Back to basics – bonuses and commissions

June 29, 2022

In a time where cashflow looks like it might become tight for organisations of all sizes, the use of short term incentives (bonuses and commissions) can help make the difference in hitting growth targets.

However, our experience shows that many organisations do not think strategically about their use of bonuses/commissions.  In such circumstances, the thinking behind the short term incentives is “we have always done it this way” and “people don’t like change”.

For those wanting to grasp the nettle on this topic, we would suggest that it is sensible to go back to first principles and consider is what is the difference between a bonus and a commission.

Irrespective of what it might be titled, a bonus plan is something which is connected to achieving a future “outcome”.  The best bonuses of this type, in our view, are set out clearly from the outset and allow the participant (either on an individual or collective basis) some control over how the outcome is achieved.  By way of example, a bonus based on company profits will be achieved through a mixture of revenue generation and cost management.

In comparison, a commission is connected to the individual directly being responsible for bringing about an “event” or completing a task – the most typical, of course, would be selling a certain number of products or services.  Whilst the individual may have some scope to consider how they approach making the event happen or how the task is completed, the amount of commission payable, typically a flat percentage of the value of product sold, is known and fixed by the company at the outset.

Why is this distinction important? One reason is that, traditionally, commissions are paid on a more frequent basis than bonuses and come with few, if any, clawbacks if there are complications further down the line.  In addition, commission is almost exclusively an individual exercise, allowing for a person to feel that they have direct control over their future earnings.

We would suggest that, in most organisations, commission should only be used on a limited basis.  With commission only really being awarded either to (i) the classic “hunter” salespeople, who generate leads and win new work or (ii) those individuals who have to bring about significant events or complete tasks that would lead to a “step change” in the value of an asset (a good example here being internal land agents who manage to obtain planning permission on investment property).

As noted above, used well and on a targeted basis, bonuses and commissions can have a material effect on the success of a business.  MM&K are well placed to help with any of the issues set out above.  Should you want to have someone help you explore your thinking on this issue, please contact Stuart James in the first instance.

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