A sales compensation plan typically consists of commissions and bonuses, or components of both. But what’s the difference between a bonus vs. a commission?
We define commissions as a percentage of earnings tied to performance and based on the amount of the deal sold. There are several types of commissions, including flat rate commission, rate commissions, fixed amount per deal commissions.
Single Rate Commissions: Also known as flat rate commissions, apply the same percentage for all deals regardless of the amount sold. An example of a single rate compensation plan might pay 10% on all deals. For a compensation plan template that you can input your business numbers into, check out the Single Rate Commission Plan.
Rate Commissions: In rate commissions structures, the commission rates change based on where the revenue is coming from. For instance, a rep might earn 10% on new business and 15% on retention deals or upsells.
Multi-tier Commissions: A multi-tier commission structure pays various commission rates based on performance. In practice, this might look like: a rep earns 8% on all deals between 0 and 50% to quota. Then the rate increases for deals between 51% and 100% to 10%. Upon passing quota, any deal the rep brings in after achieving 100% attainment, the rep earns 13%.
Meanwhile, organizations may reward bonuses for when sales reps meet or exceed a pre-defined goal. Bonuses may be issued as a percentage of cumulative revenue or as a dollar amount. Like commissions, several different types of bonuses may be structured and rewarded, including the year-to-date bonus plan, ranking bonus, and bonus on multiple quotas.
Year-to-Date Bonus Plan: A bonus rewarded for achieving quotas set for each quarter, month, or milestone during the year, i.e. if you hit your monthly quota, you earn a $500 bonus. Look at this milestone bonus comp plan example to experient with your own numbers.
Ranking Bonus: When rewarding a bonus for being the top seller, or the likes, this is called a ranking bonus. As an example, a company might reward the top seller of the month a $500 ranking bonus.
Bonus on Multiple Quotas: This type of bonus pays when a seller achieves a combination of quotas. In practice, this might look like a rep earning a $1,000 bonus for hitting their new business quota as well as their retention quota.