Sales Compensation and Expense Allowances

Straight Commission Plans

In straight commission plans, an employee's pay is based upon a set percentage of the total amount that he or she sells. The employee would not be paid a base salary. These plans encourage the quickest, easiest sales and discourage long-term goals and more difficult tasks such as obtaining new customers. Straight commission plans suit aggressive, money-motivated types best.

In theory, a commission plan is very simple: the sales representative is paid a commission based on sales volume (or number of units). But the commission percentage should increase or decrease with the effort the salesperson must exert to increase sales volume.

Example:

• no commission for sales under $500,000
• 5% commission for sales between $500,000 and $1 million
• 7% commission for sales over $1 million

Determining levels

You should examine the effects of the commission system before putting it into operation. You will need to estimate what amounts will be paid to sales personnel in the form of commissions and make sure they line up with the:

• sales costs
• salary structure
• income required to motivate employees

Sales costs. First ascertain the total cost of selling the product. Make sure these costs are in line with the product's price and the cost of production.

Salary structure. Make sure that targeted commissions provide sales representatives with an annualized targeted compensation comparable to their competitive marketplace. You might expect some internal conflict, however, as it is not uncommon for a salesperson (who assumes all the risk and uncertainty) to earn more than his/her manager. This is why some people won't move into management, and others don't want to work on commission.

Expected income. An incentive program will only motivate if the employees can realistically reach sales targets and make enough money to find the job worthwhile.

We'll further discuss how to evaluate compensation plans later in this course.