Finally, the last method is a combination of salary and commission. This is probably the most used option in compensation plans because it takes advantage of the strengths of both approaches, which help to offset the weaknesses. In this method, part of a person's total compensation is paid as salary. The rest of the compensation is paid as either a commission, or a bonus, or in some cases, a combination of commission and bonus. Now, what did I mean when I just said, helps the strengths and weaknesses, and helps to offset each other. Well, kind of in a top line way, salaries are very appealing to salespeople because it's sort of a guaranteed income, it provides a sense of security which is very important to people. On the other hand, incentive compensation ties a salesperson's performance to compensation. So, it's kind of when the salesperson does well, they're paid well, when they don't do so well, they're not paid as much, and that's kind of very appealing from a firm perspective. So, it didn't take too long for people to realize that you get the best of both worlds when you use these combination approach. Now as a general rule of thumb, about 60 percent of a person's compensation is done as salary, and the remainder is considered incentive compensation in the form of commissions, or bonuses, or both. With that said, a big decision is deciding on the exact ratio of salary to incentive compensation. The salary plus commission is the most popular combination approach. In one hypothetical example, one company offered a salary pegged at about 60 percent of the planned total compensation, and then set up a commission system that allowed salespeople to earn between 40 percent to 200 percent of planned compensation. The idea is that if a salesperson performed as expected, they would earn 100 percent of the planned compensation. Those salespeople who did not perform as expected would earn less, as well as those who perform well would be rewarded equally well. The salary plus bonus works along the same way, except the bonus is usually tied to some activity and is a lump sum payment. Like commissions, bonuses are tied to performance. If a goal isn't achieved, the salesperson isn't paid. Bonuses can be a powerful motivator to get the salesperson to achieve a goal. Some bonuses can be very short-term, like achieving a sales goal for a given month. Other bonuses cover longer periods of time. In some cases, a year. Both are used, sometimes in combination with each other. A general rule of thumb, commissions are best when a company is focused on maximizing revenue. Bonuses are useful in slow growth industries when the focus is not financial, such as improving customer satisfaction. Finally, a salary, plus commission, plus bonus, uses all three elements as compensation. For example, a company may pay a salary plus a commission based on gross sales dollars. They may also offer a quarterly bonus based on customer satisfaction.
