MKTG473 Ch. 9: Sales Force Compensation

Steps in designing a sales compensation plan

(1) Review job descriptions (2) Identify plan's objectives (3) Establish level of compensation (4) Develop the method of compensation (5) Decide on indirect monetary compensation (6) Pretest and install plan

(3) Establish Methods of compensation - Steps in designing a sales compensation plan

(1) Salaries (2) Commissions (3) Bonuses (4) Indirect Monetary benefits (5) Expenses

Combination plans

(1) Salary plus commission (2) Salary plus bonus (3) Salary plus commission and bonus *incentive portion should be larger when a company is trying to increase its sales or gross margin; salary element should be larger when management wants to emphasize customer servicing, a fully balanced selling effort, or team selling*

Salesperson's Perspective

(1) Secure Income and Incentive Income (2) Simplicity (3) Fairness (4) Choice

Indirect Monetary Compensation

(1) non-financial compensation (2) indirect monetary benefit

Basic types of compensation plan

(1) straight salary (2) straight commission (3) combination of compensation elements

Financial Compensation

- Direct Payment of Money - Indirect Payment: paid vacations or company-financed insurance programs

Proper treatment of customers - compensation plan characteristics

- a seller's ability to maintain strong, long-term relationships with customers depends largely on providing customer service that results in a high level of customer satisfaction - sales people should be motivated by their compensation plans to maintain those relationships

(3) Salary plus commission and bonus - combination plans

- allows companies to have a certain degree of control and to provide an incentive as well as offer a bonus for the accomplishment of a specific goal

motivate salespeople - compensation plan characteristics

- companies want to encourage salespeople to reach and exceed their goals. Thus, compensation plans are designed to motivate salespeople to perform.

(6) Install, Monitor, and Evaluate the plan - Steps in designing a sales compensation plan

- compensation plan may be installed throughout the entire sales force, or it may be tested in only one or two territories - important to precisely monitor each salesperson's progress on a continuing basis - evaluate the plan frequently to prevent it from being outmoded

(2) Identify specific objectives - Steps in designing a sales compensation plan

- decide specifically on what a sales compensation plan is supposed to accomplish Ex: - increase profits by 10% - increase sales volume of a certain class of products by 10% - Increase volume at existing accounts - Improve customer satisfaction - stimulate missionary work - develop a new territory Compensation should be based primarily on factors that: (1) salespeople can control; and (2) the company can measure *firm should try to base most of each salesperson's compensation on factors over which the rep has a maximum of control*

attract and retain competent salespeople - compensation plan characteristics

- helps a company build the quality of its sales force because it assists in attracting high-caliber reps and helps to keep desirable people

(4) Pretest the compensation plan - Steps in designing a sales compensation plan

- involves determining how the proposed plan would have operated if it had been in effect during the previous few years - management can estimate what the company's cost would have been and what income would have been earned by the salespeople *commission features of a plan are easier to pretest than the salary elements*

(5) Introduce the plan to the sales force - Steps in designing a sales compensation plan

- management should develop and introduce a new plan very carefully - managers should announce the plan well in advance of when it is to take effect

Characteristics of a good sales compensation plan

- motivate salespeople - correlate efforts and results with rewards - control salespeople's activities - ensure proper treatment of customers - attract and keep competent salespeople - be economical yet competitive - be flexible yet stable - provide secure and incentive income - be simple and fair - provide choice

(3) Fairness - Salesperson's Perspective

- must treat all salespeople fairly - strive to base compensation plan as much as possible on measurable factors that are controllable by the salesforce

Non-financial compensation

- opportunity to advance in the job - recognition inside and outside the firm - enjoyment of the job

(2) Simplicity - Salesperson's Perspective

- plan should be simple enough for salespeople to understand readily; they should be able to figure out what their incomes will be

(1) Review job descriptions - Steps in designing a sales compensation plan

- review the detailed job descriptions to disclose the exact nature, scope, and probable difficulty of each job

(1) Secure Income and Incentive Income - Salesperson's Perspective

- sales reps should not have to worry about how meet living expenses; however, steady income should not be so high that it lessens the desire for incentive pay - good pay plan should furnish an incentive to elicit the above-minimum performance

(4) Choice - Salesperson's Perspective

- salespeople want to have choice in how they are compensated

control salespeople's activities - compensation plan characteristics

- should act as an unseen supervisor of a sales force by enabling management to control and direct the sales reps' activities - should motivate the sales force to ensure a fully balanced selling effort

economical yet competitive - compensation plan characteristics

- should be economical to administer - a firm whose compensation expenses are disproportional to its revenues will have to increase the price of its product or suffer decreased profit margins

flexible yet stable - compensation plan characteristics

- should be sufficiently flexible to meet the needs of individual territories, products, and salespeople - the plan should contain features that enable the company to meet changing conditions without having to change the basic plan

correlate performance with rewards - compensation plan characteristics

- there is often a weak correlation between pay and performance - in most cases, rewards are given for results Two main problems: - a person can work very hard but get few results-and therefore little reward - many companies do not differentiate the top performers enough from the average performers

(1) Salary plus commission - combination plans

- used more than any other compensation method - provides benefits of a fixed salary and flexibility features of a commission

(2) Salary plus bonus - combination plans

- used when a company wants to control its sales force at all times, while still offering some incentive - great for encouraging some activity for a short time

salary

a direct monetary reward paid for performing certain duties over a *period of time* Strengths: - gives salesperson a considerable degree of security - gives salesperson stability of earnings - lower turnover rates - management can direct the salesforce into various activities more easily under a salary plan than under any other method of compensation - salespeople can give proper concern to customer interests Limitations: - provides no direct incentive to the sales force - bases of adjustment are not sound - fixed cost (if sales are down, paying salaries can be a burden) *a salary plan is best used when management: (1) wants a well-balanced sales job; and (2) can supervise and motivate the reps properly*

(1) straight salary - type of compensation plan

a fixed element related to a unit of time during which the salesperson is working

bonus

a lump-sum payment for an above-normal performance - must always be combined with salary or commission

commission

a regular payment for the performance of a *unit of work* Consist of three items: (1) a *base* on which performance is measured and payment is made (sales in dollars or units of the product) (2) a *rate*, which is the amount paid for each unit of accomplishment (3) a *starting point* for the commission payments Strengths: - gives salesforce huge incentive (no ceiling on commission) - strong motivational factor to get reps to work hard - weeds out bad salespeople - acts as a direct expense (paid only when a sale is made) Disadvantages: - salespeople are more interested in selling merchandise, than in the relationship with the customer - reps may concentrate on easy to sell product and ignore slow moving ones *Straight commission is best when: - a company is in a weak financial position and therefore selling costs must be related directly to sales - salespeople need great incentive to achieve adequate sales - very little missionary work is needed - developing long-term relationships with customers is not required - a firm uses part-time salespeople or independent contractors such as manufacturers' agents* *When a firm uses the commission method, it must make decisions about commission bases, commission rates, split commissions, and limits on earnings*

(2) straight commission - type of compensation plan

a variable element related to the performance of a specific unit of work

indirect monetary benefit (fringe benefits)

an item that has the same effect as money, though payment is less direct than a salary or commission - company pays medical insurance, life insurance, disability insurance, as well as looks into a retirement plan

non-financial compensation

compensation in the form of honors, recognition, and opportunities for promotion - help salespeople develop a sense of self-worth and a feeling of belonging to a group

Commission rates

the amount paid for each unit of accomplishment Rates affected by factors such as: (1) the level of income desired for the salesforce (2) the profitability of given products (3) difficulty in selling a product (4) classes of customers *higher commission rates are paid on the high-margin products to encourage their sales; low rates are paid on sales of low-margin products* *progressive rate*: commission rate that increases as volume increases *regressive rate*: decreases as the volume increases Ex: 7% on first $20,000 in sales, 5% on the next $20,000, 3% on all sales over $40,000

method of compensation

the plan by which the reps earn or reach the intended level

Level of earnings

the total dollar income paid to each sales representative for a given period of time

Commission bases

what measurement of performance to use in figuring out payment - most related to sales volume or gross margin