Do you receive variable compensation? A performance bonus is a fixed or lump-sum reward for hitting a goal or exceptional performance. Commissions are rewards specifically given to salespeople based on the number of sales they make.

We have previously talked about performance bonuses in the article “How variable compensation can benefit your company”.  This article will focus mainly on commissions: their pros and cons, their functions, and how they are determined. Everything can be applied to performance bonuses too.

What is the function of commissions?

Their primary function is to keep sales representatives extrinsically motivated. It means that they are motivated by money. They are key to attracting, retaining, and engaging. 

Commissions can also influence sales team strategies. Placing higher commissions on targeted products at a given moment will increase their sales. When priorities are identified, this strategy can put focus on them

So to say, commissions motivate salespeople and increase sales. 

At a more managerial level, commissions are used to understand the business structure. They are a soft way of implementing hierarchy among workers that may be in the same position, but with clearly different conditions.

Moreover, by implementing different commission structures (they will be explained later on), managers can discover which way of approaching sales is more effective for their business.

Who is likely to obtain them?

As previously said, they are a common benefit in the sales department. Salespeople at all levels can obtain them. They are offered by companies of all sizes.

Usually, they happen in real estate companies. Also, it is a known practice in the telecommunications and the business services industry.

Commissions are given all over the world, but, proportionally, they are more common in the US and in France.

Often, managers are the ones to decide how they are determined: which shares represent if there are minimum requirements, who is eligible to obtain them… Having said that, in big companies such as BenefitMall or Genworth there exist the positions of “commissions analyst” and “commissions specialist”.

Different types of commissions

Depending on how managers structure commissions, they can incentivize different behaviours:

The manager needs to figure out the priorities they want from each individual and establish personalized plans.

How are they determined?

There are different ways to calculate them. They can either be a share of total sales or of total revenue. The percentage given can be constant or increased if sales increase. 

Usually, there is a base salary (which amounts to approximately 60% of pay) and commissions on top. Some companies offer all their pay in commissions if they represent a higher percentage of sales. This plan is for aggressive vendors.

Many commission plans do not depend uniquely on sales but on hitting some quotas. In this case, it is called a performance bonus more than commissions. The other quotas may be: acquiring a number of leads, do not lose more than a set-up value of customers, improving the average benefit from each transaction, etc. 

They can also depend on the aggregate amount of sales of the whole team. It is used to improve team-building dynamics.

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