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Compensation  >>   Commission vs. Incentive Search Discussion Posts
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Commission vs. Incentive  
Posted: 10/21/2010 08:10am   192 Views
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I am looking for clarification on the difference between commissions and incentives.  At my company we distinguish between commission and incentives.  We typically view commissions (which is paid as part of the associates monthly pay) as a % of the monthly objective achieved, not as a % of revenue and an incentive is typically viewed as a "boost" that is above and beyond.  The proper classification is important as it does determine the payroll taxes.   I was just wondering if this is a common industry distinction or just the way we view it.  Your comments are greatly appreciated.


Commission vs. Incentive  
Posted: 10/21/2010 09:18am  
   (1 rating)

There can be a difference in terminology between how you compute something and how you use it.

Many dictionaries and glossaries exist, including the one in the Resource Center here.  A commission is an income payment based on a percentage (usually of the selling price) of the product or service.  An incentive is any item offered in addition to guaranteed salary as a motivational inducement.   A commission is both a form of earned income and a particular type of incentive.  A recognition program is also a form of incentive, but its value is not typically taxed like wages, commissions or bonus, if the recognition award comes in a non-cash form like glory or status. 

Not sure what you mean about payroll taxes and the "boost" concept, but commissioned workers (and payroll tax egulatory agencies) usually consider commission a vital core component of their total compensation rather than something extra but unnecessary.  Commissions tie output directly to income, making them essential compensation elements and not like "icing on the cake."  Commissions are rarely fringe froth but are instead the central performance metric both for continued employment retention and for a substantial part (if not the majority) of total remuneration.  Commissions are typically contractually enforceable and part of the basic employment agreement; they are also specified in both amount and manner.  Commissions are not uniform random group profit-sharing surprise bonuses awarded on a subjective discretionary basis.   


Commission vs. Incentive  
Posted: 10/21/2010 01:17pm  

It sounds to me what you are describing as a commission is actually a bonus (therefore an incentive.) I also take what you mean "determine the payroll taxes" as federal tax withholdings of employee wages.

For one of the companies I worked for, we had to distinguish between commissions and bonuses (monthly & quarterly incentive pay) in order to insure we were in compliance with Federal and State withholding requirements. Our definition of a commission was as Mr. Brennan defined it - a commission is an income payment based on a percentage (usually of the selling price) of the product or service. In our case, commissions were paid on the amount of the insurance policy that was sold. A bonus for our purposes was a monthly or quarterly incentive based upon achieving certain target levels of policies sold for the month or quarter that employees could earn in addition to their commissions.

The deference between the two has an impact on the tax withholding (payroll taxes) of the employees' pay and therefore on their take home pay. If their payout is categorized as a commission (ordinary income) then their tax withholdings are base upon their expected annual income level.

A bonus on the other hand (supplemental wage) which my be a specific % of monthly objectives,  quarter performance metric, etc., will have tax withholdings generally around 25% (flat rate) of the pay out/bonus which is what most companies use do to avoid more detail calculations (aggregate method) and be in compliance with Federal and State tax withholding requirements.

Hope this helps.


Commission vs. Incentive  
Posted: 10/21/2010 03:20pm  

To Anon #1,

No matter what terminology you decide to use, just make sure your internal audience is on board with that language.

I've seen WorldatWork professionals use interchangeably: commissions, variable pay, pay-for-performance, incentive, merit, recognition, rewards, etc, etc.  The most important thing for you to manage internally is an understanding of what concept you are discussing.  

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