Bonus schemes and commission pay

Bonus schemes

Bonus schemes and commission pay are two tools that, among other things, can be used to motivate employees to make an extra effort.

In this article, we will make you understand what an employee bonus entails, what characterises commission pay and what the difference is between bonuses and commission pay.

What is an employee bonus?

The term employee bonus is not always clear. It depends on the company and when a bonus is relevant. According to Danish law, there is basically freedom of agreement with regard to bonus schemes, but with limitations that are clarified in the general invalidity rules of Danish law and §36 of the Contracts Act.

A bonus scheme for employees must not constitute illegal discrimination. There are different types of bonus schemes, including one-off schemes, for example:

• Sign-on bonuses: A sign-on bonus is also called a “golden hello” and is a bonus that is typically paid if a top candidate signs an employment contract for a key position

• Retention bonuses: It can be, for example, a bonus intended to retain an essential employee and is usually payable after a certain length of time

• Single bonus: This can be a bonus that is triggered if an employee has delivered an extraordinary work effort

The most common bonus schemes, on the other hand, are the ongoing bonus schemes. Here, the bonus is triggered continuously after the expiry of fixed time intervals, e.g. annually, half yearly, quarterly or monthly.

Below you can see two examples of ongoing bonus schemes:

• Discretionary schemes: Here there are no predefined criteria for obtaining the bonus

• Performance programs: Bonuses that are based on a performance program are often characterised by the employee having to meet KPIs/bonus criteria/objectives

If the bonus scheme is a fixed part of the employment relationship, you must include the terms in the employment contract. The bonus scheme can also be clarified in an addendum to the employment contract or in your personnel handbook.

Finally, it should be noted that it is always possible to reward your employees with a bonus, for example if your company has had an extraordinary financial year. Here, it is also recommended that you explain in writing that it is a simple payment due to special circumstances.

What is commission pay?

Commission pay is another way in which employees can be paid depending on their work performance. Typically, commission employees are guaranteed a basic salary, which is why the commission salary only forms part of the total salary payment.

However, it is worth mentioning that some employees, e.g. sales staff, are paid a salary that is solely based on commission. In other words: The salary is determined based on how much the sales employee generates.

If your workplace wants to make use of commissions in the remuneration of employees, it is crucial to establish clear agreements about how this is done. In the agreement, you must, among other things, highlight how the commission is calculated, for example whether it is calculated for each item or service sold, or whether it is a percentage of the total sale.

The commission salary terms must appear in a section of the employment contract, in an addendum to the contract or as a reference to the personnel handbook, where you have defined the guidelines in relation to commission.

What is the difference between commission salary and bonus?

A bonus and commission salary must both be taxed as ordinary salary. Therefore, A tax and AM contribution must be calculated on the entire amount. In addition, commission pay and bonus schemes are both methods that can motivate employees to make an extra effort and thus achieve certain objectives.

The difference between commission salary and bonus schemes is how the employee can earn the payment. A commission salary is often based on how much value the individual employee has created, i.e. how many goods or services the employee has sold. The commission salary can also be tied to the company's or department's total sales and is usually calculated for the individual employee per month or per quarter.

A bonus is typically triggered if a certain target or objective, cost saving for example, has been delivered. As previously mentioned, these can be specific objectives agreed between the employer and the individual employee. A number of Danish companies have also introduced bonus schemes, where the bonus is paid if the workplace achieves a common goal. Bonuses are triggered in many organisations once a year, which differs from commission pay, which is paid more frequently. 

Should a pension be paid from commission and bonus?

A pension from commission and bonus does not necessarily have to be paid. It depends on what has been agreed between the employer and the employee and whether the employment relationship is covered by a collective agreement in which it is made clear.

If, for example, the employment contract states that a pension is paid from the employee's basic salary, pensions must not be calculated from commissions or bonuses.

On the other hand, a pension must be calculated from commission and bonus if it is stated in the employment contract that a pension is calculated from the salary income subject to A-tax. And now get: