George John—Carlson School Associate Dean and Professor of Marketing
When it comes to driving sales, which compensation model better motivates employees: commissions or bonuses? New research, led by Carlson School Associate Dean and Professor of Marketing George John, suggests commissions offer more bang for the buck. His findings indicate salespeople are more productive when paid commissions based on individual sales than they would be if paid a lump-sum bonus if/when they reach their sales quotas.
In a massive three-year field study, researchers tracked data provided by an Indian pharmaceutical company on sales representatives in 458 territories. For the first 18 months, the reps were paid a base salary plus a bonus when they reached their sales targets. They were then switched to a compensation model consisting of a base salary plus a commission for every sale beyond their targets. A statistical analysis that controlled for history, seasonality, industry trends, etc., showed that sales improved by 24 percent under the commission scheme.
The data indicates that after implementing a commissions-based compensation model, both the company and the employees earned more money.
“Under commissions, if employees sell more, they earn more, whereas earnings are capped under bonuses,” says John. “It appears that for the same payout, the company will get higher sales by offering commissions than bonuses.”
Boosting sales for lower performers
While the commission model improved sales consistently across the company, the results were most substantial for lower-performing salespeople. For salespeople who performed in the bottom 25th percentile, sales increased by 37 percent after implementing commissions.
“These less-productive employees are the least successful in making sales. They know they probably won’t achieve the bonus, so they give up,” says John. “Whereas, with commissions, they sell something and they make some money. They’re never demotivated.”
Benefits of bonuses
Nonetheless, John cautions that commissions don’t trump bonuses across the board for all companies. Although commissions are more effective in driving short-term sales, bonuses may be better suited for salespeople who are responsible for more than just cold calling.
“If you want your employees to attend to tasks above and beyond making sales, like customer service or administrative tasks, bonuses are helpful,” he says. “Once the employees achieve their bonuses, they’re more likely to attend to those other things that they won’t otherwise accomplish while under pressure to sell.”
The results of the experiment appeared in the June 2013 issue of the American Marketing Association’s Journal of Marketing Research. The study was part of Sunil Kishore’s doctoral dissertation at the Carlson School.