Which work better, bonuses or commissions?
Salespersons are often paid a base salary plus incentives for attaining sales targets. Two types of incentives are commonly used: a lump sum bonus when salespeople hit their target (bonuses-at-target) or a commission for every sale beyond their target (commissions-beyond-target). Which more effective?
An answer to this question is revealed in the first large scale experiment on this issue with a real sales force. The results appear in the June 2013 issue of the American Marketing Association's Journal of Marketing Research. The study was conducted by a team of researchers from the University of Texas, the London School of Economics, and the University of Minnesota.
The researchers tracked sales representatives in 458 territories of a global pharmaceutical company for three years. For the first 18 months, these reps were under bonus-at-target plan. Then, they were switched to a commission-beyond-target plan, which was carefully designed to be financially equivalent to the prior bonus incentive. Sales were observed under the new plan for 18 months.
Sales improved by 24% when the sales reps were switched to the commissions scheme. Both the firm and the reps made more money. Why? "Under commissions, if you sell more, you earn more whereas earnings are capped under bonuses," said one of the researchers. Another benefit of commissions is that a rep is less inclined to manipulate sales timing.
Are commissions always better than bonuses? Not necessarily. While commissions definitely improve short-term sales, selling often involves tasks that have longer term payoffs not captured by current quarter sales. Reps ignore these activities under commissions, because they want to sell as much as they can today. On the other hand, once they have earned their bonus, reps are more willing to attend to these other tasks.
To sum up, if you want to boost current sales, pick commissions. If you want salespeople to attend to activities with possible payoffs beyond current sales, bonuses work better. Finally, be aware that bonuses make timing games more likely.