Commissions and Bonuses


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In many companies, the end of the year whether calendar or financial, marks the opportunity for the payments of bonuses. In recent years, reports of high value bonuses being paid to senior executives of large organisations have caused public criticism and adverse comment in the media, at what may be regarded as excessive largess for questionable results and motives.

Bonuses and commission have long been seen as a way of incentivising and rewarding hard work. For the commercial manager, responsible for producing the continuous flow of profitable income for the business, the use of commission and bonuses are well established tools to help achieve the corporate objectives.

Commissions and bonuses are two different things that are used for different purposes.
In most businesses, commission is specifically related to the process of selling. Its purpose is to encourage the sales executive to make sales. The process of selling, involves identifying the needs of a customer, demonstrating the solution and closing the sale, but also requires considerable motivation and enthusiasm to achieve repeated success. While training provides the necessary skills, motivation and enthusiasm need to be encouraged and nurtured, which is the purpose of commission. Maintaining the motivation and enthusiasm of sales executives to actively seek and contact customers is essential if they are to successfully contribute profitable income to the business. Ideally, sales executives are paid a basic but adequate salary, but with the opportunity to increase their income through their own success in the form of commission. Thus they have a vested interest in maximising their sales income by sharing in the financial income they produce.

Commission may be based on various principles, but generally it is based either on a straight percentage of the total sales income or volume achieved by the individual, or alternatively, it might be a variable commission dependent on the products or services sold. Both systems have advantages and disadvantages for the commercial manager. When commission is paid on the total sales as a flat rate, it does not encourage the sales executive to differentiate between the sales of their products and services that may have differing levels of income and profitability. Thus, if all the products in a range have the same amount of commission, sales executives may tend to sell the easier products which may be less profitable, rather than the more difficult products with higher profitability. However, when differing commission is paid on differing products, it may have a negative effect on customers, who may wonder if products were sold to them on the basis of the commission gained rather than their suitability to the customer. This has been the case where people in the financial sector have been accused of miss-selling unsuitable products to customers, because of the high level of commission that they carried, which has resulted in customers and consumers mistrusting the financial industry and its products.

Because selling is fundamental to producing income, the ability to encourage and reward those directly involved in selling to customers is a strong management tool. However, satisfying customer requirements depends on the collective support of employees not involved with selling, for whom bonus payments may be an suitable form of recognition and appreciation.

Commission is generally considered to be part of the recipient’s payment agreement, giving them a benefit from the income that they produce.
By contrast, bonuses are considered to be discretionary rather than contractual, although that is not always the case.

The benefit of paid bonuses, lies in providing recognition and reward for the work, commitment and results that are in excess of that which would normally be expected of an employee. Bonuses should not be used to reward employees who have merely been doing what they are paid to do. In this regard, performance measurement has particular importance in assessing the criteria for consideration for bonus payment, which may be considered both at an individual or organisational level. As such, bonuses can be a very useful management tool for the commercial manager and chief executive officer (CEO), to recognise and reward those staff members for their commitment and contribution to the business objectives. However, the setting and payment of both bonuses and commission are not without potential problems of which CEOs and Commercial Managers should be aware.

* High commission rates on specific products may distort sales and in some circumstances, such as financial products undermine customers’ confidence in their suitability.

* A habitual and routinely paid annual bonus brings an expectancy amongst employees, which in time may cause them to consider the annual bonus as part of their income on which they have come to rely. Should a bonus not be declared, for whatever reason, the resulting disappointment might damage employees’ commitment and motivation.

* High bonuses to senior well paid executives are often questionable. This is particularly the case when senior executives employed on high salaries, for the achievement of corporate objectives, receive large bonuses for achieving what they were contracted to do. Such bonus payments can appear to be unjustified, resulting often in negative publicity which can be damaging to the corporate image.

Commission payments are a legitimate incentive to encourage sales and produce income, while bonuses recognise and reward commitment and effort over and above what would normally be expected of an employee. Used sensibly, commission and bonuses reward, incentivise and motivate the employees to achieve the corporate objectives, but used casually and carelessly, can de-motivate , and disaffected even the most loyal employees on which the organisation depends.

Republished with author's permission from original post.

Nicholas Watkis, AE MA DipM CMC FCIM
Nicholas Watkis set up Contract Marketing Service in 1981, providing professional interim marketing management for a wide variety of businesses. Over 30 years practical experience in organizations, large and small, national and international, led to the development of Business Performance Maximized specialist in marketing performance measurement.


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