Employee compensation: Detail sales incentive plans

Q. Can we pay employees commissions only?
Friday, June 22, 2012

A. Sales employees have a direct and measurable impact on the company’s bottom line profit; thus, pay structures for sales employees are typically represented in the form of total target compensation rather than a fixed salary. 

Elements of a sales plan can be classified into fixed and incentive based. Total compensation may consist of either a commission-only or base salary plus commission component. Businesses selling high value services or products usually opt for a ratio of between 60%/40% and 80%/20% of fixed to variable. 

In organizations where sales representatives have greater influence over the buying decisions of customers, a larger portion of the mix should be through commissions. Alternatively, base salary should comprise a larger percentage of the mix where sales representatives do not exert much control over customer buying decisions.

The commission component may be paid based on a variety of performance measures directly related to the company’s sales and marketing objectives. There are two types of commission formulas for determining percentages to be paid:

• Flat: The commission rate is a fixed percentage regardless of the amount of sales/revenue the employee achieves. 

• Variable: The commission rate may fluctuate up or down depending on the employee’s performance or the measurement used. 

State wage payment laws generally define protected “wages” and set forth procedures to be followed when compensating employees. Various state laws include commissions among the “wages” subject to the statutory requirements. HME

Ana McGary is president of PeopleFirst Enterprises. Reach her at ana.mcgary@people1sthr.com.