for companies where sales roles have more administrative responsibility or you have employees who are not in a sales role. Bottom line: More established businesses who aren’t focusing on growing their sales base should use bonuses.
Can You Use Both?
Using commission and bonus incentives simultaneously is also an option. Using the two in combination can help incentivize non-sales employees as well as your sales time to meet company goals. After all, no matter what an employee does within the structure of your company, being financially compensated can motivate behavior.
Are you looking for more information on all things related to HR and payroll? Complete Payroll’s blog page contains hundreds of articles with up-to-date information that you’re looking for.