What are the pros and cons of using bonuses versus commissions for sales staff?

1 What are bonuses and commissions?

Bonuses and commissions are both types of performance-based and variable pay, meaning that they depend on how well the employee performs and how much revenue they generate for the company. Bonuses are typically paid as a lump sum at the end of a period, such as a quarter or a year, based on predefined criteria, such as sales targets, customer satisfaction, or team performance. Commissions are usually paid as a percentage of each sale or deal that the employee closes, based on a fixed or variable rate, such as 5% of the total value or 10% of the profit margin.

2 Pros of using bonuses

One of the main advantages of using bonuses is that they can align the employee's goals with the company's strategic objectives and encourage collaboration and teamwork. For example, if you want to increase customer retention or market share, you can set a bonus scheme that rewards the sales staff for achieving those outcomes. Bonuses can also help to smooth out the income fluctuations that sales staff may experience due to seasonality, economic cycles, or other factors. By providing a stable and predictable income, bonuses can reduce the stress and uncertainty that sales staff may face.

3 Cons of using bonuses

One of the main drawbacks of using bonuses is that they can create a sense of entitlement and complacency among the sales staff, especially if the bonus criteria are too easy or too vague. For example, if the sales staff expect to receive a bonus regardless of their individual performance or effort, they may lose their motivation and initiative to improve their skills or seek new opportunities. Bonuses can also be costly and difficult to administer, especially if they involve multiple metrics, formulas, or adjustments. Moreover, bonuses can create dissatisfaction and resentment among the sales staff if they perceive the bonus distribution as unfair or inconsistent.

4 Pros of using commissions

One of the main benefits of using commissions is that they can directly link the employee's income to their output and results, creating a strong incentive and reward for high performance and hard work. For example, if the sales staff know that they will earn more money for closing more deals or selling more products, they may be more motivated and proactive to pursue new leads, negotiate better terms, or upsell existing customers. Commissions can also be flexible and scalable, allowing the company to adjust the commission rate according to the market conditions, the product features, or the employee's experience and skills.

5 Cons of using commissions

One of the main disadvantages of using commissions is that they can create a competitive and individualistic culture among the sales staff, potentially undermining the trust and cooperation that are essential for long-term success. For example, if the sales staff are only focused on their own commissions, they may neglect the quality of service, the customer satisfaction, or the team spirit that are vital for building loyalty and referrals. Commissions can also be risky and unstable, exposing the sales staff to income volatility and uncertainty, especially if the sales cycle is long, complex, or unpredictable. Furthermore, commissions can raise ethical and legal issues, such as conflicts of interest, misrepresentation, or fraud, if the sales staff are tempted to cut corners or violate the company's policies or regulations.

6 How to choose the best option

When deciding whether bonuses or commissions are better for your sales staff, there is no one-size-fits-all answer. The best option depends on several factors, such as the industry, product, market, budget, culture, and goals. Some general guidelines to consider when making an informed decision include using bonuses to foster collaboration and alignment and reward qualitative outcomes, using commissions to foster competition and accountability and reward quantitative results, and using a combination of both to balance the benefits and drawbacks of each option while creating a diversified and customized compensation structure. Ultimately, this will help align the sales staff's interests with the company's interests.

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?