A compensation system refers to the summation of all monetary and non-monetary benefits provided to human resources as a reward to their willingness to offer their services. Compensation can be categorized into direct financial compensation, which entails monetary compensation such as salaries or indirect financial compensation, which includes compensation with a financial value but that does not involve the provision of direct monetary payment to the employee, for example, health insurance. There is also non-financial compensation, which is a form of compensation that lacks an economic value but involves the satisfaction an individual receives from working in a particular organization. Salary plus commission is one of the most popular compensation systems used by organizations. Although it is usually used in paying salespeople, the system also allows other human resources to be paid in the same manner. It works in such a way that employees receive a specific guaranteed amount and earns an unidentified amount of commission, which is dependent on the level of sales made by the employee. Salaries and commission are probably the fairest and equitable.
A salary is a set amount of money paid to an employee irrespective of the amount of work done. It is usually calculated on an annual basis but is paid out as monthly installments. The benefits of paying salaries include the fact that salaries make employees stable and secure. A reasonable amount of basic salary is important when the employee has to learn technical knowledge before selling products or when the employee has to develop a long term relationship with a client before they can do business (Gomes, 134). On the employers’ side, when paying salaries as the key compensation method, it is advisable that the employer creates targets for sales and standards for customer service. The targets should be set either quarterly or annually to motivate the employees to work efficiently.
Conversely, a commission refers to a payment given to an employee, mostly salespeople for selling commodities or services and is usually calculated as a percentage of the total revenues brought into the organization. Companies pay commissions to attract aggressive and skilled salespeople. The urge to maximize income motivates the sales representatives to find more clients, market the products, and seal business deals. Companies that pay commissions as the main remuneration method need to have a clear and financially attractive rate of commission. Moreover, the commissions need to be paid at definite times. It is also wise that employers tie the commissions to the revenues brought in as opposed to the total goods and services sold since calculating commissions based on the latter may result in heavy discounting and hence affect the organization negatively.
Advantages and Disadvantages of Salaries plus Commissions
i) Rewards performance
The main reason why companies prefer paying straight commissions is to motivate employees to make more sales and also as a means of awarding high performers (Bryant 173). Employees who earn only salaries are mostly relaxed and have limited motivation towards adding extra efforts to exceed expectations. On the contrary, commissions make salespersons work extra hard in finding new clients and explore new potential markets.
ii) Paid Only when income increases
Commissions are only paid based on the value of revenues that is above the set expectation. Payment of commissions helps business firms to reduce expenses, especially when the business is not making significant profits. On the other hand, commissions are disadvantageous to the employees when the business is experiencing low sales. Paying fixed salaries is advantageous to the company when the company is making high sales and disadvantageous when the company is making below average sales.
Providing a straight salary offers stability to employees thus, enabling them to work efficiently. Employees are able to offer their best when they feel that they are financially stable. However, in the case of sales representatives, it is wise that employers offer enough stability to make employees satisfied but not too much that may make them too comfortable to lack the motivation of making more effort in sales.
Remuneration that is based on salary plus commission may lead to confusion about the payment structure (Suchyta 93). For the employer, it becomes a challenge to administer the method as compared to handling a payment structure with a single type of payment. The method of salary plus commission requires that the finance department calculate not only the salaries but also the commission aspect of pay, which makes the calculations clumsy. Salespeople may also find it complicated to understand how their pay is calculated. The situation is tougher for organizations that offer different commission percentages for varying categories of products and services, as opposed to a common commission rate across all goods and services.
There might be challenges in executing the compensation system, especially when the percentage of commission offered by a company is insignificant. Some organizations offer relatively small commissions to their employees and thus, making the employees less motivated since the commission has a negligible impact on their earnings. As a result, the company ends-up handling lots of computerization and working with a complicated system yet the efforts have little impact on the employees’ motivation. Some employees may also consider small commissions as an insult by the employer, which may lead to strained relationships with the employer and eventually under production at work.
Other Factors to Consider
Pay and Benefits
In addition to remunerating employees using the salaries and commission method, employers should also consider adopting pay and benefits policies that facilitate a positive social and economic impact on both the employees and the community. Such policies include ensuring that the payment structure is fair and equitable (Laundon 719). Employees view fair pay internally or externally to the company. Internal fair equity is determined by comparing the rates of remuneration between employees of the same organization while external equity refers to comparing the rewards offered by one organization to the rates offered by other organizations for the same services. It is, therefore, advisable that organizations conduct continuous studies of the prevailing conditions in the market and adjust where necessary (Bryant 174). Furthermore, a company should also consider providing additional benefits that may improve the employees’ quality of life. Such benefits may include health insurance and paid sick-leaves.
Organizations need to consider the theories and concepts of equity when considering staff compensation systems. To be successful, it is crucial that employers examine the fairness of their decisions about payments. Employees take into account both the decisions made by the employers and the manner in which the decisions are made. Moreover, employees consider the concept of equity both within and outside the organization. An organization with a compensation system that the employees consider inequitable is more likely to suffer costly implications. On the contrary, an encouraging compensation system will help employees achieve performance and job satisfaction and hence become more productive at work.
Bryant, Phil C., and David G. Allen. “Compensation, benefits and employee turnover: HR strategies for retaining top talent.” Compensation & Benefits Review 45.3 (2013): 171-175.
Gomes, Jorge, and Mário Romão. “How Benefits Management Helps Balanced Scorecard to Deal with Business Dynamic Environments.” Tourism & Management Studies, vol. 9, no. 1, Jan. 2013, pp. 129–138.
Laundon, Melinda, et al. “Just Benefits? Employee Benefits and Organisational Justice.” Employee Relations, vol. 41, no. 4, July 2019, pp. 708–723.
Suchyta, Mark, and Timothy W. Kelsey. “Employment and Compensation in the Marcellus Shale Gas Boom: What Stays Local?” Journal of Rural & Community Development, vol. 13, no. 4, Dec. 2018, pp. 87–106.
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