Commission and bonuses pay people according to results rather than time alone.
Why businesses use them
Cost moves with revenue rather than being fixed, which lowers break-even and makes a quiet period survivable — see fixed and variable costs.
And it aligns effort with what the business needs, provided the measure is chosen correctly.
The measure has to be within the person's control
A technician paid on revenue will sell more, including work the customer did not need, because that is what the measure rewards.
Paid on job margin instead, the incentive includes doing the work efficiently and not discounting, which is usually closer to what the business actually wants.
Paid on a figure they do not influence — total company profit, for a field employee — the plan is a bonus rather than an incentive, and should be described as one.
What it can damage
Incentives on speed produce callbacks. Incentives on sales produce customers who do not return. Both costs land later than the payment, and neither shows up in the measure being rewarded.
Pairing any incentive with a quality condition is what prevents this.
Predictability
Highly variable earnings are a retention risk even when the average is good, because people budget on the low months — see employee retention.
A base sufficient to live on, with variable pay above it, generally retains better than a plan with a larger upside and a thin floor.
Keep it explicable
A plan the person cannot calculate themselves does not motivate, because they cannot connect the work to the outcome. Simple and slightly imperfect beats precise and opaque.
The cost is real
Variable pay carries payroll tax and usually workers compensation premium like any other wage, and belongs in labour cost rather than being treated as a discretionary extra.