Long ago, we wrote about the importance of a compensation plan in an organization. I thought we’d follow up on that post by exploring the six different types of compensation plans in depth. In many companies, basics plus bonus-based compensation plans are used as a way to motivate employees. Finding what compensation plan works best for the company, involves accessing its strengths and weaknesses, making a decision based on the long-term goals, and carefully negotiating the contract with the employee in a way that it works best for the company and its needs. We’ve picked the most common and most rewarding forms of compensation plans and highlighted their benefits and downsides, so you can decide which one works best for your business needs.
Straight salary refers to the basic salaries and wage given to the worker. In most companies, the base pay is determined by the worker’s job title and job role. The company sets a minimum and maximum range that can increase, decrease or remain the same, depending on the worker’s performance.
This is one of the most reliable types of compensation plans. An employee who agrees to this type of compensation will receive a base salary along with an additional bonus if performance hits or exceeds earning goals.
This is a primary method for compensating independent sales agents. It is a highly attractive model, especially to start-ups who are seeking to penetrate a specific territory.
This type of compensation is well-suited for employees who work in a team-based culture. The compensation is usually calculated by finding out territory volume. The sales numbers are added up and all commissions are split equally among all sales professionals.
Profit margin is one of the most popular types of compensation used by start-up companies. Under this plan, companies compensate its employees entirely on the profits made by the business. Due to the complexity and compliance issues involved, very few companies offer equity or stock.
This type of compensation plan is every salesperson’s dream. In this, salespeople continue to receive a commission as long as their accounts are generating revenue for the employer. Sadly, employers are usually reluctant to offer a residual commission deal to employees.
No two compensation plans are alike. Usually, the type of compensation plan an organization chooses, and the type that an individual accepts, depends on the market conditions and the goals of those involved.
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