Bonus vs Commission: What Are the Differences?
There are around 3 million salespeople in the US and you can bet that the vast majority of them do not know how to properly negotiate their compensation packages. The most common mistake salespeople make is assuming that commission and a bonus are interchangeable terms when, in fact, they’re not.
In this article, we’ll look at the different types of compensation and see which is most likely to inspire powerful work. Read on to see who wins in bonus vs commission.
What Is a Bonus?
A bonus is a one-time payment that you receive for performing well at your job. It’s a payment on top of your regular income. You can think of it as an incentive to keep you working hard and doing what you’re supposed to be doing.
The Pros and Cons of Bonuses
A major benefit of bonuses is that they’re usually awarded at the end of each year. Christmas bonuses are some of the most common.
Most workers love bonuses because they’re a nice treat after a year of hard work. They also come in handy when it’s time to buy gifts during the holidays.
Bonuses are also given to workers who have exceeded expectations, which is another reason why people love them so much. They’re like a pat on the back for going above and beyond.
But there are some downsides to bonuses as well. Since they’re not guaranteed, you could always get nothing at all. And even if you get one, it’s often relatively small compared with your regular income—especially if your employer doesn’t pay very well in general.
What Is a Commission?
When you sell an item on commission, you receive a percentage of the sale. For example, if you are selling a pair of shoes worth $100 and earning a 15% commission, then your employer will pay you $15 for each pair sold.
The amount of money that goes toward paying commissions varies from industry to industry. Some companies will pay as much as 25%, while others may only offer 5%.
Remember that, in most cases, you only get paid a commission if a customer that you served makes a purchase. Your employer will not compensate you for any future purchases made by this client unless your contract says so.
Most companies offer you the choice between a commission or salary; some pay a salary and a commission. This means that they will pay you a base salary every month, regardless of how many sales you make, and then give you an additional percentage of profit after each sale. The advantage of this method is that it gives employees some security and doesn’t pressure them to sell all day.
How to Calculate Commission?
In order to calculate commission, you first have to know how much your company pays out in commissions. You can find this information in your sales compensation plan.
Once you have that number, divide it by the total amount of sales made during the period. That gives you the percentage of each sale paid out as a commission.
For example, if your company pays out 10% of each sale in commission, and you make $100,000 in sales that month, then you’ll receive $10,000.
The Pros and Cons of Commission
If you need a brief commission guide before you make the final decision on taking a commission-based job, then you’ve come to the right place.
The upside of commission is that there’s no cap on how much you can earn, and it’s paid out regularly as long as you keep making sales.
The downside of commission is that you don’t get paid until after the sale. So if someone places an order and then backs out at the last moment, or your payment processor doesn’t approve their card, then there’s nothing in it for you.
You’ll also be compensated based on how hard you work. This isn’t a downside in itself, but if you prefer a set paycheck rather than no money at all, then commission-based work may not be for you.
Bonus vs Commission: Which Is Better?
There are a few key differences between bonuses and commissions.
Companies pay bonuses out when your annual review rolls around, whereas you’ll receive a commission payment every week or every month. However, bonus payments aren’t as reliable because if there isn’t enough profit in the company’s budget, there won’t be any extra cash available for anyone—including those who deserve it most (like yourself).
Also, bonuses don’t always have dollar amounts attached. Sometimes companies will give out gift cards or extended vacation time. If these things matter more to you than the amount of money you’re making, a one-time reward might be more appealing than ongoing earnings.
The last major difference between bonus-based jobs and commission-based roles is that the former is usually more secure than the latter. While it’s true that some employers will fire an employee if they don’t perform, this scenario is less likely to happen when you’re being paid on commission instead of receiving a salary or bonus.
If you want to know exactly how much you’ll be making each month, then commissions might not be the best option. If you’re willing to work hard and put in long hours, then commission-based positions can pay off big time.
Choose the Right Compensation for Your Lifestyle
When it comes to bonus vs commission, it’s up to you to decide which type of compensation is best for your lifestyle. If flexibility and earning potential are more important factors than regular paychecks, then starting out on commission is ideal.
If you find yourself still unable to decide which is best for your lifestyle, brush up on your personal finance skills. We have written many articles that can help you make better money decisions. Read a few and see how they work for you and your family.