structuring commissions and bonuses

Incentivising the right behaviour and results typically falls down to providing monetary incentive and to this end we have two broad options to draw upon. there are additional options such as vesting shares, but these are less common and fundamentally the over structure remains consistent.

I think of commissions are being scalable and pegged to the specific unit result, eg. a sale of a product. Where as a bonus is usually tied to a target of some kind. so in this way a commission becomes a cost of a transaction and therefore the analysis of commissions and results over time is proportional. the downside is that in order to use commissions in conjunction with effective hiring planning and budgeting, you also need to have a reliable forecast of expected results. Bonuses operate differently in that they are awarded after passing a threshold, since you can set that threshold at discretion, it makes forecasting and budgeting easier.

Commissions are an easier incentive when you’re trying to motivate a specific repeatable deliverable, a contract, or the sale of a widget. Bonuses tend to work better when you want to exceed a threshold or where the specific repeatable deliverable is a lagging result of efforts – for example marketing efforts tend to have an indirect effect on sales, if you set a commission based on leads marketing generates it can have a negative byproduct on the quality of leads. however if you do regression analysis and understand the relationship between leads and sales you can assign a bonus for that lead to sales ratio improving, you wouldn’t apply a commission to this since theres no specific repeatable deliverable to work with.

Another useful way to setup bonus structures is the work off of % instead of absolutes, its easier to scale a bonus that is structured – $500 bonus if 50% of target is reached, $1000 bonus if 100% of target is reached. With commissions this means the commission is always a % of the specific repeatable deliverable, e.g. 5% of sale value.

Here you see commission as a % of sales
Here you see bonus as a % of target completed

lastly, you can actually combine both commissions and bonuses, by making the bonus to be an increase in commission.

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