Everything You Need to Know About Employee Compensation Plans

happy and satisfied employees mean increased productivity, the achievement of business objectives, and less turnover
Happy and satisfied employees mean increased productivity, the achievement of business objectives, and less turnover

Like it or not, we spend most of our time working at the office on weekdays. Many firms do not pay attention to taking care of their workers other than just giving them their regular paycheck. Conversely, many businesses understand that their employees should be given more than a salary. Entrepreneurs rely too often on guesswork when deciding what to pay their employees. For this, they make plans and try to make their employees happy while being in the workplace also. After all, happy and satisfied employees mean increased productivity, the achievement of business objectives, and less turnover. One way to encourage the employees is the compensation they get from their business.

Other than the regular paycheck, there are many other wages that employees get. Do these wages are called compensation? What compensation actually is? When people hear the word compensation, they instantly think of a paycheck. While cash is definitely part of the compensation, the total compensation of most people includes several different elements, some of which aren’t essentially noticeable. Compensation is the total non-cash and cash payments that employees get as a reward for the work they do for the business they are working with. Typically, it is the main expense for business with their workers.

In 2016, BLS stated that salaries and wages considered as 68.4% of workers’ compensation, while the remaining 31.6% were the other benefits. In simple words, benefits often have a greater share in the pay than most people understand. However, for an employer, it’s significant to know precisely about everything going into the employees’ complete compensation packages so they can explain the collective benefits to their employees.

Many businesses use the approach of basics plus bonus-based compensation to perk up their team and to motivate them. It is imperative to know that there are different compensation plans that different companies choose according to their strengths and weaknesses. Below in this article, we’ve picked up the most common and rewarding forms of compensation plans and also what you should know about them. To learn about them, be sure to read this article, till the end!

Salary Plus Commission

It is one of the most common and reliable types of compensation plans used by companies to pay salespeople, but other job titles can also benefit from this structure. Salary plus commission structure makes employees earn more than their regular salary based on the number of sales they make. A worker who agrees on this type of compensation will get a base salary plus an additional bonus if they perform better. This pay structure has both advantages and disadvantages as compared to other play plans.

The main reason why companies use this compensation structure is to motivate their staff toward better outcomes and to reward those who are performing well. If companies pay only basic salaries to their salesman, then they will not be motivated to exceed their expectations. Therefore, it is in both the firm and the employer’s interest to follow this type of commission plan, which is not only motivating workers to perform better but also exceeding the expected goals. Plus companies only have to pay for extra work. However, if someone does not get their compensation and companies fail to fulfill what they promised, they can hire Orange County Workers Comp Attorney.

In addition to the pros, this pay structure has a lot of cons. For example, salary plus commission plan is a lot more complex than it seems as it can be hard to manage than a pay structure with one simple type of pay. Furthermore, it can be confusing for the salesmen to know how their pay is calculated, especially when there are more than one type of commission is being offered. Another con is that some firms use comparatively small commissions to standard wages and salaries, which is not the way to motivate employees. In fact, it may only frustrate them off.

Straight Salary Compensation

The straight salary plan is one of the simplest compensation plans that companies offer to their employees, particularly sales representatives. As the name suggests, straight salary compensation is just what you would expect. No compensation or any commission on the top, an employee will receive a straight-forward fixed salary. Salespersons receive a fixed amount of money usually every month. This leaves no opportunity for salespersons to earn incentives or extra money on top of their regular salary.

The biggest benefit of this structure is that it treats all employees equally, which is great when they’re working as one team, part of the team, or a small group. Moreover, it makes all the team members contribute equally to achieving sales and business goals. Another advantage of this pay structure is that it helps in attracting more talent with the assurance of regular pay, no matter how they perform. Straight salary compensation is ideal for businesses whose regulatory structure forbids direct sales.

Undoubtedly, this compensation structure is not ideal for those employees who want to make extra money and earn an incentive for their hard work and dedication. It will only attract those individuals who are not that experienced and want to get a job with a safe pay structure. Moreover, this pay plan can also increase turnover while decreasing the retention rate. Salespersons also tend to get lazy as they are not motivated to exceed expectations because they will be paid a fixed sum of salary only no matter how hard they work.

Commission Only

This is a major technique for compensating independent sales agents. It is an extremely attractive structure, especially to start-ups who are pursuing to enter a particular territory. In commission only structure, companies offer to draw against commission structure. The business pays its salespersons a fixed which is called a predetermined draw at the start of every pay period. After the pay period, this prepayment is drawn from how much money a salesperson has made. If a salesperson has made more commissions than he was paid, he takes the extra money home. In case he has earned less in commissions, he has to pay the rest back to the firm. Moreover, if the salespersons fail to make any sales during the whole pay period, then he will not be paid at all. However, a successful salesperson is most likely to earn a lot of money with a commission as compared to a salary plus commission job.

Territory Volume Compensation Plans

This type of compensation is ideal for workers who work in a team-based corporate culture to achieve business goals. This type of compensation is typically calculated by concluding territory volume at the end of a compensation period. Probably the main benefit is that the sales numbers are added up and all commissions are equally split between all sales professionals who operated that territory. This structure works out well when sales territories are visibly defined.

Moreover, it is a great structure for when the sales team cooperate with each other to accomplish common goals, and territories are wealthy enough to keep up with competitive wages. Territory volume compensation plan is one of the best because it doesn’t put pressure on individuals and nurtures team-building. However, like any other compensation structure, this also has a drawback that it can lead to aggression between team members if anyone feels that efforts are not equally divided between all.

Profit Margin Compensation Plan

In this compensation structure, sales representatives are paid on the basis of how well the business is performing. It is the reason why the profit margin compensation plan is one of the most popular types of compensation structure, which is legitimately common amongst startups that don’t have enough liquidity. This plan does involve workers to support each other over lean sales periods, but it can attract individuals attracted to long-term incentives such as stock shares.

Under this plan, firms pay their workers completely on the base of profits generated by the business. However, due to the involvedness and agreement issues, only a few companies offer justice or standard. Startup businesses using profit margin or you can say revenue-based compensation strategy can also offer long-term incentives to their employees like a stock to shape devotion and a valued sales base.

Residual Commission

In this compensation plan, salespeople will continue to make a commission as long as they are generating revenue for the corporation and it will not be wrong to say that this type of compensation plan is a dream for every salesperson. Though this can be a consistent source of generating commission, it can also make representatives lose significantly when their accounts are not generating enough revenue for their employer. But for good salespeople this doesn’t seem to be an issue at all as they can continue to collect residual commission even after they leave the firm over negotiation.

Conclusion

As you have seen in the article, that every compensation plan comes with both pros and cons. Not every structure will be appropriate for your type of organization as they tend to choose the type of compensation plan, keeping a lot of factors in view. For choosing a sales compensation plan, companies need to consider the type of service they sell, the size of their workforce, the objectives they have, etc.