Let’s talk sales incentives and bonuses.
Known to be big drawcards for certain roles, both sales incentives (commission plans) and annual bonus schemes offer pay above and beyond a fixed base salary. When designed in the right way, they can be an affordable way to pay talented employees more and can be key in influencing the behaviour and performance of your employees.
Both are forms of variable pay, but what is the real difference between a sales incentive scheme and a bonus?
What is a Sales Incentive?
A sales incentive scheme, sometimes known as a commission plan, is a variable pay method that is always based on tangible targets. It is often linked to a percentage of ‘things’ sold. Depending on an organisation’s chosen calculation method, it can be based on aspects like volume, revenue or profit. Typically, it is paid frequently, usually on a monthly or quarterly basis.
Generally, a sales incentive is delivered via a straightforward calculation, such as when selling £XXX the person in question will receive £YYY.
As the figures paid are driven by sales generated, affordability is generally separate from the overall company performance. This means your sales teams might earn a commission even when the overall company KPIs are not achieved and the company bonus scheme does not pay out.
A sales incentive scheme is an excellent option for sales staff and can help them to hit or exceed their sales targets in order to maximise the remuneration they receive.
Key considerations when designing a sales incentive scheme
- Will it drive the right behaviours? Be careful that the scheme design doesn’t encourage misselling or silo behaviour. Consider including a quality or moderating behavioural factor to consider, especially in a regulated area. This could be something like delayed payment to adjust for when a customer cancels after the initial sale.
- Beware of double/triple dipping – how much of the profit margin are you willing to invest in the scheme? In addition to the commission percentage per sale awarded to the sales agent, will their supervisor, line manager, or department manager also receive a percentage? It is important to identify at what level in the team structure the variable pay reverts from commission to bonus to protect the profit margin and affordability of the scheme.
What is a Bonus Plan?
A bonus plan is also an additional variable sum of money that an employee can earn. However, it differs from a sales incentive scheme as it is typically paid as a certain percentage of a person’s base salary.
Determined by achieving KPIs or objectives based on individual, team or company performance, or a blend of them all. Some KPIs might be measurable, with very clear and objective metrics, not unlike the metrics in a commission plan. But inevitably, there are often metrics that are more subjective and harder to quantify.
Even though the KPI might hit a certain revenue target, the payment criteria may not be directly related to the amount of revenue generated. Instead, the payout figure would be a pre-determined payment calculation based on a percentage of the employee’s base salary. A very simplified example might be achieving 100% of the company’s EBITDA target means an employee receives 10% of their base salary as a bonus payment.
A bonus plan is typically paid less frequently than a commission-based incentive, usually quarterly or annually, though monthly payments do happen in some organisations.
Key considerations when designing a bonus scheme
- Ensure affordability – the scheme needs to be affordable (does the total OTE – on-target earnings for each employee match the amount that Finance would say is a reasonable ‘total bonus pot’)? And it needs to be funded, and typically this is by a ‘gateway’ threshold of company performance – usually EBITDA or another similar profit or revenue metric. Schemes that wholly or partly include individual performance metrics should still have a company performance gateway to ensure they can be funded.
- Robust performance systems – this one is huge. For schemes that rely on subjective individual performance criteria, the organisation’s performance management system needs to be robust and trusted.
- Calculation transparency – for bonuses to drive performance, employees need to see a direct connection between their behaviour/achievement and exactly what they are likely to earn as a result. Anything calculated less transparently, such as ‘reverse calculated’ where a manager is given a pot or percentage to distribute to their teams, runs a big risk of being a retrospective ‘thank you’ payment rather than an effective mechanism to drive strong performance.
Clearly, there are complexities to bonus scheme design – contact me if you would like guidance on how best to approach yours.
The Differences Between Bonus and Commission
The main difference between a sales incentive or commission scheme and a bonus scheme is the way that they are calculated. That makes each one more suitable for some roles than others.
Commission-based incentives are ideal for sales teams. There is a clear pathway for them to earn their additional remuneration, and the calculations are simple for your business. There is little risk on the affordability front as the revenue the sales team brings in will exceed the amount you pay to them.
Bonus incentives are great for key management roles that don’t directly generate sales themselves. Their efforts clearly contribute to increased revenue and/or profit for the organisation, but they aren’t necessarily the ones directly generating that revenue.
You wouldn’t have a non-sales team member on a commission scheme as there is no way for them to directly generate the revenue required to hit the sales targets. However, it is possible to have sales bonus schemes in place in your organisation rather than sales commission schemes. This would be similar to a bonus design – a high-level sales target triggering a payment that is a percentage of the base salary.
Which is Right for Your Organisation?
Which option is best for your organisation will depend on affordability and your business structure. You may even choose to have a mixture of the two schemes for different teams.
For example, sales managers can create a grey area. Their incentives tend to be determined by team performance. So, technically they would be on a bonus scheme rather than a commission scheme. This needs to be factored into the affordability calculations.
If you are paying your sales managers based on KPIs and your sales team a percentage of each sale, the total amount of commission and bonuses for all team members needs to be factored into the affordability calculation to prevent a negative impact on profitability.
Should Your Organisation Offer One?
You might be questioning whether any kind of additional incentive is wise in a challenging labour market. While it might seem counterproductive to give out money in a difficult financial period, offering these kinds of incentives is actually essential – when done right, they enable higher pay within strong affordability boundaries. They do not generate the same ‘on costs’ – remember that base salary is guaranteed regardless of market conditions and the multiplier for other areas of your remuneration (eg pension, holiday pay, redundancy pay etc). And when done in the right, it can actually be a great way to boost your team’s focus and morale.
Is it time to review your variable pay?
It can be difficult to determine which form of incentive is most suitable for your organisation and also which calculation parameters to use.
If you need support and advice in this area, then get in touch.
With extensive experience in reward consultancy and HR, I can provide expert advice to help your organisation’s key stakeholders develop an appropriate incentive scheme.
