Is there a difference between merit pay systems and sales compensation?

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M.P. Ossa eNotes educator| Certified Educator

A merit pay system is also known as an incentive plan, or a incentive compensation. The purpose of this plan is to give all employees an equal chance to perform their duties, however, special consideration is given to those employees who out-perform the others in hopes that peers will follow suit and perform optimally.

These incentive plans do not occur at all times. They are only open to employees when funding becomes available for that purpose. For example, a department store may hold a merit-based pay plan for all employees who are able to sell the highest amount of shoes of a specific brand. The assumption is that the brand funded the department store with extra funds to spike their sales, and to compensate those employees who made the sales possible.

Meanwhile, sales compensation is the rate that a salesperson will be paid based upon the number of sales, or the total amount of the final sales price. Some salespersons are salaried, for which their compensation comes directly from the company. However, in most circumstances salespersons are givenĀ  a commission, which is a specific percentage off the total sales price. The purpose is to motivate salespeople to generate more sales so that they feel compelled to earn higher commissions.

A typical commission runs anywhere between 10% when the sales are based on higher prices, while smaller sales can earn up to 50% depending on the company. You can find examples of sales compensation in businesses from the DSA, which is the Direct Sales Association. This organization propels home-based sales businesses in companies such as Scentsy, Thirty-One and other companies that invite people to sell their products for a commission. You can see the same dynamics in other well-known companies such as Avon, Mary Kay, and in the car sales industry as well.