Compensation Plans - Commission or Flat Rate?

In episode EP521 of Keep What You Earn, Shannon delves into the critical factors to consider when it comes to compensation planning for businesses. She emphasizes the significance of understanding cash flow, structuring compensation plans, and the potential benefits of utilizing a mixed model of compensation.

Shannon begins by highlighting the significant impact of labor as a major expense for service-based businesses and agencies. She focuses on the substantial investment of time and money that goes into hiring and training employees. Shannon underlines the necessity of a strategic approach to compensation planning and how it can influence the success and growth of a company.

One of the key elements Shannon highlights is the essential role of a cash flow forecast in compensation planning. She explains how this tool helps businesses plot and project when it makes sense to hire new personnel. By carefully analyzing the timing and impact of hiring on cash balances, businesses can mitigate potential cash flow issues arising from the onboarding and training period. This underscores the importance of aligning hiring decisions with the company's financial capabilities.

Shannon differentiates the role of a CFO from a traditional CPA, emphasizing the future-focused projection aspect of CFO responsibilities. She stresses the significance of conducting thorough market research to understand and set competitive compensation rates. Additionally, Shannon emphasizes the need to tailor compensation strategies to individual roles, market demands, and the specific skills and expectations of potential hires.

A prominent aspect of compensation planning that Shannon elaborates on is the consideration of a mixed model of compensation. She delves into the concept of connecting an employee's compensation directly to revenue generation, highlighting the potential benefits of utilizing a commission model for roles that significantly impact a company's revenue.

Shannon shares insights into her own experience, emphasizing the importance of aligning compensation metrics with an employee's level of control over the associated outcomes. She provides examples, emphasizing how commission-based structures can motivate employees to drive revenue and maintain a constant margin. Suggesting a base plus commission approach, Shannon illustrates how this strategy can align employee incentives with the company's growth objectives.

The podcast outlines the potential drawbacks of offering a percentage of revenue or profit to employees who have limited control over these metrics, and Shannon shares a personal anecdote to underscore the frustration that may arise from such compensation models.

Shannon further encourages businesses to consider alternative compensation models such as flat rates, and she outlines the benefits of moving away from hourly billing, particularly in service-based businesses, to create predictability and fairness for both parties.

The episode concludes by stressing the need for businesses to align compensation strategies with their cash flow capabilities, market competitiveness, and internal profit margins. Shannon highlights that finding this balance is essential to attracting and retaining top talent while maintaining financial sustainability.

In summary, Shannon's insights underscore the importance of strategic compensation planning, emphasizing the need for businesses to align their compensation structures with their financial capabilities, market demands, and the specific roles and responsibilities of their employees. By carefully considering these factors, businesses can create a compensation strategy that motivates employees, drives revenue, and contributes to the overall growth and success of the company.

What you'll hear in this episode:

04:49 Structure compensation based on direct revenue impact.
07:51 Hybrid base plus commission model for sales.
13:34 Commission-based work can simplify implementation. Flat rate or unit-based payment may be easier. Triple your time estimate for others.
17:04 Move away from hourly billing to a flat rate.

If you like this episode, check out:

Is Hiring Your Family the Right Thing to Do?

Mastering Recruitment: Marketing Strategies with Shannon
How My Dad's Advice Shaped My Career and Business Success

Want to learn more so you can earn more?

Tax Deduction Guide: https://www.keepwhatyouearn.com/tax-deduction-guide

Visit keepwhatyouearn.com to dive deeper on our episodes

Visit keepwhatyouearncfo.com to work with Shannon and her team

Watch this episode and more here: https://www.youtube.com/channel/UCMlIuZsrllp1Uc_MlhriLvQ

Connect with Shannon on IG: https://www.instagram.com/shannonkweinstein/

The information contained in this podcast is intended for educational purposes only and is not individual tax advice. Please consult a qualified professional before implementing anything you learn.