Tag Archives: Quota bonus

What is the difference between a commission and a bonus?

In the context of sales compensation, WorldatWork defines a “bonus” in contrast to a “commission.” The difference is that the “commission” is communicated as a “piece of the action” (e.g., 2% of revenue, $5 per unit, 6% of margin dollars); whereas a “bonus” is a fixed incentive amount offered for achieving a specific objective, often with less offered for lower achievement levels and more for higher levels.

Most of the time, the amount of the commission at goal (or “quota”) is higher if the quota is higher – so if one sales person has a $1M quota and another has a $1.5M quota, then one has a target commission that is 150% that of the other. Whereas in a “bonus” world, the target incentive is fixed for the role (e.g., $40k per year) and is paid for hitting quota, which may vary from one person to the next.

Some people hear the word “bonus” and mistakenly conclude that the payout outcome will be binary (all or nothing). While that’s possible, it’s rarely advisable. A typical sales compensation bonus plan will include payout rates to pay additional compensation for every increment of additional performance. The most straightforward approach here is to pay 1% of the target payout for every 1% of the quota achieved. So if the target payout is $40,000 and the quota is $1,000,000 then for every $10,000 in sales (1% of $1M), $400 is paid (1% of $40,000). It is also usually advisable to pay at a higher rate once the quota is achieved. So in our example, the payout for every additional 1% of quota over 100% (every $10,000 over $1M) might be 2% of the target incentive ($800).

Of course there are myriad nuances and variations, including the possibility of “personal commission rates” which communicate a “bonus” as if it were a “commission,” etc.

In deciding whether your compensation plan should be quota-based or commission-based, the key question is one of your business’ philosophical starting place about variable pay for sales people.

  1. Do you start with a fixed amount you know you can afford to pay to get your offering sold (e.g., 5% of revenue), and design the plan to manage to that value?
  2. Do you start with the idea that the sales job has a market value, and that those who meet the goals assigned based on the sales organization and roles you have put together should earn that market value?

If your starting place is #1, a commission is likely a better fit for your business. If your starting place is #2, a bonus type incentive could be a better approach. Commissions are more typical and appropriate in earlier stage businesses, new business roles, product launches, and certain industries; and bonuses are more typical and appropriate in more mature businesses, complex selling organizations, and account management roles.

Of course, both the cost of the sales compensation compared to the sales team’s productivity and the compensation delivered to the sales people as it relates to their job prospects outside the company must both work in order to have a successful business model.

How do we keep high producers motivated when their goals keep going up each quarter/year?

Assuming your high earners are also your most valuable sales people, it’s actually possible for their goals to go up each year, and for their earnings to go up as well. Usually it’s most appropriate for the earnings to increase at a somewhat slower rate than the goals so that the cost of compensation as a percent of sales falls slightly each year.

The problem occurs when stellar performance this year results in a very high quota next year (calculated as a percent increase over this year’s results), and so a significant risk that the new higher quota will not be attained next year. Sales person frustration will be compounded if, in addition, there is a relatively high threshold below which no payout is earned (e.g., 85% or 90% of quota), and total compensation at target does not increase with added quota. If all of this aligns, then the sales person who wants to maximize total earnings over the long run may do best to adopt a pattern of dramatic over-performance in one year followed by dramatic under-performance the next year. Most sales people in this situation, even if they realize that the high-low-high-low pattern is their best strategy do not intentionally execute it. But they are painfully aware that top performance will not go unpunished.

To avoid this situation, consider these suggestions for quota-based plans:

  1. Set quotas based on territory potential, not just prior year actual sales.
  2. Avoid setting low quotas for weak performers and high quotas for strong performers, unless you…
  3. …Offer higher total compensation at target to those with the highest quotas, perhaps adjusting both the base and the variable pay at target for them.
  4. Set any threshold at the level of quota attainment below which performance is truly unacceptable. And you know what’s unacceptable because you actually terminate or reassign people who perform at this level, and it’s probably not more than 5% of your sales people. (If you have more than 10% or 15% of your sales people below threshold, earning no variable pay, and you’re not putting them on a performance plan or moving them out of the role, then your thresholds are too high.)
  5. Offer meaningful acceleration for over-achievement so that the added risk of next year’s higher quota (if that’s what will happen) is offset by the added compensation for this year’s over-achievement.