In which of the following situations will a straight commission compensation plan be most appropriate?

Do not underestimate the value of the advantages or perquisites that your company has to offer that may not be readily available in larger companies—opportunities for interesting work, lack of hierarchy, flexible environment, and so on.

Some people are motivated by the desire to be on the leading edge of scientific or technological advances. They may take less pay to work for a startup if they believe in its future and the work it has to offer.

Salary and wages

A salary (or wage) is a fixed amount paid in exchange for an employee’s services. Ontario Employment Standards legislation entitles most employees to receive a “minimum wage” in exchange for the work they complete for a company.

For full-time employees, salary is generally described in annual, monthly, bi-weekly or weekly amounts. For part-time employees, it is generally described as an hourly amount.

To determine an appropriate salary and/or salary range that your company is willing to pay for a position, you must:

• Establish the value of the position based on your organizational requirements
• Understand what the market is paying for a similar position

Incentives: Drivers in attracting the best employees

Compensation can be divided into salary, benefits and incentives. While salary and benefits must be competitive, incentives are the most likely drivers of attracting and retaining the best employees in startups.

There are three key types of incentives: bonuses, profit sharing and stock options.

1. Bonuses
   • Individuals are rewarded based on attainment of performance-based goals (individual, team and/or company).
   • Goals must be realistic and closely matched to the business and people involved.
   • Payout potential should be large enough to be significant to the individual.
   • Bonuses can be set up to directly drive and support the company’s needs (for example, profitability, annual results, successful completion of projects and/or significant project milestones).
2. Profit sharing
   • Payment is tied to company profits.
   • A pre-determined percentage of profit is shared among all employees.
   • Profit-sharing bonuses are generally paid out once a year in the form of cash or on a deferred basis.
3. Stock options
   • An individual receives the option to buy company shares for a set price during a specified time frame.
   • Option can be exercised by the individual at any time during the agreed-upon term and subject to any vesting schedule.
   • Stock options are often part of management’s executive compensation but may be offered to key employees in lieu of a higher salary—especially where the business is not yet profitable and/or cash flow is constrained.
   • If the business does well and the company’s stock rises, the holders of the options share in the financial benefits.
   • In general, if the company permits a long period from the date of issue to the last date for exercising the option, it will encourage the employee to stay with the company and be fully committed to its success.

Commissions

Commissions are a common way to remunerate employees (salespeople) for securing the sale of a product or service. The intent is to create a strong incentive for the individual to invest the maximum effort into their work. Commissions are usually calculated as a percentage of the sale of the product or service (for example, 5% of a computer component’s retail selling price).

Payment may be either straight commission (no base salary) or a combination of base salary and commission. In general, the commission structure is based on reaching specific targets or quotas that have been previously agreed upon by management and the employee. These targets or quotas are typically tied to sales revenue, unit sales or some other volume-based metric.

A sales compensation plan outlines your employees’ base salary as well as the company’s commission and incentive program. The commission structure should incentivize employees to reach their objectives in order to earn a deserved reward.

There are many types of compensation structures to choose from, and sales leaders should implement a plan that aligns best with their team’s specific needs.

First, it’s important to understand where and how sales efforts fall short and create a plan to address these shortcomings with enticing rewards that drive results. Using tools like Pipedrive can help you pinpoint those areas that are lacking, so you can effectively use sales commission to promote hard work.

How sales compensation plans are built

Sales compensation plans vary depending on your team's structure, budget and goals.

For example, one company might offer a low base salary in combination with a hefty commission package, while another may provide a mix of a medium-sized salary, competitive targets and career growth opportunities. What kind of compensation plan you decide on all depends on the product, process, clients and company culture.

There are several factors you need to consider when drawing up your team’s compensation structure. Here are some questions to ask yourself when mulling over your sales commission structure:

• What are the goals you have for your sales team?
• What are your company's overall goals?
• What revenue do your salespeople bring in?
• How much of your budget can you afford to allocate to compensation packages?
• How much are your main competitors paying their reps, and are you prepared to make your reps a better offer?
• If your reps are working in-house, what is the cost of living where your company is based?

Understanding expectations makes it easier to build attractive compensation packages that will appeal to high-quality candidates, as well as your top-performing employees already on the payroll.

First, let's look at some important terms you'll need to know when creating compensation plans.

Clawbacks

Some compensation plans require that a new customer stays with your company for a period of time before a rep is entitled to their bonus.

If a customer churns before the period is up, you can include a clawback. When this happens, the sales rep will have to return the commission they earned on the sale. Clawbacks are a helpful way to incentivize reps to focus on customer retention and deal quality over quantity. They also act as an incentive to stay with your company in order to reap the benefits of their sales commission.

On-Target Earnings (OTE)

OTE’s are a realistic goal of what a rep will earn if he/she performs well and achieves set objectives.

A rep's OTE is a sum of their base salary and commission earned from closed deals. For example, a sales rep may be given a base salary of $60,000 and expect to reach $40,000 in commission in a one-year period. Therefore, their OTE would be $100,000.

It’s unethical for companies to advertise unrealistic OTE numbers to attract reps if they don’t plan on compensating them at that figure. If you plan on doing this, it won’t work in the long-run, and you’ll find that quality salespeople won’t join, or stay on your team. OTE’s should be as practical of a projection as possible.

Incentives/Contests

Incentives and contests are also compelling ways to reward top performers.

Incentives are often paid out as a dollar amount but can be presented as other reward types like dinners and excursions. For example, team leaders might set up a contest where the first sales rep to close 50 deals for the month earns a $1,000 bonus. Or, the first team to upsell 100 subscriptions will get a collective weekend away at a spa.

Sales Accelerators/Decelerators

Sales accelerators are used when a rep closes more deals than their quota requires. They are a great way to entice your top-performing sales reps to keep selling if they’re running hot.

An example of a sales accelerator might be a rep closing 15% above their quarterly quota. To reward them, the company will pay an accelerator fee for each percentage above their required quota. For example, if a sales rep closes 115% of their quarterly sales quota, the rep might earn a 12.5% commission on the extra 15%. If they closed $10,000 worth of extra sales, their accelerated commission will be $1,250.

Sales decelerators, then, penalize reps who don’t reach their quota by paying them less compensation.

Under what conditions is a straight commission compensation plan most appropriate?

What is straight commission compensation?

Which of the following is an advantage of a straight commission compensation plan?

What does straight commission mean?