Sales commissions are a form of variable pay. They are based on the principle of “pay for performance”. Organizations with a sales incentive program believe that granting commissions encourages higher sales performance.

In reality, things are more subtle:

  • What does “sales performance” really mean? Should it be based on gross revenue or profit? Should specific sales behaviors (or business goals) be encouraged more than others?
  • What is the actual return on investment of commissions? Is there a point of diminishing return, after which paying more in commissions doesn’t matter? Which types of reward are more effective in terms of motivating representatives?
  • How should commissions be presented to the sales force, and how will they perceive them? Could one presentation (say bonuses) motivate the sales force more than another (say percentages) – at the same cost?

Many companies struggle to structure their incentive plans because there are many options and degrees of freedom available – quotas, attainment levels, percentage of revenue, percentage of profit, cash bonuses, SPIFFs, prizes, multipliers, accelerators, etc. This said, one fundamental design choice for any incentive plan is – bonuses vs. percentages.

Business Goal and Perception

The best way to choose between bonus vs. percentages is to be clear about business objectives. Here is a simple table showing, for each incentive type, the associated business goal, and how the incentive may be perceived by the sales force.

Incentive Goal Perception
% of Revenue Any growth A payout for every large deal I close
% of Profit Any profitability A payout for every profitable deal I close
Revenue-Based Bonus Target growth A payout for attaining revenue goals
Profit-Based Bonus Target profitability A payout for attaining profitability goals

Pros and Cons

Besides signaling a business goal (and packaging it with a perception), bonuses and percentages have unique pros and cons. Here are a few things to consider when making a decision:

  • Percentage-based approaches often require caps to protect organizations from anomalies. For example, a mega deal, landed by chance, could result in an unreasonable payout if commissions are just percentages without any cap.
  • Bonus-based approaches can reduce motivation because they are conditional on meeting certain objectives. There isn’t a feeling of “if I close this deal – in fact any deal, I’ll get a percentage of it”.
  • Bonus-based approaches require careful thinking about offered amounts. Percentage-based approaches can just follow industry standards. On the flip side, representatives may quit because they are offered a higher percentage next door.
  • Percentage-based approaches should prevent double-crediting to avoid double-taxation. On the flip side, a collective business objective (involving many employees), once met, could could trigger payment of many bonuses.

Managing Spend

More about managing costs. Bonuses are often paid as fixed cash amounts, or as a percentage of salaries. Here are the associated underlying spend management principles behind each approach.

Incentive Spend Management Principle
% of Revenue Pay a % of gross revenue
% of Profit Pay a % of net profit
Fixed Cash Bonus Pay from a money pool (fixed budget)
Salary-Based % Bonus Extend the total salary mass

Business Stage

Often the decision between bonuses and percentages depends on the maturity of the organization. For example, when launching a new product, you want sales representatives to be motivated to close every deal.

Percentage Bonus
Product launch Account management
New roles & structures Established roles & structure
Emerging business Mature business


So which approach is best for your organization – bonuses or percentages? It all depends on the following:

  • What your true business goals are
  • How you want to manage commission spend
  • How your sales team will perceive offered rewards
  • Which approach will best motivate your sales team

We recommend designing several incentive plans, each with different options, and testing them. You can use a software solution to design incentive plans and run various calculations to find the best option for your business.