IVEntrepreneurshipComparison
Sales Compensation: Base Salary, Commission, and Bonus Compared
Every pay model rewards a particular behavior, and you get what you pay for. This comparison shows what base salary, commission, and bonus encourage and what they can cause along the way.
Key takeaways
- Base salary gives security and encourages care, commission rewards each individual deal, a bonus rewards reaching a threshold. Most businesses combine them.
- A longitudinal study links higher base pay with more effort and lower intention to leave. Variable components had less consistent effects.
- Strong incentives have side effects. In a field experiment in telesales, salespeople listened less well during a sales contest.
- The Leverage Test uses three questions to clarify how much variable pay makes sense: influence, measurability, side effect.
Why does pay cause so much conflict in sales?
Hardly any decision in sales is regretted as often as the one about pay. The owner wants to reward performance and introduces a commission. Six months later the team argues about who owns which order. Small customers are left waiting, and discounts become more generous because the commission depends on revenue. Or the owner pays a good fixed salary and wonders why nobody touches the difficult inquiries.
The reason is simple. A pay model is an instruction written in money. It says more clearly than any meeting what counts in the business. If you share revenue, you get revenue, including the unprofitable kind. If you pay only for presence, you get presence. So the first question is which behavior you need, and only then how you pay for it.
That raises one question: which mix of fixed salary, commission, and bonus fits the behavior your sales team needs? To answer it, we first explain the three building blocks and compare them by the same criteria, then look at what studies say about their effects and side effects, and finish with a test for checking your own model. The article covers employed salespeople. Self-employed commercial agents are subject to legal rules of their own.
What are base salary, commission, and bonus?
The terms are used loosely in everyday language. A clear separation is worthwhile for the comparison.
- Base salary is the fixed pay. It is paid regardless of the sales result.
- Commission is a share of each individual deal, usually a percentage of revenue or of contribution margin. Contribution margin is what remains of revenue after deducting directly attributable costs.
- Bonus is an amount paid when a goal set in advance has been reached, such as incoming orders in a quarter.
Commission and bonus together form the variable component. The difference between the two is larger than it seems. Commission rewards every deal evenly. A bonus rewards crossing a threshold. Just before the threshold the incentive is very high; far before it and just after it, it is low.
A pay model is the most honest job description a business has.
Base salary, commission, and bonus in direct comparison
The following overview applies the same five criteria to all three building blocks.
| Criterion | Base salary | Commission | Bonus |
|---|---|---|---|
| What is rewarded | The work as a whole | Each individual deal | Reaching a goal |
| Security for the employee | High | Low | Medium |
| Cost predictability for the business | High, but independent of results | Costs follow revenue | Costs arise in steps |
| Typical strength | Care, advice, teamwork, long sales cycles | Clear, continuous incentive with short cycles | Alignment on a shared goal, also as a team |
| Typical side effect | Little pressure to tackle uncomfortable tasks | Disputes over attribution, discounts, neglect of small customers | Shifting orders around the cutoff date, easing off once the goal is reached |
A worked example shows how strongly the models make income fluctuate. Three businesses pay the same annual income of 60,000 euros at full goal attainment but distribute it differently.
| Model | at 80% attainment | at 100% | at 120% |
|---|---|---|---|
| Salary only | €60,000 | €60,000 | €60,000 |
| Combination: 70% fixed, 30% variable | €56,400 | €60,000 | €63,600 |
| Commission only | €48,000 | €60,000 | €72,000 |
Worked example
Worked example with freely chosen numbers and a linear curve. The amounts are not a pay recommendation. They show how much risk each model transfers to the employee.
What does research say about fixed and variable pay?
The combination of salary and a variable component has long been the common solution. As early as 1978, Steinbrink reported in the Harvard Business Review on a survey of 380 companies in 34 industries in the United States and Canada, which together employed more than 15,000 salespeople. Most favored a combination plan, and pure commission plans were in decline. Steinbrink gives a plausible reason: in the downturn of 1971 commissions collapsed, and in the boom of 1973 they rose to amounts that had little to do with the salespeople's effort. He considers a straight salary appropriate where it is hard to say who actually won the order, for instance with technical products where inside staff and engineers contribute, for account servicing tasks, and in industries with strongly cyclical demand. The author also pointed out that combination plans have disadvantages too, and that the choice should depend on the needs of the company. The survey is almost fifty years old and describes what companies did, not what works best. Its core message has held: no model fits everyone.
That base pay does more than it is given credit for is suggested by a longitudinal study by Kuvaas, Buch, Gagné, Dysvik, and Forest (2016), which followed sales incentives for more than two years. Unlike most work on the subject, it uses the amounts actually paid out for each pay component and controls for the initial levels of effort and turnover intention. The amount of base pay was positively related to reported work effort and negatively related to the intention to quit. Both ran through what the authors call autonomous motivation, meaning work out of one's own drive. Pay-for-performance, quarterly as well as annual, was by contrast related to controlled motivation, the feeling of having to do something because of the reward, and its relations to effort and turnover intention were mixed. Effort was self-reported by the respondents. The authors justify this by noting that sales results also depend on things the individual does not control: the economy, the product, marketing campaigns, and the size of the client list. The study does not refute variable pay. It warns against seeing base salary only as a block of cost.
On the question of commission versus bonus there is mainly theoretical work. Schöttner (2017) compares the two in a mathematical model over several periods. Which instrument is cheaper depends there, among other things, on when in the period the salesperson is hardest to motivate and what intermediate information the firm has about sales. If interim figures are available, bonus plans dominate commissions in this model. A model is not a measurement in a business. But it shows that the choice between commission and bonus depends on your numbers and not on preferences.
What side effects do strong incentives have?
Incentives work. That is their benefit and their risk. They strengthen the rewarded behavior and easily crowd out what is not rewarded. Koehl, Poujol, and Tanner (2016) were able to observe this in a natural field experiment in telesales. During a sales contest, salespeople's listening declined in two of the four forms examined, namely passive and active listening. Two other forms were unaffected. A contest is not a pay model, but it follows the same logic: short-term pressure on closing.
The same applies to goals that carry a bonus. Schwepker and Good (2012) surveyed 345 business-to-business salespeople. Those who perceived their quotas as hard to reach trusted the organization less and sold worse. Trust in turn was related to customer-oriented selling. A bonus on a goal nobody believes achievable is therefore not an incentive. It damages the relationship on which good selling rests.
If you want to grow without losing margin, variable components should therefore be tied to contribution margin more than to revenue. The background is explained in the article Scaling or Just Growing?.
The Leverage Test: which model fits your business?
The Leverage Test consists of three questions. The more clearly you answer all three with yes, the more variable pay is justifiable. With a no, the emphasis belongs on base salary.
Influence
Can the salesperson essentially influence the result themselves? If orders depend mainly on marketing, engineering, or the owner's name, a commission pays for chance.
Measurability
Can the result be attributed clearly and promptly to one person? With sales cycles of many months and orders several people work on, disputes arise.
Side effect
Does what you do not pay for survive anyway? Advice, care in the proposal, attention to small customers, and cooperation in the team must not suffer from the incentive.
| Situation | Result of the Leverage Test | Obvious emphasis |
|---|---|---|
| First salesperson during onboarding | Influence still low | Base salary, plus small rewards for activity goals |
| Inside sales handling inquiries and follow-up | Result depends on the team | Base salary with a team bonus |
| New business with a short sales cycle | Influence and measurability high | Combination with a noticeable commission on contribution margin |
| Consulting-heavy projects with a long cycle | Measurability low, care important | High base salary, annual bonus on a few goals |
| Looking after existing customers | Result shows over years | Base salary, bonus on retention and expansion |
Worked example
The first row deserves special attention: as long as the new person is learning, you measure activities and not revenue. This is described in the guide to the first sales hire. Goals that carry a bonus should be derived together. How that works is shown in the articles Planning Sales Goals and Leading a Sales Team.
How do you recognize a good pay model?
Whatever the mix, there are features that distinguish a sound model from one prone to disputes.
- Simple: The salesperson can calculate their variable pay themselves at any time.
- Few measures: Two or three measures at most. More dilutes every incentive.
- Tied to profit: Where possible contribution margin or order value after discount, not pure revenue.
- Achievable: The goal was derived together and was reached by part of the team in the previous year.
- Prompt: There is a manageable period between performance and payout.
- Regulated: Attribution of orders, cancellations, absence, and changes to the model are set down in writing.
- Reviewed: Once a year you check which behavior the model actually encouraged.
The sixth point touches on employment law. How variable pay can be contractually agreed, changed, or revoked, what applies during illness and vacation, and which co-determination rights exist (in Germany, for example, those of a works council) should be reviewed by a qualified professional in the individual case. The same applies to tax and social security treatment.
Worked example
How to get started
Before you change anything, get a picture of what your current model rewards.
- Write down in two sentences which behavior you need most urgently in sales.
- Note what your current model actually pays for, and compare the two.
- Answer the three questions of the Leverage Test for every role in your sales team.
- For the past year, calculate what each salesperson would have earned under an alternative model.
- Ask your team which rule in the current model most often leads to discussions.
- Have planned changes reviewed under employment law before you announce them.
Expect a new model to need a year before its effect becomes visible. For that you need a few reliable numbers, as described in the article on sales metrics for small and medium-sized businesses. Change rarely and give reasons for every change. A model that changes every year ends up rewarding only negotiation about the model.
Back to the opening question: a pay model fits when it pays for the behavior your sales team needs, not just for what is easy to measure. The studies suggest not underestimating the base salary and giving variable components weight only where the Leverage Test confirms influence, measurability, and few side effects. Where that holds, the variable component is better tied to contribution margin than to revenue.
Frequently asked questions
Which is better: base salary or commission?
That depends on which behavior you need. A base salary encourages care and advice and suits long sales cycles. A commission fits when the salesperson influences the result themselves and it can be attributed clearly. Most businesses combine the two.
How high should the variable share in sales be?
There is no universally valid figure. The more the salesperson can influence the result and the more cleanly it can be measured, the higher the share can be. The Leverage Test, with its questions on influence, measurability, and side effect, helps with the assessment.
What is the difference between commission and bonus?
A commission is a share of each individual deal and rewards every deal evenly. A bonus is paid when a goal set in advance has been reached. A bonus focuses more strongly on one goal but can tempt people to shift orders around the cutoff date.
Should commission be calculated on revenue or contribution margin?
Where it can be measured, there is much to be said for contribution margin or order value after discount. A commission on pure revenue also rewards orders that come about through heavy discounts and bring in little.
Does variable pay really motivate salespeople?
It steers behavior but has side effects. A longitudinal study by Kuvaas and colleagues (2016) links higher base pay with more effort and lower intention to leave, while pay-for-performance had mixed effects. A field experiment in telesales showed that a sales contest can impair listening.
Sources
- Steinbrink, J. P. (1978): How to pay your sales force. Harvard Business Review, 56(4), 111-122.
- Kuvaas, B.; Buch, R.; Gagné, M.; Dysvik, A.; Forest, J. (2016): Do you get what you pay for? Sales incentives and implications for motivation and changes in turnover intention and work effort. Motivation & Emotion, 40(5), 667-680.
- Schöttner, A. (2017): Optimal sales force compensation in dynamic settings: commissions vs. bonuses. Management Science, 63(5).
- Koehl, M.; Poujol, J. F.; Tanner, J. F. (2016): The impact of sales contests on customer listening: an empirical study in a telesales context. Journal of Personal Selling & Sales Management, 36(3), 281-293.
- Schwepker, C. H.; Good, D. J. (2012): Sales Quotas: Unintended Consequences on Trust in Organization, Customer-Oriented Selling, and Sales Performance. Journal of Marketing Theory & Practice, 20(4), 437-452.
Note. This article is not legal or tax advice. Pay arrangements touch on employment, tax, and social security law, which differ by country, and should be reviewed by a qualified professional in the individual case. The amounts mentioned are worked examples and not a pay recommendation.
