The difference between bonus and commission Pros and Cons.
Are you trying to decide whether compensation for your employees should be in the form of a bonus or commission? It can often be tricky to figure out which type of payment is best suited and how it will fit into your overall pay structure.
With so many different aspects to consider, it’s important that you understand the difference between bonuses and commissions before making any major decisions.
Join our employee reward specialists here at OurlinQ to explore both types of compensation in detail, examine their pros and cons, and ultimately provide some tips on how you can determine which pay model is right for your business.
Let’s get the short answer first before we look at the differences between bonus and commission in a little more detail.
Bonus and commission are two methods of compensation used by employers to incentivize workers. A bonus is awarded for performance goals either specific to the individual or achieved as part of a team. Commissions are commonly used for salespeople and are determined as a percentage of their sales.
But this is a wider topic that needs to be explored, so with the takeaway in place, let’s head into more detail.
Difference Between Bonus and Commission
When it comes to compensation, bonus and commission are two common types of rewards for employees.
Both bonuses and commissions are financial incentives that employers offer to motivate their staff.
A main difference between bonus and commission is that bonuses refer to periodic payments set by an employer — such as quarterly or annually—based on performance, sales targets met, or even seniority.
Bonuses may be given in either cash or merchandise such as gift cards and vouchers.
On the other hand, commissions are related directly to sales performance; they’re calculated based on a percentage of each sale made.
Commission payments are usually made more frequently than bonuses (e.g, weekly).
Another key distinction between bonuses and commissions is that a bonus is usually given out regardless of sales performance, while commission payments are only received when actual sales have been made.
Some additional payment schemes are usually based on past performance and one is based on future performance. You can find more about this in our article difference between bonus and incentive.
In other words, if an individual does not meet their sales quota for the period, they will not receive a commission for that period.
Ultimately, bonuses and commissions can be used to motivate employees — however, the two types of payments vary significantly in terms of how and when they are paid out.
As such, employers should carefully consider which type of payment system best fits their needs before committing to either one.
By understanding the differences between bonuses and commissions, employers can better ensure that they reward their employees in a fair and effective manner.
On the subject of finding the best way to reward employees, here are 10 reasons why you should implement an incentive program.
Similarities between bonus and commission
Both types of payments can be used to incentivize employees, as well as reward them for excellent performance or hard work.
Both can also help keep morale high by showing employees that their efforts are appreciated.
Ultimately, whichever payment system is chosen should reflect an employer’s goals and values while providing a financial incentive for employees to continue working hard.
Ok, so we can delve even further, let’s start by taking a look at what both these types of incentives are in more detail along with their pros and cons.
What is a bonus?
A bonus is an extra payment given to an employee in view of their outstanding performance, usually over and above the salary or expected compensation they receive.
Bonuses are often used as a way to reward employees and give them incentives to work hard. Bonuses can come in the form of money, additional vacation days, quality-of-life improvements, or other forms of awards.
Different organizations have different policies when it comes to assigning bonuses — some focus the rewards on individual performance, whereas others assign bonuses based on team successes or broader goals for a company.
Regardless of the policy, bonuses have become a popular way for employers to encourage hard work from their teams and get better results from their staff.
Pros of a bonus structure
A well-designed bonus structure can be an incredibly effective tool to help a business stay productive and competitive.
It can provide an additional incentive for employees to work hard and reach their goals, which can ultimately lead to higher levels of productivity.
Additionally, businesses may sometimes offer more attractive bonuses than what they could pay in regular salaries, meaning they don’t have to break the bank to keep their best employees working hard and achieving success.
Bonus structures can also help create a culture of achievement within the workplace, creating a sense of friendly competition between employees that drives them all toward greater success.
Cons of a bonus structure
When it comes to bonus structures, there can be certain drawbacks.
An overly complex or confusing structure can end up being counterproductive and, instead of incentivizing employees to work harder, can actually have a negative effect on morale.
Additionally, if the rewards for hitting a goal are too low relative to the effort required, it may lead employees to set lower goals and not challenge themselves enough.
Finally, if a bonus plan is tailored too heavily towards individual performance it can cause friction among coworkers who are competing against each other, or when one individual is seen as receiving a greater bonus for the same perceived effort.
On the whole, while bonus plans can be an effective way to motivate employees, they need to be carefully thought out in order to achieve the desired result.
Here’s more information on how much a bonus should be.
Ok so now let’s contrast that with a brief explanation of commission and its pros and cons.
What is a commission?
A “commission” is a form of payment that is typically associated with sales jobs.
In a nutshell, It’s a percentage of the total income generated from the sale plus any bonuses or incentives that could be attached to it.
Generally, the more a person sells, the higher their commission rate as a reward for their hard work.
Commission can be a great way to incentivize someone to put in extra effort on the job and increase their income without requiring an expensive raise.
It’s an important part of many sales positions and is just one way in which businesses can reward performance and boost productivity.
Pros of commission
One of the major pros of a commission structure is that it creates an incentive for workers to perform better and increase their productivity.
It rewards employees based on the sales that they make, so performance is monitored using tangible indicators.
This can encourage them to go above and beyond, if their sales are higher then their commissions will go up too.
Additionally, compared to fixed salaries, commission structures often result in lower expense costs for employers as they only pay out when there is actual successful business generated by workers.
Consequently, commission structures are often favored by businesses that are running on tight budgets or need more reliable production rates from their employees.
Cons of commission
It’s important to consider the cons of commission structures before deciding if it’s a suitable system for your business.
A primary shortfall is that such structures frequently leave employees feeling uncertain and without financial security, creating an uncomfortable work environment.
Furthermore, this kind of compensation puts particular stress on salespeople to continuously bring in new business, rather than focusing on ways to improve customer service or find innovative solutions.
Additionally, commission-based salaries can be highly unpredictable: while a productive period may mean very healthy earnings, it won’t always balance out slower months.
This can make budgeting quite challenging for employees on commission.
Finally, since such payment schemes are derived from sales revenue (directly tied to financial targets), there’s potential for conflict between managerial goals and the motivation of employees.
Both incentives have benefits
Overall, bonuses and commissions both have their own benefits when it comes to motivating employee performance.
By understanding the differences between these two payment methods, employers are better able to determine which type of reward system is best for their organization and team members.
With this knowledge in hand, they can ensure that their employees remain engaged and dedicated while still meeting important business objectives.
By recognizing the distinctions between bonuses and commissions, employers can make sure that their payment systems are best aligned with their company culture and objectives—ultimately allowing their workers to feel more valued and motivated.
Using a bonus and a commission together
Finally, it’s important to note that bonuses and commissions don’t always need to be considered separately—employers can also use them together as part of an overall incentive program.
By combining both of these payment methods, employers can create an even more powerful way to reward employees for outstanding performance and help them reach their full potential.
Difference Between Bonus and Commission – Next steps
No matter what combination of incentives you choose to use in your organization, it’s important that you have clear expectations and criteria for each one.
That way, everyone will understand how they can be rewarded and remain motivated throughout the year.
With the right mix of bonuses and commissions in place, you’ll ensure that your team has what they need to stay engaged and successful! Download one of our useful resources, 5 steps to building a better bonus program, or click here for a demo to find out how we can help your employee incentive program