Hourly plus commission compensation does have its disadvantages as well. Get the definitive guide to employee compensation packages and benefits in this comprehensive QuickBooks resource written by payroll expert Katey Maddux. Disadvantages of straight salary compensation Some disadvantages of straight salary compensation may include reduced retention and high turnover if employees don't see opportunities to increase their pay. A valid objective in creating commission-based pay programs is to devise a system that encourages salespeople to sell items that maximize profits of the firm. The key to this type of plan is to offer enough stability that employees feel satisfied and secure but to pair that salary with a commission that motivates stellar performance. Advantages. Copyright 2023 Leaf Group Ltd. / Leaf Group Media, All Rights Reserved. By accessing and using this page you agree to the Terms and Conditions. In this compensation structure, the employee receives a set hourly rate, plus a percentage of their sales. Commission for independent sales reps can range from 5% to 40%, with the average ranging from 20% to 30% of gross margins or 7% to 15% of gross sales. Per the IRS definition, the contractor is in control of how the work gets done, so there is a lot of freedom. Travel and entertainment costs are a relatively insignificant portion of a salesperson's compensation package. Millennial Accounting primarily serves two nichesreal estate and property managementand is on a mission to serve, inspire, educate, and problem-solve. \text{Bal.} Employees who like working in sales but also in a team environment will be attracted to such compensation, as it takes the pressure off the individuals performance. A sample of 10 NCAA college basketball game scores provided the following data (USA Which of the following statements regarding changes in the reward system is false? Your salespeople are paid on commission. According to the Customer-Product Matrix, sales positions which focus primarily on New Business Development require a greater proportion of __________ in the compensation plan than those sales jobs in the lower left-hand quadrant (Account Management). The Management Dictionary covers over 2000 business concepts from 5 categories. The company sets a minimum and maximum range that can increase, decrease or remain the same, depending on the workers performance. What is the amount of net increase in owners equity during the month? Before making any decisions, consider what type of compensation you can offer potential employees and what the stipulations of that compensation plan are. \text{Symbol} & \text{Stock} & \text{High} & \text{Low} & \text{Last} & \text{Change} & \text{Volume} & \text{High} & \text{Low}\\ \hline The least valued nonfinancial reward by salespeople, other than those nearing retirement, is, According to the text, controls typically used by companies to ensure judicious spending by the Because they are self-employed, contractors are eligible for SEP IRAs. In the same vein, contractors are not subject to withholding and are therefore responsible for their own taxes (the self-employment tax). 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Theres something for every HR professional, whether youR Today, creating a sense of purpose is more critical than ever, and we provide employees the means to be successful and feel valued through empowerment, development, feedb HR Drift The right plan will not only motivate your workforce, but it will also align with your business goals and profitability. Whos using straight hourly compensation? When determining the financial compensation mix, the sales manager must. a large company purchases products from a company and ships them to its affiliates in several cities, with the selling firm's salespeople in these cities required to provide Following are the advantages of the straight commission plan: Pay relates directly to performance and results achieved. Long ago, we wrote about the importance of a compensation plan in an organization. Jobs report: Are small business wages keeping up with inflation? \text{Purdue} & \text{76} & \text{Michigan State} & \text{70} & \text{6}\\ 5. On a straight salary, they will be paid this regardless of how many deals they close. No two compensation plans are alike. If you have less experience or education than other job applicants, taking a salaried . more points. It is critical that companies using this type of system have good metrics in place for tracking sales so they can fairly and accurately calculate commissions. This is a primary method for compensating independent sales agents. They receive fixed sums of money at regular intervals (usually each month). \underline{\underline{2,300}} && \underline{\underline{101,000}} && \underline{\underline{-2,000}} && \underline{\underline{35,000}} && \underline{\underline{-29,000}}\\ \\ \\ \\ 6. Which of the following is not mentioned in the text as a challenge to sales managers attempting to adjust \underline{\underline{14,800}} && \underline{\underline{\ \ \ 2,500}} && \underline{\underline{90,000}} \\ \\ \\ \\ In fields that typically involve commissions, the outside sales exemption and the retail sales exemption may also apply. 1. An incentive pay cannot work in such a case. Part A: Compare the advantages and disadvantages of straight salary and straight commission compensation plans. Under Straight salary method, a salesman is paid remuneration on time basis. A common salary-to-commission ratio is 60:40 (60 percent fixed / 40 percent variable). \text{Kansas} & \text{78} & \text{Colorado} & \text{57} & \text{21}\\ follow-up and service. Some terms may not be used. Let's explain the benefits with a clear example of an unpackaged salary versus an FBT exempt salary package. Weve 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. Each time a commission check is cut you have the satisfaction of knowing that it's due to something positive. Differences between Straight Salary and Straight Commission Method, Business Environment Analysis | Objectives & Process, 5 Important Classification of Business Environment, Localisation of Industries | Meaning, Advantages, Disadvantages, Storage and Warehousing | Meaning, Functions, Advantages, Kinds, Sole Trader Business | Advantages | Disadvantages | Suitability, How do Business Diversification affect performance of, Job Evaluation | Meaning & Definition |, Supervision | Definition | Functions of supervisor, Sole Trader Business | Meaning | Definition, Primary functions of Commercial banks in accepting, RBI | Origin | Objectives | Organization, Concepts of Job Analysis | Meaning, Procedure,, Arguments in favor of Social Responsibility of, Accountlearning | Contents for Management Studies |. What is salary pay? Of course, there are exceptions to every rule. Different companies offer different compensation plans to their sales representatives- the straight salary plan being one of the simplest. 30,000 && 4,000 && 75,000\\ Good salespeople can continue to receive residual commission ever after they leave the company through negotiation. Ultimately, you have to determine the method of pay that your company can best manage and to weigh the advantages and disadvantages of offering a fixed salary. A straight salary plan can be advantageous in certain situations. Hence, this concludes the definition of Straight Salary Plan along with its overview. international stocks and bonds \textbf{\textsf{Cash}} & \bm{+} & \textbf{\textsf{Supplies}} & \bm{+} & \textbf{\textsf{Land}}\\ \end{matrix} a. salaries are a fixed cost to the firm and thus tend to decrease proportionally as sales increase. 5. Your boss thinks you should implement a salary plus commission plan with an incentive ceiling. He holds a Bachelor of Science in marketing from York College of Pennsylvania. In many companies, basics plus bonus-based compensation plans are used as a way to motivate employees. A regular and stable income can do much to develop a loyal and well-satisfied salesman. However, successful salespeople tend to make a lot of money with commission than with a salary plus commission job. But straight commission method distinguishes between efficient and inefficient salesmen. Similar to straight salary, this compensation structure offers employees a guaranteed base income annually, but also offers performance-based income in addition, unlike straight salary. Advantages of straight-salary compensation plans include all of the following except. Straight salary might not be tempting to top-performing sales reps who want to make as much money as they can through hard work and dedication. Design the plan centrally and dictate to local countries. 9. Your paycheck is based on a specific percentage of the sales that you are able to generate. PMR-based compensation often encourages loyalty among employees, but it will also require long-term incentives to retain talent. An advantage of the straight salary plan for compensating salespeople is that it: Provides a direct relationship between sales and expenses. The latest product innovations and business insights from QuickBooks. Straight salary offerings can also be good for attracting new talent thats concerned with stability. If your family does not have a complete home inventory, encourage your parents or other adults with whom you live to create one. Increment is given annually as per the scale of pay, and after a certain number of years of service, salesman is promoted to a higher scale of pay. The advantages of straight salary compensation include which of the following? In most companies, the bonus is usually tied to a budgetor other target that has little significance to the employee. 4. 10. In my experience, both in the corporate (salary) and retail (hourly) space, an employee compensation plan encompasses salary orhourly payand any benefits added to the package. This type of compensation refers to a set hourly amount without additional performance-based income. After initial investigations by Holmes Miller, head of the Operations Department, BIA has narrowed the list to 9 cities. Salary plus commission is a balance of both stability and performance-based income. __________ tends to help give the sales force the needed push to sell complex products or services and can be used to redirect salesperson efforts toward specific product lines; under this plan administrative costs tend to be high. Which of the following statements about a straight salary compensation plan is true: A major limitation of straight salary compensation plans is that financial rewards are not directly tied to any specific aspect of job performance. In order to "weather the storm," the best course of action among those presented below is to: Raise commission rates on higher margin products in all regions in order to boost sales. It has been reviewed & published by the MBA Skool Team. PMR is common in sales and is good for startups with low liquidity. They want to know precisely how much money they're going to make each month and to feel as though that income is dependable. Efficiency: Straight salary method does not distinguish between efficient and inefficient salesmen. Operating costs are minimized during slack selling periods. Straight salary refers to the basic salaries and wage given to the worker. Paycheck calculator for hourly and salary employees. }\\ Because her income is stable, planning and managing her personal finances is easier. Which of the following is not true regarding the design of a global salesforce compensation system? 7. nonfinancial reward: All of the following are steps suggested for facilitating a sense of accomplishment in the salesforce Compensation usually takes the form of monetary payment exchanged for time, labor and expertise. Recommend a plan to the board of directors. If the nonselling administrative duties of the salesperson are of major importance, this compensation Focus on Service A straight salary can work well for sales positions for which a high focus on service is required, such as a salesperson who calls on retail stores on a regular basis to take orders and stock merchandise. Your base pay provides a steady income during seasons where commission may be more difficult to earn. Similar to hourly employees, workers who are paid with this type of compensation are usually governed by the FLSAs nonexempt requirements and earn overtime. Once the person has established himself in the area, the company can switch to performance-based salary. compensation plans are used as a way to motivate employees. Due to the complexity of the plan and its many compliance issues, few companies offer equity or stock in the short-term. These can range from monetary benefits (like extra. The compensation is usually calculated by finding out territory volume. Employers are often hesitant to use this type of compensation, as payroll expenses can be high or unpredictable. Tax and bookkeeping basics you need to run and grow your business. How to start and run a successful e-commerce business. Which of the following accurately describe per diem expense plans? Transcribed image text: QUESTION 17 An advantage of using a straight salary plan to compensate sales employees is that employees can be paid for performing only sales effort. Intuit Inc. does not have any responsibility for updating or revising any information presented herein. For you as a business owner, paying fixed salaries allows you to precisely know how much you're going to pay out each month in labor costs and to budget accordingly. Provide equal pay to all employees at the same level. In this situation, employees only receive their bonus if the district, division, or even continent hits its sales goals. You have a meeting with her to outline the drawback(s) of this type of plan . , which can vary depending on their states minimum wage. Employees need not be scheduled for the same number of hours each week. Assume that the points scored by the winning teams for all NCAA games follow a Corporate industries and IT sales, for example, often use this type of compensation when creating bonus plans. Talent poaching occurs when an employee is recruited away from one company by another. Which one of the following statements regarding global compensation is false? According to a survey of sales executives reported in the text, the most popular sales incentive is. ___________ rewards are those that are given in return for acceptable performance or effort. Intuit Inc. does not warrant that the material contained herein will continue to be accurate nor that it is completely free of errors when published. You think you have finally selected a compensation method and wage level that meets your boss's requirements. 1. This type of compensation is often used for entry-level jobs or employees working in restaurants, retail, or the service industry, usually in non-management roles. Salaried employees receive an equal portion of their annual compensation every week. It tends to only attract less experienced staff who want a "safe" pay structure. The salespersons perfect plan, a residual commission compensation (RCC) plan pays employees a commission as long as the accounts are producing revenue. This $35,000 level is called: Your customer's buying cycle is approximately 2 years and your reps need to invest significant amounts of time understanding their customers. -7,200\\ One regulation is employers are required topay overtimeat a rate of time and a half if an employee works over 40 hours in one week (this is a U.S. standard and differs by country). Disadvantages of straight hourly compensation, Whos using hourly plus commission compensation, Benefits of hourly plus commission compensation, Disadvantages of hourly plus commission compensation, Disadvantages of commission-only compensation, Whos using territory volume compensation, Benefits of territory volume compensation, Disadvantages of territory volume compensation, 7. Once the person has established himself in the area, the company can switch to performance-based salary. This is one of the most reliable types of compensation plans. \\ Q&A With Jane key activities within the company, he/she is offering this non-financial reward: A firm offering a college tuition reimbursement program has made a commitment to providing this salesperson's total pay that is salary should be relatively high? \text{ESI} & \text{ITT Ed Services} & \text{7.95} & \text{1.93} & \text{2.95} & \text{-0.03} & \text{140,466} & \text{3.11} & \text{2.92}\\ \hline While in certain compensation plans, the salespersons receive benefits on accomplishment for specific tasks (e.g. Last week's MPG for 35 student vehicles (xmin=9.4,xmax=38.7)\left(x_{\min }=9.4, x_{\max }=38.7\right)(xmin=9.4,xmax=38.7). The earnings of a person who is working as an independent contractor are subject to self-employment tax.. Such a plan is quite common in the services industry as well as in the industrial goods sector. When it comes to employee compensation, there isnt a one-size-fits-all solution. Katey Maddux is a paddle boarder, music lover, Zumba instructor, and Founder and CEO of. Some of this is likely due to a generational shift in what employees are really looking for. This type of compensation is well-suited for employees who work in a team-based culture. Business is going well for Park N Fly , the company that operates remote parking lots near major airports. Companies that pay their employees using PMR-based compensation will want to offer additional benefits to make up for their potentially low liquidity. Benefit packages amount to a negligible portion of the cost of keeping a salesperson in the field. ii) There will be no surprise of payroll expenses. Employees earning salary plus commission will have higher income tax rates than a self-employed agent. It tends to eliminate or reduce high-pressure selling, i.e., pushing items which are not needed by the customers. For example, since the pay of salaried salespeople is not directly related to performance, some of them may not make all of their calls or give the firm "a full day's work for a day's pay." Motivated salespeople may search for this type of income, knowing that if they work really hard early on, they can work less later and still make the same income. However, the$5 million that the business needs for growth cannot be raised within the family. When more than one individual works together to make a sale, the selling process is described as: You have just been promoted to the position of sales manager. The workplace catchphrase you need to know. Person B works for an NFP and is part of a salary packaging program. $$ Straight salary plan can help promote a sense of equality among sales people who work as teams or small groups, for everyone is paid equally and the contribution of each team member is also expected to be equal. . 2. Due to the complexity and compliance issues involved, very few companies offer equity or stock. Katey Maddux is a paddle boarder, music lover, Zumba instructor, and Founder and CEO ofMillennial Accounting, LLC in Miami, Florida. Overall compensation and rewards increase with the use of team selling. The straight salary plan proves advantageous to both the salesperson and the management. Whos using straight salary compensation? Straight Salary Straight salary sales compensation plans aren't very common, but they do have a place in some organizations. the working capital requirements are lessened with the straight-salary compensation plan. Such a plan is quite common in the services industry as well as in the industrial goods sector. \\ In your job analysis of the salesperson's activities, you discover that a significant level of activity of a successful salesperson includes taking orders for inventory replenishment, equipment installation and maintenance, and shelf-management programs. You are the sales manager of a large, multi-product company. Salespeople may also be paid on a straight salary basis in which there is no opportunity to earn incentives. This type of environment tends to foster a sense of camaraderie and can be good for company culture and morale if done well. a. Lavish formal recognition programs can provide all of the following benefits to a salesforce except. The goal of the compensation package is to reward employees for their efforts without putting the firm's profitability in jeopardy. Nevertheless, salary compensation plans are appropriate in a number of situations. Straight salary method of remuneration is found suitable and is usually adopted under the following circumstances: 1. finds the job to be inherently rewarding. When there are considerable seasonal variations in the sales made by the salesmen. Further, the straight commission motivates poor performers to become more productive since it rewards good performers (Johnston and Marshall, p. 329). MBA Skool is a Knowledge Resource for Management Students, Aspirants & Professionals. . One thing to keep in mind: If the commission rates are too low, they may seem disingenuous and could decrease morale or cause bitterness among employees. \text{T} & \text{AT&T} & \text{37.50} & \text{30.97} & \text{37.12} & \text{-0.01} & \text{22,009,008} & \text{37.50} & \text{37.06}\\ \hline Plan A is to borrow at 6%. This content is for information purposes only and should not be considered legal, accounting, or tax advice, or a substitute for obtaining such advice specific to your business. . Sales jobs consisting primarily of Account Management involve a greater account servicing component and are therefore better suited to a primarily __________. \end{array} Commission-only compensation can be valuable for employers because top performers get the most money. salesforce include all of the following except. 2. This is a very important distinction, as it determines who pays the taxes (the worker, not the employer) and to what standard an employer is held. Base salary + sales commission-based pay. One regulation is employers are required to, at a rate of time and a half if an employee works over 40 hours in one week (this is a U.S. standard and differs by country). 3. You can tweak the budget annually by deciding whether the business has flourished enough to offer merit raises. costing little and reinforcing desirable behavior immediately after it occurs. 4. Here Are the Pros of Straight Commission. Which of the following is not an advantage of the commission compensation plan? Control over Salesmen: Straight salary plan gives the management sufficient control over the salesmen. The compensation plan in which virtually every type of sales activity is rewarded, is called a: Your boss thinks you should implement a salary plus commission plan with an incentive ceiling. 2. One benefit, from the employers perspective, is the company only pays commissions when the top line improves, so its beneficial from a profitability standpoint. The board of directors of this family-owned company believes that Park N Fly could earn an additional $1.5 million income before interest and taxes by expanding into new markets. Service focus: Such a plan works well for sales positions where pushing a product may not be necessary and customer service is of utmost importance. Celebrating the stories and successes of real small business owners. \bm{=}\\ \bm{=} \\ \\ \\ \\ \\ \\ \\ \\ \\ \\ \\ \\ \underline{\ \ \ \ \ \ \ \ \ \ \ \ \ \ } && \underline{\ \ \ \ \ \ \ \ \ \ \ \ \ \ \ \ } && \underline{\ \ \ \ \ \ \ \ \ \ \ \ \ \ } && \underline{\ \ \ \ \ \ \ \ \ \ \ \ \ \ } && \underline{-3,000}\\ The location selection is critical, and with the potential for 4,000 new skilled blue-collar jobs on the line, virtually every city in western Europe is actively bidding for BIA's business. As a result, salaried workers often dont track hours worked. In these situations, it can be difficult to determine who contributed most to attaining the sale, making a commission plan difficult to administer. has very specific requirements for classifying and paying employees. Which of the following is not a guideline for optimizing the use of sales contests? Although many customers expect after-sale service on repair parts and delivery, compensation programs based on straight salary are not likely to encourage these important follow-up activities. The company uses a combination of brokers and independent sales reps. What kind of a compensation program would they most likely to use for their salespeople? Bal.1.2.3.4.5.6.7.Bal.AssetsCash+Supplies+Land30,0004,00075,000+35,00026,00015,000+15,000+1,5002,0007,2003,00014,8002,50090,000==Liabilities+OwnersEquityAccountsMurrayKiser,MurrayKiser,FeesPayable+CapitalDrawing+EarnedExpenses8,000101,00035,00026,000+1,5002,0007,2003,0002,300101,0002,00035,00029,000\begin{array}{lccl} Provide an opinion of which type of compensation plan you would prefer as a professional salesperson. Compensation rewards might include all of the following except. And because there is no financial security that kicks in if sales arent made, those who dont earn enough leave or burn out quickly. b. Ages of 50 airplane passengers (xmin=12,xmax=85)\left(x_{\min }=12, x_{\max }=85\right)(xmin=12,xmax=85). Expert Answer. The major disadvantage is that the salespersons may not feel motivated and would only complete the minimum requirements. the following except. The advantages of straight salary compensation include which of the following? But straight commission method provides sufficient incentive to the salesmen to do hard work.