For all positions that are responsible for sales and profits it is better to provide a base salary and a commission, an incentive or a bonus that is related to the performance of those people that are responsible for generating it. By instituting such a plan one can allow a person to in effect give themselves a raise based on their results, instead of bumping up their base and reducing their incentive to strive. By producing more sales, margin $, gross profit or bottom line income one can create a win-win comp plan for both the employee and the company. When performance improves all participate in the gain, when it decline all are likewise negatively impacted.
We can divide most all positions as either a) sales or profit producing, or b) required and necessary without having an easily measurable impact on the company’s performance. The former would include positions in sales, most managers and directors, CEO’s, order fulfillment and scheduling, etc. In the later group would be administrative assistants, receptionists, clerical positions and other staff positions. It is not that these jobs don’t impact profit, as many do, but it is usually difficult to measure their profit impact and it is therefore easier to provide a competitive base salary for these jobs and let them share in any company wide bonus that may exist.
For those positions that impact results one should structure a comp plan that reflects this. Sales reps are the easiest to do. For example, If a rep has a base salary of $50,000/year and brings in sales of $1 million at a margin rate (gross profit) of 25%, this represents $250,000 in margin that they brought in. One can create sliding commission scales so that the best producer gets a higher payout rate in order to retain them then a marginal producer that one does not have to compensate as highly in order to retain. For example, one could pay a 4% commission rate of the first $250,000, 6% on the next $250,000, pay 8% on the next $250,000 and 10% on $1 million and above. For a person with $500,000 in margin this would amount to a total compensation of $75,000 and a contribution of $425,000 (or a 5.7:1 ratio) for the company and for a million $ producer this would be $95,000 and a contribution of $905,000 for the company (or a 9.5:1 ratio). These values are before considering benefits, other costs and the fair market value for such people, but the concept is clear, that one can create a win-win comp plan that essentially lets a person give themselves a raise and act as a retention device at the same time.
For managers, their profit impact would be measured for them by their team’s performance. This process is similar to that above and can be refined by trial and error until the results are win-win for everyone and the manager, their staff and the company prosper.
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Optimal Management is the premier management consulting company to the staffing industry. We act as mentors to owners and managers to maximize their sales, profits and value of their company. We become an extension of our clients operations and are there for all of their staffing and business needs, from sales, marketing and compensation plans, to finance, M&A, general management and everything in between.