Types of Compensation Plans – Does Your Company Need to Change its Existing Plan?
Recently, we talked about the various reasons why every company needs a solid compensation plan. We also looked at how much you should pay your sales reps. Today, we continue our journey in discovering the best ways to handle a sales force by highlighting the different options of compensation plans available for businesses. Find out whether your company may need to change its existing compensation structure.
Types of Compensation Plans
1. Straight Salary Compensation
Under this structure, workers receive a wage or basic salaries. In many instances, the business sets a range within which the employee’s pay will fall. The base payment is influenced by the professional’s rank and job description. Whether the pay rises or falls is determined by the employee’s performance.
Straight salary structures encourage equality among sales reps working in teams. This structure will also attract any sales rep joining a new industry. This is because it gives them something to survive on as they learn the ropes in the new territory. However, the reps lose their chance of earning incentives.
2. Pure Commission
Businesses that engage independent sales agents tend to pay them commissions only. This plan could be helpful for a startup that wants to break even in a certain territory. To cater for seasons when sales are low, some businesses decide to offer the salesperson an advance pay commonly known as “draw against commissions.” The company, however, recoups the draw amount from future earnings. Unfortunately, with this model, if the employee doesn’t sell they are not paid at the end of the month.
3. Salary Plus Commission
This arrangement compensates employees with a base salary and bonuses for performance that meets or exceeds the set goals. Companies tie this bonus to their budget or specified targets. One benefit of this plan is that employees always receive a salary even in seasons when sales aren’t coming by. However, commission plus salary earners battle with higher income tax rates compared to most workers.
4. Territory Volume Compensation Plan
Under this kind of pay structure, the business calculates sales turnover and all commissions are distributed evenly among salespeople. This model is highly effective where teamwork is a priority. However, since the structure rewards teamwork, professionals who put extra effort may feel that their exceptional work isn’t well recognized.
Why a Company Might Need to Change Its Existing Compensation Structure
Generally, every business should evaluate its compensation structure at least every 3 to 5 years to see whether it still aligns with the company goals and labor market. The more frequently this evaluation is done the better. Furthermore, salary issues are easier managed when caught in good time. Here are other reasons that may call for a change in a payment structure:
- Changing trends in the business environment
- Business not making enough profits
- Competitors coming up with competitive pay packages or setting up related businesses within your location
The Bottom Line
Every company is different and a good compensation plan will focus on the specific needs of the business it’s designed for. Luckily, the compensation plans above offer different options for businesses and salespeople. To get more insights on designing a solid payment structure, join us at our upcoming webinar about Preparing for a New Compensation Plan. Register HERE. Tickets are free.