Incentivising productivity through financial rewards is usually structured around either bonus schemes or commission structures – and this is a model that is followed worldwide.
Knowing that you get your salary at the end of each month is an important factor for all employees. For those hungry to progress and succeed, implementing a bonus or commission structure as part of your rewards and recognition schemes for employees injects that impetus to work towards greater productivity and greater reward, but what is the difference between the two?
The difference is actually quite subtle but important in the context of who within the business is going to benefit from the reward definition.
What is a commission?
A commission is wholly driven by sales and is generally paid as a percentage of each sale. Many sales positions are paid with a basic salary plus commission or by commission only. Often commission gets paid to third parties who are acting as agents on behalf of an organisation.
Many organisations will implement a commission-based salary structure if they are looking for a regular high turnover of sales. By incentivising their sales team, the hunger to close is stronger. In the UK, a commission is usually offered to professionals such as estate agents, sales reps, and financial advisors.
Commissions tend to be more ‘immediate’ than a bonus. It is paid on each individual sale (usually once that sale invoice has been paid), so in time your monthly pay packet will reflect the variations month on month.
What are the advantages and disadvantages of a commission-based rewards scheme?
The benefit of incorporating commissions as part of your total reward strategy is that a successful salesperson has the opportunity to earn great money. There is no real limit to what they could be earning as long as they continue to bring in sales.
It can also be a focus of competition with other salespeople within an organisation – and competition can be good for incentivising people to get out into the field and put in that extra bit of effort.
However, if one person dominates, then that incentive could be compromised, and the other team members may feel demotivated about their potential and feel as though they don’t get access to a big enough piece of the action.
While competition can be an integral part of sales psychology, there is a fine balance. Ensuring your sales team is evenly spread out with fair and equitable access to the potential market is crucial for maintaining good morale and a long-term growth strategy (you don’t want to be reliant on one individual’s success).
What is the definition of a bonus?
A bonus is understood more as an amount that is offered to an employee upon completion of a project which achieves a specific objective. If that objective is not reached, then the bonus is not paid. Part bonuses can be paid, and they tend to include other employees, not just the sales rep. Bonuses can be related to a company target as well as an individual target.
Bonuses among larger corporates tend to be more common, bringing together employees from different departments into a project with a common aim and creating a total rewards strategy.
How to choose between a commission or a bonus
Establishing a rewards and recognition scheme for your employees is a strategic decision that needs to take into account a number of different factors:
- Is the scheme going to be fair and equitable across the company in terms of roles and responsibilities?
- Are the goals set achievable, or will they simply lead to disappointment and, therefore, demotivation?
- Does the level of reward correspond with industry norms, and is there room for improving them to attract a wide talent pool?
- Is the managerial and administrative support in place to help employees reach their targets?
Having the right rewards strategy in place is an essential element to the overall success of your business. While growing sales is always going to be the main objective, issues around talent acquisition and employee engagement and motivation will always be a significant element that drives that strategy.
A long-term and focused approach needs to be taken, rather than a scattergun method which will only result in a drop in morale and potentially losing experienced and knowledgeable staff.
If your company needs help in restructuring its bonus and commission rewards strategy in line with the changing trends of your industry, Paydata can work with you to create a long-term approach. Contact Paydata for more details about our Bonus and Commission Design service.