Combination Salary-and-Incentive Plan

Salary plus commission: Most sales compensation plans are combinations of salary and commission plans. Most developed as attempts to capture the advantages and offset the, disadvantages of both the salary and commission systems. Where the straight-salary method is used, the sales executive lacks a financial means for stimulating the sales force to greater effort. Where the straight commission system is used, the executive has weak financial control over no selling activities. By a judicious blending of the two basic plans, management seeks both control and motivation. Actual results depend upon management’s skills in designing and administering the plan. Unless there is skillful adjustment of salary and commission, weaknesses of both basic systems reappear.

Strengths and weaknesses of combination plans: A well- designed and administered ‘combination plan provides significant benefits. Sales personnel have both the security of stable incomes and the stimulus of direct financial incentive. Management has both financial control over sales activities and the apparatus to motivate sales efforts. Selling costs are composed of fixed and variable elements; thus, greater flexibility for adjustment to changing conditions exists than under the commission method. Nevertheless, selling costs fluctuate some with the volume of business. There are beneficial effects upon sales force morale. Disagreements on pay increases and territorial changes are less violent than under a straight-commission plan. Further, if salespeople realize that the company shares their financial risks, a cooperative spirit develops between them and the company.

The combination plan, however, has disadvantages. Clerical costs are higher than for either a salary or a commission system. More records are maintained and in greater detail. There are risks that the plan will become complicated and that sales personnel will not understand it.

Sometimes a company seeking both to provide adequate salaries and to keep selling costs down uses commission rates so low that the incentive feature is insufficient to elicit needed sales effort But, if the incentive portion is increased, salespeople may neglect activities for which they are not directly paid. Therefore, the ratio that the base salary and the incentive portion bears to the total compensation is critical. As mentioned earlier, most companies split the fixed and variable elements on a 60:40 to an 80:20 basis.