Used in investing, a commission refers to the fees paid to a broker to execute a trade.
As a form of compensation, a commission is often paid to sales personell. Instead of commissions, most large companies pay bonuses to their sales and key management personnel. Typically, the company plan for the year includes both sales and production targets. The bonus system rewards participants with extra payments for those who exceed or far exceed the plan.
When a bonus plan is in place, participants often have low average base salaries and then receive extra compensation from the bonus system. Of course, in a bad year, payments can be minimal.
A commission system differs in that it is usually not capped. A commissioned sales person can continue increasing his income every time he gets an order. A bonus system effectively caps the compensation system. Most know that once they max the bonus, they have little incentive to excell. Hence, holding business to the next quarter or bonus period becomes a strategy to maximize bonus.
Some bonus plans include trap doors and trip wires. Your bonus can be cancelled under certain circumstances. For example, if you meet or exceed the plan, but your business sector does not meet its profit target, you get no bonus.
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