Compensating SalespeopleCompensation Methods

C. Combination Plans– Most common today1. Salary + Commission

• base for non-selling activities• commission for incentive to push complex industrial

accounts

2. Salary + Bonus• base for non-selling activities• bonus to reward completion of special tasks in consumer

products selling

3. Salary + Commission + Bonus• rewards every activity, BUT costly to administer

Compensating Salespeople

Compensation MethodsB. Straight Commission

– Maximum incentive

– All variable cost

– low costs when sales/salesperson is low

– hard to control reps

– low loyalty

– pay low when business is weak

– used in small firms, door-to-door, retail sales, insurance, stock brokerage, printing

Compensating Salespeople

Components Needs

* Motivate effort on non-selling activities

Salary * Adjust for differences in territory potential

* Reward experience and competence

Commissions * Motivate a high level of selling effort

* Encourage sales success

Compensating Salespeople

Components Needs

* Direct effort toward strategic Incentive objectives

Payments * Provide additional rewards for top (Bonus) performers

* Encourage sales success

Sales * Stimulate additional effort targeted at Contests specific short-term objectives

Personal * Satisfy salespeople’s security needsBenefits * Match competitive offers

Compensating SalespeopleExpense Accounts & Benefits

• Objective -- enough, but not too much.

• Types of plans– Unlimited

• Low supervision

• easy to abuse

– Per diem• controls costs but may restrict coverage of distant accounts

• needs constant adjusting

– Limited• can lead to wasted time on “cheat sheets”

• limits for each category

SalarySalary

CommissionsCommissions

Incentivepayments(bonus)

Incentivepayments(bonus)

Salescontests

Salescontests

Personal benefits

Personal benefits

•Motivate effort on non-selling activities•Adjust for differences in territorial potential•Reward experience and competence

•Motivate effort on non-selling activities•Adjust for differences in territorial potential•Reward experience and competence

•Motivate a high level of selling effort•Encourage sales success

•Motivate a high level of selling effort•Encourage sales success

•Direct effort toward strategic objectives•Provide additional rewards for top performers•Encourage sales success

•Direct effort toward strategic objectives•Provide additional rewards for top performers•Encourage sales success

•Stimulate additional effort targeted at specific short-term objectives

•Stimulate additional effort targeted at specific short-term objectives

•Satisfy salespeople’s security needs•Match competitive offers

•Satisfy salespeople’s security needs•Match competitive offers

COMPONENTS NEEDS

Source: Adapted from Sales Compensation Concepts and Trends (New York: Alexander Group, 1988).

Figure 14-2: Comparing Salary and Commission Plans for Field Sales Representatives

0 100 200 300 400 500

10,000

20,000

30,000

40,000

Straight salary

10% Commission

Tot

al c

ost p

er p

erso

n(t

hous

ands

$)

Sales Per Person in Thousands

Compensating Salespeople

In-Class Exercises 14-1

DEC Joins the Rest of the World

1. What is the purpose of adding an incentive

portion to sales compensation?

2. Having decided to incorporate incentive pay,

what other compensation decisions must be

made to complete the sales compensation

program?

Compensating Salespeople

In-Class Exercises 14-1DEC Joins the Rest of the World

3.How can the compensation plan be adjusted

for different types of selling situations

4. How will other management functions change

as a result of the compensation change?

Compensating Salespeople

In-Class Exercises 14-1

DEC Joins the Rest of the World

5. What are the trade-offs between alternative compensation plans?

6. How will the compensation changes affect:

* Recruiting * Setting Quotas

* Sales Territories * Organization

* Performance appraisal

Compensating Salespeople

In-Class Exercises 14-1Results: DEC Joins the Rest of the World

• 40% incentive for salespeople selling to resellers and VARS because of the large volume involved and the emphasis on volume rather than consultative selling.

• 20% incentive for the regular sales force

• 10% incentive for those salespeople assigned to one or a few large accounts with longer selling cycles and performing much more of a servicing and upgrading function.

Compensating SalespeopleOther Considerations

• Trend toward TEAM selling– difficult to reward team members for group effort– usually emphasize shared commissions / bonuses

• Optimum Pay Plans– Gross margin commissions

• Salesperson & firm attempt to maximize same $$• rasies wages for salespeople often at expense of

company profits• tends to increase industry price competition• tends to raise price elasticities in the long run

Compensating Salespeople

Selecting Benefits

• Salespeople expect cars

• Insurance and Travel are very common

• Some plans offer a choice of alternatives

Compensating Salespeople

Setting Pay Levels• At parity, above, or below competition

• Some salespeople paid too much to keep peace

• Example Public Service of New Mexico (14-4b)– paid better than average before deregulation– With deregulation more competition

• need to reduce & control salary costs

• employees made contributions to health plans

• fewer pay classifications, flexible benefits,

• pay based on individual performance & responsiveness

• Sales managers use signing bonuses -- BUT not adjust pay

Compensating Salespeople

Compensation MethodsA. Straight Salary

– Control wage levels

– easier to control rep’s activities

– increases loyalty to firm

– fails to provide incentives

– high costs when sales are low

– most common in complex business selling

Table 14-1 Use of Compensation Plans

Straight Salary 7Straight Commission 10Salary Plus Bonus 34Salary Plus Commission 21Salary Plus Bonus Plus Commission 24Commission Plus bonus 4

Total 100%

Percentage ofCompanies Using

Compensating Salespeople

Gross Margin Commission Problems

Marketing Plan

DiscountedPrice

PercentageDecline

Selling Price $100 $92Cost of Goods Sold 80 80Gross Margin 20 12GM% Commission 20% 20%$ Commission $ 4 $ 2.40 40%Contribution 16 12Overhead Costs 10 10Net Profit $ 6 $ 2 66%

Table 14-3 Compensation Levels for Firms using Salary Plus Incentives, 1996

Total

Salary Incentive Compensation

Position ($000) ($000) ($000)

Top Sales Executive $91.2 $31.5 $122.7

Regional Sales Manager 69.0 23.3 92.3

National Account Manager 66.9 18.7 85.6

District Sales Manager 61.8 22.0 83.7

Key Account Rep 54.6 16.6 71.2

Senior Sales Rep 45.1 23.2 68.3

Intermediate Rep 34.6 16.1 50.7

Entry Level Rep 28.8 10.9 39.8

Source: Sales Force Compensation Survey (Chicago: Dartnell Corporation, 1996), p. 28.

Table 14-2 Comparing Gross Margin Commissions on Two Orders

Percentage Size Gross Percentage CommissionOrder Gross Margin of Margin to Commission on Paid toNumber on Each Order Order Company Gross Margin Salesperson

1 10 $1,000,000 $100,000 15 $15,000 2 20 $500,000 $100,000 15 $15,000