Getting creative with compensation strategy can help attract and retain top talent beyond traditional employee benefits. One effective tool is variable pay, which adjusts with outcomes rather than remaining fixed like salary. In fact, some data shows that nearly 60% of staffers say that working for commissions or bonuses motivates them to do a better job, offering employees financial rewards directly tied to results
What you’ll learn
What you’ll learn
Updated: July 1, 2025
Key takeaways
- Bonuses reward employees for the achievement of organizational goals that can pertain to one or more functional areas, while commissions reward employees for generating sales
- Commission structures typically offer higher rates for new business production compared to renewal business, encouraging ambitious sales behavior and business development
- Bonuses are generally paid quarterly/annually and reflect a fair amount of volatility, while commissions are paid on a continual basis as sales are generated
The two most common types of variable compensation are bonuses and commissions. Bonuses reward employees for achieving organizational goals, while commissions reward employees for generating sales. This guide takes a deep dive into the subject of bonuses vs. commissions, exploring how they compare and how they can have an impact on your bottom line.
What are bonuses and when are they typically paid?
Bonuses are a performance-incentivizing aspect of an employee’s compensation package. Bonuses are awarded if specific functional goals and/or company-wide milestones are achieved. Bonuses, which are a complement to wages and salaries, can be an effective way to drive productivity and bolster retention.
Most organizations distribute bonus pay in the form of cash, but payouts can take many forms, including those outlined below.
- Paid time off
- Stock options
- Gift cards
Any form of payment can incentivize performance. The key is to make sure bonuses motivate your employees and enhance the short- and long-term trajectory of your business. On that note, it’s important to differentiate between the two basic types of bonuses – discretionary and non-discretionary.
Discretionary bonuses
A discretionary bonus is a bonus that is awarded to employees at the discretion of management. There is no specific criteria for these payments, and there is no contractual commitment to make them. An example of a discretionary bonus is a surprise holiday payout after an unusually strong fourth quarter.
Non-discretionary bonuses
A non-discretionary bonus is based on the achievement of specific, measurable criteria. These payments are not guaranteed; distributions are contingent upon satisfaction of the specified performance criteria. In many cases, the terms of discretionary bonuses are outlined in employment contracts.
Now that you understand the basics of bonuses, let’s shift our attention to commissions and delve into how employers use them to motivate team members.
How commissions work and what they’re based on
A commission is a form of compensation in which an employee earns a percentage of the revenue or profit he or she generates. Commissions are very common in sales roles, where productivity is largely associated with business development. They are also utilized in some customer-facing, quota-driven positions.
Commission structures vary, but they’re often based on the value of closed deals or the number of units sold. If an employee sells more, he or she earns more – a framework that is clearly designed to encourage ambitious behavior. Incidentally, commission rates are generally higher for new business production vs. renewal business production.
How different bonuses and commissions work
Bonuses and commissions can be structured in a variety of ways. We touched on the core features of these variable compensation plans above. Now, let’s take a few minutes to highlight some specific ways organizations utilize bonuses and commissions to incentivize employee performance and attain favorable outcomes.
Signing bonuses
A signing bonus is a one-time payout provided to a new hire following acceptance of a job offer. You can use signing bonuses to improve recruitment efforts. Specifically, they can make job offers more competitive in industries with high demand for talent, and they can help attract talent in industries or roles that persistently experience high turnover rates.
Performance bonuses
A performance bonus is a payout made to a team member who meets specific performance goals, such as exceeding a quarterly productivity target or completing a project ahead of schedule and/or below budget. These bonuses can go a long way toward rewarding a job well done and fostering an achievement-focused culture.
Straight commissions
A straight commission structure is a compensation framework in which an employee has no base salary and only earns a percentage of the sales he or she generates. This high-risk, high-reward model is used in roles where business development is deemed central and confident, ambitious salespeople are desired.A handful of well-known examples include insurance agents, real estate agents, art dealers, and medical device salespeople.
Tiered commissions
A tiered commission structure has a series of payout rates associated with different levels of production. It is similar to the progressive income tax system maintained in the United States. Quite simply, as sales production increases, commission rates increase – and the more a salesperson sells, the more he or she earns per dollar of sales.
Good to know
“The terms incentive payment, bonus, and commission are often used interchangeably, but they have distinct meanings. An incentive payment can be either a bonus or a commission. A bonus is a performance-based award that can relate to a wide variety of employee behaviors. A commission is a sales-based award that is directly tied to production.”
— Tom Brock, CFA, CPA
Bonuses vs. commissions: Key differences to know
Bonuses and commissions vary in terms of performance criteria, predictability, and payout. The table below summarizes the differences.
| Feature | Bonus | Commission |
| Performance criteria | Individual, team, or company-wide goals and milestones | Individual or team sales production |
| Predictability | Less predictable, as payments are tied to performance and sometimes awarded on a discretionary basis | More predictable, calculated as a percentage of sales production |
| Payout frequency | Usually paid quarterly or annually (if goals are met) | Paid continually (based on closed deals) |
Regarding taxation, there is no real difference between bonuses and commissions. Both forms of compensation are taxed as supplemental income. To better understand the tax obligations associated with these payments, consider using a bonus tax calculator to assess IRS requirements.
Planning for payouts: Financial and cash flow considerations
Offering either bonuses or commissions to your employees entails budgeting and projecting cash flows. However, you need to plan for these payment types in different ways.
Bonuses are less predictable than commissions, because they are usually tied to performance goals that may or may not be attained. Fortunately, there’s usually enough time between the achievement of the goals and the distributions of the associated bonuses to fund the payments. Additionally, historical payout patterns can serve as a good benchmark for the future. That said, it’s always a good idea to set aside some discretionary funds to cover unexpected payouts.
Commission payouts are directly tied to sales , which means remuneration expenses fluctuate with your topline. As a result, accurately forecasting commissions entails having a good feel for your business’ growth trajectory. This can be challenging, given the highly uncertain nature of the economy. Therefore, much like planning for bonuses, it’s a good idea to maintain a cash reserve to cover unexpected payouts.
How different industries use bonuses and commissions
Bonuses are widely used in industries where employee contributions aren’t always directly tied to sales. In technology, for example, a software engineer could receive a bonus for completing a major product launch ahead of schedule and under budget. In finance, an investment banker could receive a bonus for successfully closing a high-value merger deal.
Commissions, on the other hand, are widely used in sales-focused industries, such as retail, real estate, automotive, and insurance. These industries are heavily reliant on high-volume or high-value transactions, and commissions are the best way to directly align compensation with performance.
Bonuses and commissions are key aspects of a compensation plan
Many organizations get the best results by using both bonuses and commissions, since each works well for different situations. Bonuses can be effective when rewarding big-picture achievements and individual milestones, while commissions help drive sales performance.
Whatever mix you choose, the most important thing is making sure your incentive plan actually motivates people to hit the goals that matter most to your business. Just as important is handling payroll accurately and transparently — when employees trust they’ll get paid correctly and on time, they’re more likely to stay engaged and give their best effort.
Getting your compensation strategy right takes some thought, but having solid payroll support makes the day-to-day management much easier. Along the way, we are here to help with any payroll-related questions you have.
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Jon Davis is the Sr. Content Marketing Manager at OnPay. He has over 15 years of experience writing for small and growing businesses. Jon lives and works in Atlanta.