Are Sales Bonuses a Waste of Money?
Years ago, I carried a sales quota myself, and it was built on one thing. Total revenue. So here is what I did with it.
I pushed my team hard to hit the monthly number, and when the month got tight, I pushed harder. I micromanaged. I hovered. And I steered everyone toward the sales I knew we could close fast, the easy re-orders from customers who already loved us, because those were the ones that would land before the calendar ran out.
Do you know what I quietly stopped doing? Chasing new customers. Developing the accounts that would not pay off until next quarter. Coaching the rep who needed six months, not six days. None of that helped my number this month, so none of it got my attention.
I was not a bad manager (according to senior management). I was a manager doing exactly what the plan paid me to do. And the plan was paying me to think small. (FYI. Within 6 months of managing, I lost almost all my staff.)
I tell you that because...I want to be clear about something up front. I have not only studied bad incentive plans. I have lived inside them, and years later I built and paid for a few of my own from the other side of the table.
So when I talk about how a bonus shapes behaviour, I am not describing a theory. I am describing my experiences.
Here is what I have landed on. Sales bonuses are not inherently a waste of money. But companies (including myself) waste an enormous amount of money paying for results their people did not create, or for behaviours the business never actually wanted.
A substantial body of research supports the first half of that. Financial incentives can improve performance. Where it gets interesting, and where the money gets wasted, is in the design.
Caps can cause your best people to stop selling. Quota thresholds can encourage salespeople to delay orders. A heavier reliance on variable pay can lift performance while also raising stress and exhaustion. Frequent targets can keep weaker performers engaged while nudging stronger ones toward easier, less profitable sales.
So the real question is not simply whether bonuses motivate people. It is a sharper one. What behaviour does your compensation plan make economically rational?
Because whatever that behaviour is, that is what you are likely to get.
That is the idea I want to explore. A compensation plan is not simply a reward system. It is a communication system. It tells your people, in the clearest language you have, which behaviours the company is willing to pay for and what it values. When I was that manager thinking small, my plan was communicating perfectly. I just did not like what it was saying.
Money works, but it rarely produces exactly the work you intended
Let me be fair to the money first, because I do not want you to walk away thinking incentives are a scam. They are not.
A large meta-analysis by Garbers and Konradt, pooling 146 studies and nearly 32,000 participants, found positive average effects for both individual and team-based financial incentives. The reported effect was g = 0.32 for individual incentives and g = 0.45 for team-based ones. The team results were also stronger when rewards were distributed equitably, in line with contribution, rather than split equally regardless of who did the work.
Those are meaningful average effects. But they are averages across many different jobs, measures, and plan designs, and an average hides its own failures. They should not be read as a promise that every plan produces the same result.
The performance lift can also carry a human cost. Across four studies involving more than 1,400 salespeople, Habel, Alavi, and Linsenmayer found that a larger variable-pay component was associated with more performance pressure, stress, emotional exhaustion, and sick days, which partly offset the gains. As many managers and business owners know too well, push too hard... it leads to turnover, lower engagement, etc. That was not limited to badly built plans. It came with the variable pay itself.
So money can work. It just does not work in a straight line. It works through the behaviour a particular plan rewards, under the conditions that plan operates in, and it tends to bring a stress cost along for the ride. That is why the design matters at least as much as the size of the payout.
Bonuses, commissions, and accelerators are not the same thing
There are several different mechanisms, and each one sends a different behavioural signal. The key is to understand the pros and cons of each.
A commission typically pays continuously, based on each sale, unit of revenue, or unit of margin. In a genuinely uncapped plan, every additional qualifying sale keeps generating pay.
A quota bonus pays a lump sum once a threshold is crossed. Below the line, the payout may be zero. Above it, the next dollar of sales may be worth nothing until the next threshold. That shape creates its own behaviour, and not always a good one.
An accelerator increases the commission rate after a defined level of performance. It is meant to keep strong performers pushing after they have already hit target.
A team bonus rewards collective performance. It can encourage collaboration, but it can also weaken an individual's line of sight between their own effort and their reward.
An MBO bonus, short for management by objectives, rewards defined managerial or strategic goals rather than raw sales output. Think forecast quality, hiring, retention, or landing a specific strategic initiative.
These are not five sizes of the same thing. They are five different messages. A threshold bonus says, get across this line. A straight commission says, every qualifying sale counts. An accelerator says, do not coast after quota. A team bonus says, help the group win. Before you decide how much to pay, you have to decide what you are actually trying to say.
Four ways incentive plans quietly destroy value
Most wasted compensation money does not come from paying too little. It comes from design choices that reward the wrong thing. Here are the four I watch for now, several of which I once caused.
Earnings caps. When you cap what a salesperson can earn, the value of additional sales can fall to zero once the ceiling is reached. Misra and Nair studied the compensation system of a large contact-lens manufacturer and concluded that both the earnings cap and the practice of adjusting quotas based on past performance suppressed effort. Their model predicted that a redesigned plan removing both the cap and the quotas would raise sales by about 8 percent. The firm implemented the new plan, and revenue rose by roughly 9 percent. Because several things changed at once and there was no randomized control group, you cannot pin the whole 9 percent on the cap alone. Still, the direction is hard to argue with, and the deeper lesson is about behaviour. The gain did not come from paying people more. It came from removing the dead zones where the next sale was worth nothing, so effort stopped bunching up and gaming the calendar.
Quota ratcheting. This is the practice of raising someone's future quota simply because they did well last year. It feels reasonable, and it quietly teaches your best people to never look too good, because looking good just makes next year harder. Quotas do need to move as territories and market potential change. The mistake is raising them mechanically off a single person's past results.
Thresholds that encourage giving up or timing games. Lump-sum quota bonuses create a cliff, but the research here is more nuanced than the usual warning about hoarding deals. Steenburgh found that lump-sum bonuses mostly increased effort in the sales force he studied, and that the gains outweighed the cost of order-timing behaviour. In a separate pharmaceutical field study, Kishore and colleagues found that moving from a quota-bonus to an equivalent commission plan reduced timing games and lifted short-term productivity, especially among lower performers, but also led to more neglect of tasks that were not directly rewarded. Replacing a bonus with a commission solved one distortion and created another. Target frequency is its own trade-off. Chung, Steenburgh, and Sudhir found that quarterly bonuses acted as useful pacers for weaker performers, while overachievement commissions kept top performers producing after they cleared quota. Then, in a field experiment with a retail chain in Sweden, Chung, Narayandas, and Chang moved salespeople from monthly to daily quotas. The more frequent target stopped weaker performers from giving up late in the cycle, but it pushed stronger performers toward lower-ticket products, which reduced overall sales and profit. The pattern is not "thresholds bad." It is that the same feature sends opposite signals to your strong and weak performers.
Paying for volume while ignoring everything else. This is the one I lived. If you reward only top-line revenue, people have a reason to chase revenue even when that means discounting too hard, favouring the easy products, or neglecting account quality. Not everyone responds that way, but the plan makes the behaviour rational. Everything you leave out of the formula, margin, product mix, retention, account development, the unglamorous non-selling work, quietly gets less attention. My monthly number never once asked me to develop a new customer, so I stopped.
Why the same plan cannot work for every salesperson
Let me tell you about the other side of the table, and the bonus cheque I still regret signing.
A company I worked with brought in a new sales manager. Good hire, sharp, hungry. Near the end of their first year, a deal everyone had half forgotten about closed out of nowhere. A big one. The kind that only lands because the person before them spent eighteen months nurturing it and then left. That single deal pushed the new manager over their annual quota, and per the plan I had helped build, they earned their full bonus. So I paid it. The plan said to. And I still remember the uneasy feeling, because I had just signed off a full year's bonus for a result this manager had almost nothing to do with.
The plan was not broken. It did exactly what I built it to do, which was pay on a number without ever asking whether this person actually moved it. That is the trap. A single plan lands very differently depending on who is standing under it.
The same threshold or quota cycle affects lower and higher performers differently, as the studies above show. A rep in a mature, established territory has a different relationship with quota than someone opening a new market, where results lag effort by months. Reward them identically and you may overpay for inherited opportunity, exactly as I did, while under-rewarding the person building next year's revenue.
Then there is the distinction that trips up so many growth-stage companies. A sales manager is not simply a rep with a bigger bonus. If you hand a manager a rep's plan and just enlarge the numbers, you have given them a powerful reason to keep selling their own deals, whether or not that is the best use of the role.
It is exactly what I did in my first sales manager role, and what the plan rewarded. 50% of my bonus was attached to my own sales quota, so... I spent 80% of my time ensuring I met this target and not helping my team.
A player-coach might reasonably carry a partial personal quota. But a full sales manager's plan should put more weight on the outcomes the manager is meant to create through the team, things like team attainment, forecast quality, hiring and ramp, coaching, retention, and strategic execution.
That is a design recommendation, not a claim that one formula fits every manager. The right measures and weightings depend on the role, the business model, and how much the manager genuinely controls.
The psychology helps here, as long as you treat it as a diagnostic and not a slogan. Vroom's expectancy theory asks three questions about any incentive. Does the person believe their effort can actually improve the measured result? Do they trust that hitting the result will produce the promised reward? And do they value the reward enough to justify the effort?
In some transactional roles, the line from effort to result is easy to see. In complex sales, product quality, pricing, territory potential, supply, market conditions, and support from the rest of the company can all blur that line. A plan loses its motivational force the moment people believe the outcome is mostly out of their hands. My windfall manager is the perfect example in reverse. The reward arrived with no effort attached at all.
One more caution, because I promised you research and not vibes. It is tempting to say cash bonuses simply crowd out intrinsic motivation. That is too strong. Some research shows that expected, controlling rewards can dampen intrinsic motivation for already interesting work. More recent workplace evidence shows a messier picture, where pay for performance can support performance through intrinsic motivation and a sense of fairness, and can also undermine it by adding pressure. The takeaway is not that money corrupts. It is that how the money is framed, administered, and experienced does most of the work.
The five tests of a defensible incentive plan
When I pressure-test a plan with a client now, I run it through five questions. If it fails one, we fix it before anyone gets paid. I ask them because I have been caught by every one of them.
First, can the employee materially influence the result you are paying on? If not, the plan is closer to a lottery than an incentive. My windfall cheque failed this test.
Second, is every additional unit of valuable performance rewarded, or does the plan hide a cliff or a cap where good work suddenly becomes worthless?
Third, does the measure reflect profitable growth, not just activity? Revenue is not margin, and volume is not organizational health. My old monthly quota confused all three.
Fourth, are the rules stable, transparent, and trusted? If people expect you to ratchet the quota the moment they succeed, they will start managing you instead of the market.
Fifth, and this is the one people skip, what harmful behaviour could a rational employee use to maximize the payout? Every plan can be gamed. Your job is to know how before your team figures it out for you.
A quick note for Ontario employers
One practical flag, offered as general HR information and not legal advice. Bonus entitlements at termination depend on the employment agreement, the plan language, the circumstances, and the statutory and common-law rules that apply.
At common law, the Supreme Court of Canada in Matthews v. Ocean Nutrition set out a two-part analysis. First, would the employee have earned the bonus as part of their compensation during the reasonable notice period? Second, if so, does the wording of the plan clearly and unambiguously take away or limit that common-law right? Labels alone do not settle it, and a bare requirement that someone be in "active employment" may not, on its own, be enough to exclude the entitlement. Separately, minimum standards under Ontario's Employment Standards Act, 2000 still have to be met.
So if you are building or changing a plan, put it in writing, define how and when the bonus is earned and paid, spell out what happens when employment ends, and have qualified Ontario employment counsel review the language. Design the incentive for the behaviour you want, and design the document for the day the relationship ends. Both are the job.
Compensation buys behaviour, not motivation
So, are sales bonuses a waste of money? Only when you have not decided what behaviour you are buying.
I know this because I have sat in both chairs. I have been the manager who thought small and called it hustle, chasing the fast, easy sale because that was the only thing my number rewarded. And I have been the consultant who signed a full bonus for a deal a manager never really earned, because the plan told me to and I followed it. Neither of those was a character flaw. Both were me faithfully doing what the plan communicated, which is exactly the point.
The plan is talking to your people whether you meant it to or not. It is telling them what counts, what to chase, what to protect, and what to quietly let slide. If you design it carelessly, it will still communicate clearly. It will just communicate the wrong thing, and your team will follow it faithfully, because you paid them to.
Get clear on the behaviour first. The number is the easy part.
References
Chen, Y., Zhang, Z., Zhou, J., Liu, C., Zhang, X., & Yu, T. (2022). A cognitive evaluation and equity-based perspective of pay for performance on job performance: A meta-analysis and path model. Frontiers in Psychology, 13, 1039375. https://doi.org/10.3389/fpsyg.2022.1039375
Chung, D. J., Narayandas, D., & Chang, D. (2021). The effects of quota frequency: Sales performance and product focus. Management Science, 67(4), 2151–2170. https://doi.org/10.1287/mnsc.2020.3648
Chung, D. J., Steenburgh, T., & Sudhir, K. (2014). Do bonuses enhance sales productivity? A dynamic structural analysis of bonus-based compensation plans. Marketing Science, 33(2), 165–187. https://doi.org/10.1287/mksc.2013.0815
Deci, E. L., Koestner, R., & Ryan, R. M. (1999). A meta-analytic review of experiments examining the effects of extrinsic rewards on intrinsic motivation. Psychological Bulletin, 125(6), 627–668. https://doi.org/10.1037/0033-2909.125.6.627
Garbers, Y., & Konradt, U. (2014). The effect of financial incentives on performance: A quantitative review of individual and team-based financial incentives. Journal of Occupational and Organizational Psychology, 87(1), 102–137. https://doi.org/10.1111/joop.12039
Habel, J., Alavi, S., & Linsenmayer, K. (2021). Variable compensation and salesperson health. Journal of Marketing, 85(3), 130–149. https://doi.org/10.1177/0022242921993195
Kishore, S., Rao, R. S., Narasimhan, O., & John, G. (2013). Bonuses versus commissions: A field study. Journal of Marketing Research, 50(3), 317–333. https://doi.org/10.1509/jmr.11.0485
Misra, S., & Nair, H. S. (2011). A structural model of sales-force compensation dynamics: Estimation and field implementation. Quantitative Marketing and Economics, 9(3), 211–257. https://doi.org/10.1007/s11129-011-9096-1
Steenburgh, T. J. (2008). Effort or timing: The effect of lump-sum bonuses. Quantitative Marketing and Economics, 6(3), 235–256. https://doi.org/10.1007/s11129-008-9039-7
Vroom, V. H. (1964). Work and motivation. Wiley.
Legal authorities
Employment Standards Act, 2000, S.O. 2000, c. 41. https://www.ontario.ca/laws/statute/00e41
Matthews v. Ocean Nutrition Canada Ltd., 2020 SCC 26. https://decisions.scc-csc.ca/scc-csc/scc-csc/en/item/18496/index.do
