What’s the difference between bonus and commissions? The two types of compensation often get confused but there’s a pretty distinct difference. If you’re evaluating or reevaluating your sales compensation structure, it’s an important difference to know.
Base salary plus bonus compensation plans tend to foster teamwork for more mature sales organizations.
According to WorldatWork, commissions are a “piece of the action” while a bonus is a fixed amount. For instance, where commissions might pay a percentage of revenue or profit to a salesperson upon a sale, a bonus is a predetermined sum of money that a salesperson earns by reaching a goal.
Some organizations choose to compensate their salespeople with a base salary plus a bonus instead of commission. It could be the right fit for your team as well. We’ve laid out the details, benefits, drawbacks, and best practices for you below. Take a look as you decide how to pay your sales team. (Take a look at how to build out an entire commission plan by reviewing our Complete Guide to Sales Commissions.)
What Is Base Salary Plus Bonus?
When a salesperson earns a base salary plus bonus, it means they’ve accepted a guaranteed salary along with the potential to earn an additional predetermined amount by reaching goals laid out by their executives.
An example might be a salesperson starting with a $35,000 yearly salary and a guaranteed paycheck every two weeks. On top of that, they may have the opportunity to earn an additional $25,000 per year by reaching quotas set throughout the year.
Where to Start with Base Salary Plus Bonus
As with both straight commission and base salary plus commission structures, an organization needs to determine the ideal on-target earnings for a salesperson. Variables such as industry, location, seniority, and how competitors pay their salespeople should be taken into account to come up with this number.
Once an estimate for on-target earnings has been reached, then it’s time to break down the salary to bonus ratio. One example breaks down total compensation to 50% salary and 50% bonus.
Worth noting that many organizations, when first starting up, may begin with commissions and eventually mature to the point where a bonus plan makes more sense. This is because a bonus plan generally fosters more teamwork whereas commissions rewards independent and high-performing salespeople.
Benefits of Base Salary Plus Bonus
- Balances Risk: When an organization offers incentive pay but has the ability to predetermine what that pay will amount to regardless of how much revenue earned, it allows the finance department to plan out that budget more accurately. It lowers the financial risk for the company while still providing a performance-based incentive.
- Increases Stability: A guaranteed salary provides paycheck security for the employee while a yearly bonus plan keeps them focused on their goal in the long term. This type of compensation may reduce employee churn and provide a more stable sales team.
- Fosters Teamwork: Since all employees on the sales team know how much they can earn by reaching their goal, the impulse for competition among peers is lowered. It also makes room for more cooperation between team members to ensure that everyone hits their goals and earns more money for the organization as a whole.
Drawbacks of Base Salary Plus Bonus
- Limits Motivation: By fixing the amount an employee can earn through performance, it may tamper an aggressive salesperson’s drive to sell more. To avoid discouraged employees, add additional non-monetary incentives or focus recruiting efforts on team players.
- Discourages Independent Selling: In many start up situations, sales representatives prospect, sell, and own client relationships independently. However, with a bonus structure in place, this practice may seem less lucrative. While every salesperson may be working toward different quotas and earning differing bonus amounts, the predetermined nature of those bonuses could curb an aggressive seller. That type of employee may not be the best fit for an organization working with a bonus plan rather than a commission plan.
- Requires More Structure: Just to budget the appropriate amount as a bonus for each individual salesperson requires an organization have the resources to make those determinations. Additionally, if a sales team is working toward a goal for a fixed bonus, they may require support, such as sales enablement tools, to allow them to focus on selling and not get bogged down with other tasks.
Best Practices for Implementing Base Salary Plus Bonus
- Provide Support: Give your sales team the support they need to not only sell the product but also to cooperate with one another and reach the overall business goals. Take the responsibility of busywork away from them to make up for the fact that they can’t earn more than their established bonus.
- Set Out Payout Schedule: Allow employees to earn a portion of their bonus even if they don’t reach 100% of their quota. And clearly communicate how the bonus will be earned. For instance, if an employee earns $600 for every percentage point reached of their goal once they hit 75%, that means they’ll earn $48,000 if they hit 80%; but if they reach less than 75%, it drops to $300 per percentage point, netting them only $21,000 for hitting 70% of their goal. Map this out and communicate it clearly and regularly to each team member.
- Hire Team Players: Aim to hire people who work well with others. In an environment where earning a fixed bonus is the goal, you want a cohesive sales team that can work together like a well oiled machine and earn money for the organization together. More individualistic sellers will become discouraged and want more incentive. Eventually, they’ll get frustrated and move on forcing you to refill that role and reinvest in recruiting. So it’s good to get the right people from the beginning.
- Make Employees Feel Invested: Give your people a reason to work hard for the company. In addition to earning their bonus, they’ll feel motivation to hit business goals because they feel they have a stake in those results. Perhaps that might be a monetary investment, like employee stock, or something less tangible like team-building exercises that help invest your team in their mutual success.
No matter what sales compensation structure you choose for your team, Core Commissions can help you manage it. Contact us or schedule a free demo and we’ll be happy to show you how it works firsthand.