Commission and bonus structure design for a small business: paying for the behaviour you actually want

Incentive design is the work of deciding what you pay people extra for, and making sure that thing is what the business needs. In most owner-led businesses the scheme was written in an afternoon, years ago, and nobody has read it since.

The plain version: your bonus scheme is a set of instructions to your team about what matters. If it pays on revenue, you will get revenue. Whether you get profit is up to luck.

The three mistakes almost every scheme makes

It pays on the top line. A salesperson on 5% of revenue is paid exactly the same for a $100,000 deal at 40% margin and a $100,000 deal at 10% margin. The second deal might lose you money after commission. They will close it anyway, because that is what you told them to do.

It has no gate. Bonus is paid even when the business did not hit its number. The intent was generosity. The effect is that the bonus becomes salary, and the incentive is gone.

It is uncapped on the wrong thing and capped on the right thing. Discounting is unlimited. Commission tops out at a figure that was reasonable three years ago. Your best performer now has no reason to push past September.

What a good structure looks like

Pay on gross margin, or on revenue at a margin floor. A deal under the floor earns nothing. This one change fixes most of the discounting problem on its own, because the person giving the discount now feels it.

Put a gate on the business number first. No company bonus until the company hits its target. Then individual bonuses on top. The team wins together before anyone wins alone.

Keep it to three measures at most. Revenue, margin and one behaviour the business needs this year: collections, retention, safety, whatever it is. More than three and nobody can hold it in their head, which means it does not change what they do.

Pay it on cash, not on invoice, for anyone who can influence collection. Commission on a sale that is never paid is a loan to the salesperson.

Write it down in two pages. If the scheme needs a spreadsheet to explain, it is too complicated to drive behaviour.

The roles that need different rules

A salesperson and a project manager should not be on the same scheme. One drives revenue in. The other protects margin on the way through. A contracting business that pays its project managers on completed revenue, with nothing for margin, will watch its margin erode one variation at a time.

Leadership bonuses should sit on the company result and on two or three accountabilities each leader owns. Not on activity. Not on effort. On whether the thing they are responsible for happened.

What the evidence says

In a transport group I worked inside before Ajility, the company-wide bonus scheme was one of four levers behind four consecutive years of net profit growth. In a 249-store national retailer, a bonus policy change was worth about $200,000, and the financial modelling behind an enterprise agreement delivered a $1.2M benefit over three years. In a recruitment business I operate today, the commission architecture for the whole team was designed and rolled out from scratch.

The pattern across all of them: the scheme changed what people did within a quarter, because it changed what they were paid for.

Superannuation and the rules you cannot design around

Commissions and bonuses paid to employees attract superannuation in Australia. A scheme that forgets this is understated by around 12% from day one. Build it in. The same goes for payroll tax thresholds and the Fair Work rules on what counts as an entitlement. Get the accountant to sign off on the mechanics before it goes to the team.

The next step

Ajility's Remuneration and Incentive Design service reviews what you pay now, models what it is costing you, and rebuilds the scheme around margin and the behaviours the business needs. It comes with the two-page document and the model behind it, and it is priced on the site.

Read about the service or see the packages page for the price.

Questions founders ask

Common questions

How do I tell if our bonus scheme is actually working?

Compare what was paid with what the business earned over recent periods, check whether payouts moved with profit, and ask staff to name the measures. A scheme that pays in poor years, or that nobody can explain, is not working.

Should commission be paid on revenue or on margin?

On gross margin, or on revenue at a margin floor so a deal under the floor earns nothing. Paying on the top line pays the same for a 40 per cent margin deal and a 10 per cent one, and the second may lose money after commission.

Are commission caps a good idea?

Usually not on the measure you want more of. Cap the discounting authority instead, and let margin-based commission run; a cap on the right behaviour gives your best performer no reason to push past September.

Do commissions and bonuses attract superannuation in Australia?

Yes for employees, so a scheme that forgets it is understated by roughly the superannuation guarantee rate from day one. Build it in, check payroll tax thresholds and the Fair Work rules on entitlements, and have your accountant sign off the mechanics before the team sees it.