SUPERVISION COMPENSATION OF SALES FORCE...Sales and growth goals are reached at low cost, and...

05. DIRECTING AND CONTROLLING THE SALES FORCE

SUPERVISION Management controls sales personnel through supervision. The aim is to improve their job performances. The executive with supervisory responsibilities establishes working relations with sales personnel for purposes of observing, evaluating, and reporting on performance; correcting deficiencies, clarifying responsibilities and duties, providing motivation; informing sales personnel of changes in company policy; helping to solve business and personal problems; and continuing sales training. Depending upon the company and its organization, sales personnel may be supervised by home office personnel, branch or district managers, or field sales supervisors.

COMPENSATION OF SALES FORCE The sales performance of an organization depends largely on the efficiency of the salespeople. Salespeople tend to increase and manage their performance by linking it to the compensation they receive from the sales organization. Money has limited potential as a motivator. In Maslow's hierarchy, money loses motivating power once an individual satisfies physiological needs and most safety and security needs, retaining only declining residual motivating power in fulfilling esteem and self-actualization needs. In Herzberg's motivation-hygiene model, money is a hygiene factor, contributing to the prevention of job dissatisfaction but otherwise not motivating at all. Sales compensation plans are aids to, rather than substitutes for, effective motivation. A sound compensation plan will motivate salespeople to enhance their performance and achieve higher targets for the organization. A properly designed sales compensation plan fits a company's special needs and problems, and from it flows attractive returns for both the company and its sales personnel. Sales and growth goals are reached at low cost, and profits are satisfactory. A sales compensation plan, properly designed, has three motivational roles: (1) provide a living wage, (2) adjust pay levels to performance, thereby relating job performance and rewards (in line with expectancy motivation theory), and (3) provide a mechanism for demonstrating the congruency between attaining company goals and individual goals (also in line with expectancy theory). In established companies it is rarely necessary to design new sales compensation plans, and sales executives concern themselves mainly with revising plans already in effect. Major changes in the compensation plan are rare. There are two situations where total overhauling of compensation plans are in order. One is the company whose sales force already has low morale, perhaps because of the current compensation plan. If the plan is at the root of the morale problem, drastic change is appropriate. A second situation calling for a complete revamping of the sales compensation plan occurs when a company is anticipating the cultivation of new and different markets.

Objectives of a Good Sales Compensation Plan Sales organizations design compensation plans with multiple objectives. One of the key objectives is to attract quality salespeople. It will also help to improve the productivity level of the existing salespeople in the organization. It also helps in optimizing the sales effort by the salespeople and maximizes the sales, reducing the sales expenses and also the production cost. A good compensation plan helps in retaining quality manpower and reducing the attrition rate in the organization. A good compensation plan also establishes good rapport between the sales force and the sales supervisors/managers in the company.

Characteristics or Requirements of an Effective Compensation Plan A good sales compensation plan meets several requirements. The reward system should address the short-term as well as the long-term issues of the salesperson. While survival is a short-term issue for the salesperson, recognition and growth in the company and career are the long-term issues. An effective compensation plan provides a living wage, preferably in the form of a secure income. The reward system should have future orientation. The remuneration should take care of the salesperson's housing need, dearness allowance, conveyance, pension, provident fund, and medical needs. The plan fits with the rest of the motivational program-it does not conflict with other motivational factors, such as the intangible feeling of belonging to the sales team. The plan is fair - it does not penalize sales personnel because of factors beyond their control-within the limits of seniority and other special cir-cumstances, sales personnel receive equal pay for equal performance. It is easy for sales personnel to understand-they are able to calculate their own earnings. The plan adjusts pay to changes in performance. The plan is economical to administer. The plan helps in attaining the objectives of the sales organization.

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DEVISING A SALES COMPENSATION PLAN Whether contemplating major or minor changes or drafting a completely new sales compensation plan, the sales executive approaches the project systematically. A systematic approach assures that no essential step is overlooked.

Define the Sales Job The first step is to reexamine the nature of the sales job. Up-to-date written job descriptions are the logical place to start. Sales department objectives are analyzed for their effect on the salesperson's job. Sales volume objectives, for instance, whether in dollars, units of product, or numbers of dealers and distributors, are translated into what is expected of the sales personnel, as a group and individually. The impacts of sales-related marketing policies are determined. Distribution policies, credit policies, price policies, and other policies affect the salesperson's job.

Consider the Company's General Compensation Structure Many companies use job evaluation systems to determine the relative value of individual jobs. Job evaluation procedure is an orderly approach based on judgment. Its purpose is to arrive at fair compensation relationships among jobs. There are four job evaluation methods. Two are nonquantitative: simple ranking and classification or grading. The other two are quantitative: the point system and the factor-comparison method. Simple ranking. In this inexpensive job evaluation method, widely used by small businesses, an executive committee sorts job descriptions in the order of worth. Only overall appraisals of the relative worth of different jobs are made. Classification or grading. This approach utilizes a system of grades and grade descriptions, against which individual jobs are compared. The grades, sometimes called classes, are described in terms of job responsibility, skills required, supervision given and received, exposure to unfavorable and hazardous working conditions, and similar characteristics. Job descriptions are then classified into appropriate grades-this is done by an executive committee or by personnel specialists. The basic process is to compare job descriptions with grade descriptions. All jobs within a grade are treated alike with respect to base compensation. Point system. The point system is the most widely used job evaluation method. It involves establishing and defining the factors common to most jobs that represent the chief elements of value inherent in all jobs. The specific factors chosen differ from one company to another, but generally include mental and physical skills, responsibility, supervision given and received, personality requirements, and minimum education required. Each factor is assigned a minimum and maximum number of points, different ranges being associated in line with the relative importance of the factors. Next, appraised factor scores are combined into a total point value. Finally, bands of points are decided upon and become the different compensation classes. Less arbitrary judgment is required than under the classification method; the use of point values makes it possible to determine the gap, or distance, between job classes. Factor-comparison method. This method resembles the point system but is more complex. It utilizes a scheme of ranking and cross-comparisons to minimize error from faulty judgment. The factor-comparison method employs selected factors and evaluation scales. However, the scale values are monetary, and no upper limit exists to the valuation that can be assigned to anyone factor. A selected number of key jobs, typical of similar jobs throughout the company, are then evaluated, factor by factor. This is done by arranging them in rank order, from highest to lowest for each factor. As a check against this judgmental evaluation, the compensation amounts actually paid for each job are allocated to the factors; the allocation automatically establishes the relationship among jobs for each factor. On the basis of the monetary amounts assigned to the several factors making up key jobs, additional jobs are evaluated and their monetary values for each factor interpolated into the scale.

Consider Compensation Patterns in Community and Industry Because compensation levels for sales personnel are related to external supply and demand factors, it is important to consider prevailing compensation patterns in the community and industry. Management needs answers to four questions: (1) What compensation systems are being used? (2) What is the average compensation for similar positions? (3) How are other companies doing with their plans? and (4) What are the pros and cons of departing from industry or community patterns?

Determine Compensation Level Management must determine the amount of compensation a salesperson should receive on the average. Although the compensation level might be set through individual bargaining, or on an arbitrary judgment basis, neither expedient is recommended. Management should ascertain whether the caliber of the present sales force measures up to what the company would like to have. Management should determine the market value of sales personnel of the desired grade. Management weighs the worth of individual persons through estimating the sales and profit that would be lost if particular salespeople resigned. Another consideration is the compensation amount the company can afford to pay. The result


of examining these and other factors pertinent to the situation is a series of estimates for the total cost of salespeople's compensation. It is not unusual to find that two companies operate under similar selling conditions but with different sales compensation levels. Sales personnel in one company earn more than those who do essentially the same work in another company. Relatively speaking, the first group -of salespeople is overcompen-sated. Sometimes, management does not know the true worth of individual sales personnel. In other cases, management regards some sales personnel as indispensable, or managerial inertia prevents adjustment of the compensation level to changed selling conditions. In still other cases, sales managers are biased in favor of high compensation for selling jobs.

Provide for the Various Compensation Elements A sales compensation plan has as many as four basic elements: (1) a fixed element, either a salary or a drawing account, to provide some stability of income; (2) a variable element (for example, a commission, bonus, or profit-sharing arrangement), to serve as an incentive; (3) an element covering the fringe or "plus factor," such as paid vacations, sickness and accident benefits, life insurance, pensions, and the like; and (4) an element providing for reimbursement of expenses or payment of expense allowances. Not every company includes all four elements. Management selects the combination of elements that best fits the selling situation. The proportions that different elements bear to each other vary. However, most companies split the fixed and variable elements on a 60:40 to an 80:20 basis.

Special Company Needs and Problems It is often possible to construct a plan that increases marketing effectiveness. If a company's earnings are depressed because sales personnel overemphasize low-margin items and neglect more profitable products, it may be possible, despite the existence of other managerial alternatives, to adjust the compensation plan to stimulate the selling of better balanced orders. Specifically, variable commission rates might be set on different products, with the higher rates applying to neglected products. Or, as another example, a firm might have a "small-order" problem. It is possible to design compensation plans that encourage sales personnel to write larger orders. Commission rates can be graduated so that higher rates apply to larger orders. As still another example, the presence or absence of point-of-purchase displays can spell the difference between marketing success or failure. Securing retail displays is a task that sales personnel may neglect, especially if they are paid commissions based on sales volume. To overcome this tendency, an incentive payment for obtaining retail displays is often incorporated in the compensation plan. Plans may assist in securing new customers and new business, improving the quality of salespeople's reports, controlling expenses of handling complaints and adjustments, eliminating price shading by the sales staff, reducing traveling and other expenses, and making collections and gathering credit information.

Consult the Present Sales Force Management should consult the present sales personnel. Management should encourage sales personnel to articulate their likes and dislikes about the current plan and to suggest changes in it. Criticisms and suggestions are appraised relative to the plan or plans under consideration.

Reduce Tentative Plan to Writing and Pretest It For clarification and to eliminate inconsistencies the tentative plan is put in writing. Then it is pretested. The amount of testing required depends upon how much the new plan differs from the one in use. The greater the difference, the more thorough is the testing. Pretests of compensation plans are almost always mathematical and usually computerized. Past payrolls, perhaps for a year or two, are reworked to check operation of the proposed plan against experience under the old system. Then a look is taken into the future. Utilizing sales forecast data, new and old plans are applied to future periods. The plan is tested for the sales force as a group and for individuals faced with unique selling conditions. Analysis reveals whether the plan permits earning in line with the desired compensation level. To conduct a pilot test, several territories representative of different sets of selling conditions are selected. The proposed plan is applied in each one long enough to detect how it works under current conditions.


Revise the Plan The plan is then revised to eliminate trouble spots or deficiencies. If alterations are extensive, the revised plan goes through further pretests and perhaps another pilot test. But if changes have been only minor, further testing is not necessary.

Implement the Plan and Provide for Follow-Up At the time the new plan is implemented, it is explained to sales personnel. Management should convince them of its basic fairness and logic. Details of changes from the old plan, and their significance require explanation. All sales personnel should receive copies of the new plan, together with written examples of the method used for calculating earnings. If the plan is at all complex, special training sessions are held and aimed at teaching sales personnel how to compute their own earnings. Provisions for follow-up are made. From periodic checkups, need for further adjustments is detected. Periodic checks provide evidence of the plan's accomplishments, and they uncover weaknesses needing correction.

TYPES OF COMPENSATION PLANS

Financial Compensation Straight-Salary Plan Straight Commission Plan

Drawing Accounts Combination of Salary-and-Incentive Plan Use of Bonuses Allied Methods

Profit Sharing Plan Special Remuneration Plan Expense Allowance Plan

Financial Compensation Sales organizations follow different types of compensation plans. One of the popular components is the financial compensation plan. The financial compensation plan includes a fixed component, a variable component linked to the salesperson's productivity, expenses, and fringe benefits. The fixed component helps in providing basic support for the family of the salesperson. The variable component in the form of commission, profit sharing, or bonus helps the sales manager in stimulating higher productivity from the salespeople. Reimbursements of expenses help the salespeople to cover up travel and other incidental expenses incurred while closing a sale for the organization. Majority of the traditional public sector companies in India like HPCL, BPCL, ONGC, and HMT follow a straight salary plan, where the salesperson is paid a fixed salary structure irrespective of his sales performance. The commission system is preferred by the majority of private sector companies operating at the lower end of the brand and market dynamics. Many of the pharmaceutical companies follow such a plan. The four elements of compensation are combined into hundreds of different plans, each more or less unique. But if we disregard the "fringe benefit" and "expense reimbursement" elements, since they are never used alone, there are only three basic types of compensation plans: straight salary, straight commission, and a combination of salary and variable elements. Straight-Salary Plan The straight salary is the simplest compensation plan. Under it, salespersons receive fixed sums at regular intervals. The payments can be weekly, monthly, or fortnightly, representing total payments for their services. Straight salary plan can take any of the following forms. It can be a fixed salary plan in which the salespeople receive fixed payments in regular intervals for their services. It can also take the form of salary and increment plan in which the salesperson receives payments on a grade at the time of appointment and receives annual increments. The third category of plan is called as salary and allowances plan in which the salesperson receives traveling allowance, meals, and medical allowance in addition to his monthly fixed salary. Such plans are more common among industrial-goods companies than among consumer-goods companies. Straight-salary plans are commonly used for compensating salespeople heavily engaged in trade selling. These jobs, in which selling amounts to mere order taking, abound in the wholesale and manufacturing fields, where consumer necessities are distributed directly to retailers. Frequently, too, the straight-salary method is used for paying driver-salespersons selling liquor and beverages, milk and bread, and similarly distributed products. Sometimes the straight-salary plan is the logical compensation plan when the selling job requires ex-tensive missionary or educational work, when salespeople service the product or give technical and engineering advice to prospects or users, or when salespeople do considerable sales promotion work. From management's standpoint, the straight-salary plan has important advantages. It provides strong financial control over sales personnel, and management can direct their activities along the most productive lines. If sales personnel prepare detailed reports, follow up leads, or perform other time-

Non-Financial Compensation Promotions Recognition Programs Fringe Benefits Expense Accounts Perks

Sales Contests


consuming tasks, they cooperate more fully if paid straight salaries rather than commissions. Straight-salary plans are economical to administer, because of their basic simplicity, and compared with straight-commission plans, accounting costs are lower. The main attraction of the straight-salary plan is that stability of income provides freedom from financial uncertainties inherent in other plans.

The straight-salary plan, however, has weaknesses. Since there are no direct monetary incentives, many salespeople do only an average rather than an outstanding job. They pass up opportunities for increased business, until management becomes aware of them and orders the required actions. There is a tendency to under compensate productive salespeople and to overcompensate poor performers. If pay inequities exist for long, the turnover rate rises; and it is often the most productive people who leave first, resulting in increased costs for recruiting, selecting, and training.

Straight-Commission Plan The theory supporting the straight-commission plan is that individual sales personnel should be paid according to productivity. The assumption underlying this plan is that sales volume is the best productivity measure and can, therefore, be used as the sole measure. This is a questionable assump-tion. The straight-commission plan, in its purest form is almost as simple as the straight-salary plan, but many commission systems develop into complex arrangements. Some provide for progressive or regressive changes in commission rates as sales volume rises to different levels. Others provide for differential commission rates for sales of different products, to different categories of customers, or during given selling seasons. These refinements make straight-commission plans more complex than straight-salary plans. Straight-commission plans fall into one of two broad classifications:

1. Straight commission with sales personnel paying their own expenses. Advances may or may not be made against earned commissions.

2. Straight commission with the company paying expenses, with or without advances against earned commissions.

The straight-commission plan is used in situations where nonselling duties are relatively unimportant and management emphasizes order getting. Straight-commission plans are common in the clothing, textile, and shoe industries and in drug and hardware wholesaling. Firms selling intangibles, such as insurance and investment securities, and manufacturers of furniture, office equipment, and business machines also are frequent users of straight-commission plans. The straight-commission plan has several advantages. The greatest is that it provides maximum direct monetary incentive for the salesperson to strive for high-level volume. The star salesperson is paid more than he or she would be under most salary plans, and low producers are not likely to be overcompensated. Straight-commission plans, in addition, provide a means for cost control -all direct selling expenses, except for traveling and miscellaneous expenses (which are reimbursable in some plans), fluctuate directly with sales volume changes and sales compensation becomes virtually an all variable expense. However, the straight-commission method has weaknesses. It provides little financial control over salespeople's activities, a weakness further compounded when they pay their own expenses. Salespersons on straight commission often feel that they are discharging their full responsibilities by continuing to send in customers' orders. They are careless about transmitting reports, neglect to follow up leads, resist reduction in the size of sales territories, consider individual accounts private property, shade prices to make sales, and may use high-pressure tactics with consequent loss of customer goodwill Moreover, unless differential commission rates are used, sales personnel push the easiest-to sell low-margin items and neglect harder-to-sell high-margin items. Under any straight-commission plan, in fact, the costs of checking and auditing salespeople's reports and of calculating payrolls are higher than under the straight-salary method.

Drawing accounts. A modification of the straight-commission plan is the drawing account method, under which the company establishes separate accounts for each salesperson, to which commissions are credited and against which periodic withdrawals are made. Drawing accounts resemble salaries, since customarily individual sales personnel are allowed to overdraw against future earnings. If sales personnel become greatly overdrawn, they may lose incentive to produce and become discouraged with the prospects of paying back overdrawn accounts and quit the company. To forestall quitting by overdrawn salespeople, some firms use "guaranteed" drawing account plans. These do not require the paying back of overdraws. Sales executives in these firms are conservative in setting the size of guaranteed drawing accounts, for they are in effect combination salary and commission plans. Drawing account plans include provision that covers the possibility of overdrafts. Legally, an overdraft cannot be collected unless the salesperson specifically agrees to repay it.

Combination of Salary-and-Incentive Plan Salary plus commission. Most sales compensation plans are combinations of salary & commission plans.


Where the straight-salary method is used, the sales executive lacks a financial means for stimulating the sales force to greater effort. Where the straight-commission system is used, the executive has weak financial control over nonselling activities. By a judicious blending of the two basic plans, management seeks both control and motivation. Strengths and weaknesses of combination plans. A well-designed and administered combination plan provides significant benefits. Sales personnel have both the security of stable incomes and the stimulus of direct financial incentive. Management has both financial control over sales activities and the apparatus to motivate sales efforts. Selling costs are composed of fixed and variable elements; thus, greater flexibility for adjustment to changing conditions exists than under the commission method. There are beneficial effects upon sales force morale. Disagreements on pay increases and territorial changes are less violent than under a straight-commission plan. Further, if salespeople realize that the company shares their financial risks, a cooperative spirit develops between them and the company. The combination plan, however, has disadvantages. Clerical costs are higher than for either a salary or a commission system. More records are maintained and in greater detail. Sometimes a company seeking both to provide adequate salaries and to keep selling costs down uses commission rates so low that the incentive feature is insufficient to elicit needed sales effort.

Use of Bonuses Bonuses are different from commissions. A bonus is an amount paid for accomplishing a specific sales task; a commission varies in amount with sales volume or other commission base. Bonuses are paid for reaching a sales quota, performing promotional activities, obtaining new accounts, following up leads, setting up displays, or carrying out other assigned tasks. The bonus, in other words, is an additional financial reward to the salesperson for achieving results beyond a predetermined minimum. Bonuses are never used alone-they always appear with one of the three main sales compensation methods. If used with the straight salary, the plan resembles the combination plan. If used with the straight commission, the result is a commission plan to which an element of managerial control and direction has been added. If used with the combination salary and commission plan, the bonus becomes a portion of the incentive income that is calculated differently from the commission. Certain administrative actions are crucial when a -bonus is included in the compensation plan. At the outset, the bonus conditions require thorough explanation, as all sales personnel must understand them. The necessary records must be set up and maintained. Procedures for keeping sales personnel abreast of their current standings relative to the goals are needed.

Allied Methods We will discuss the emerging methods of compensation under the broad heading of allied methods. One of the popular methods followed in Indian industries is the 'profit sharing plans'. In this method, the company shares a part of the profit with its sales staff and sometimes distributes the equity holding of the company in the form of earned share to increase the stake of the salespeople in the organization. This method helps to establish a sense of ownership and cordial relationship with the salespeople.

Many companies also follow a 'special remuneration plan' for specific salespeople who have to discharge certain functions along with their normal selling activities, such as road shows, displays, public relationship programmes, and solving customer problems. This method is very simple to understand and the salesperson knows the reasons of additional compensation. The performance of the salesperson can be evaluated easily and salespeople can be trained for additional responsibilities and managerial positions in the future. In this method, there is no enforcement of the additional responsibility, as the salesperson is expected to take up the responsibility on his own.

One of the popular compensation plans is called the 'expense allowance plan' in which the salespeople are provided to and fro allowances to meet the expenses of travelling, lodging, and boarding. The quota-based compensation plan is a combination model in which the straight salary and commission are linked to the fixed quota given to each salesperson. Upon completion of the quota, the salesperson is paid commission at a fixed rate along with his remuneration.


Non-financial Compensation Sales organizations also provide non-financial compensation for the salespeople to motivate them and keep them in the organization to contribute towards the long-term goals of the organization. The non-financial rewards include promotions, recognition programmes, fringe benefits, expense accounts, and sales contests. Though these compensation methods are treated as non-financial, these are directly or indirectly related to financial gain for the salespeople.

Promotions Salespeople working in organizations for a longer period of time always look for higher job responsibility. Majority of the salespeople need recognition in the form of promotion for their continued success and commitment to the organization. Since there are fewer openings as one moves higher on the ladder, the management has to plan the promotion programme in such a way that the higher positions seem worth aspiring and achievable to the salespeople. The promotion policy should be open and clear so that it serves as a motivational tool for the salespeople. Job enrichment and additional responsibilities across the departments also enrich a salesperson's career and motivate him for higher goals.

Recognition Programmes These are programmes designed to honour individual salespersons' contributions and recognize the excellent performance. These programmes are organized in most organizations. The salespeople who excel are awarded medallions for their outstanding contributions. These awards are presented in the annual conferences and published in the company newsletters and websites. These programmes can be either formal or informal programmes.

Formal recognition programmes are sponsored and are given high coverage by the company across areas and departments and they are designed to award excellence among salespeople. Life Insurance corporation has its crorepati agent scheme, which is a formal reward programme. Winners of such recognition programmes are given trophies, titles, and rewards including travel packages at the cost of the company. Some of these formal recognition programmes include cash awards, trips, and something as simple as plaque. The success of an informal recognition programme largely depends on the sales manager who recognizes quality work of the subordinate salespeople and provides praise for them. An encouraging word by the boss, a pat in the social gathering, and recognition and thanks-giving letters serve the purpose of non-financial recognition for the salespeople. Informal recognition needs minimal efforts, yet the results are extremely positive because everyone likes to be told in public that he or she is doing an appreciable work.

Fringe Benefits Fringe benefits, which do not bear direct relationships to job performance, range from 25 to 40 percent of the total sales compensation package. Some are required by federal and state law-for example, payments for social security premiums, unemployment compensation, and worker's compensation. Most, however, the company provides for other reasons: to be competitive with other companies in the industry or community, to furnish reasons for employees to remain in the company's service, and to comply with what employees expect as fringe benefits.

These are employment benefits in addition to the salary and wages paid to the sales staff. These include medical benefits, retirement benefits, life insurance, and other forms of employee motivation tools like stock options and profit sharing. The medical benefits include reimbursement of all the running medical expenses and in many organizations also the cost of hospitalization in case of any emergency. Companies also pay for the mediclaim policies of their employees. The retirement plans in the Indian context include the retirement pension provisions, gratuity, and provident funds. The gratuity amount is now linked to job as well as pension. The employee receives some amount of gratuity money for the number of years he completes in the organization and it contributes towards the pension. Sometimes, a percentage of the organization's profits are paid to the employees if the organization makes significant profit in a certain year. In this case the employees have the option to buy the company shares at a discounted price. This is a successful option for companies having fast growth in the industry. Companies like Infosys and Wipro give stock options to its employees. The other fringe benefits include the leave travel concessions (LTC), paid vacations, sick leave, and maternity or paternity leave. The amount and nature of the leave varies from company to company but most of them practice such compensation methods in some other form.

As the variety of fringes has expanded, individual fringes have been added that appeal more to some groups than others - people with bad teeth are the ones most interested in dental insurance, while those with children are the ones most interested in plans for paying educational tuition fees for dependents. Similarly, given a choice between supplemental life insurance and increased retirement benefits from the savings plan, a fifty-nine-year-old probably would pick the latter, but a thirty-six-year-old father of two might opt for the life insurance.


An increasing number of companies offer a "cafeteria" approach to fringe benefits. In this approach, the company offers a core of basic benefits - the benefits required by law plus other traditional benefits, including paid vacations, medical, disability, and death benefits and a retirement program. Employees then use credits (based on age, pay, family status, and years of company service) to obtain optional benefits not included in the core; this lets employees select those benefits that best fit their needs. Because needs for benefits change, employees are given opportunities to change their selection of those benefits that best fit their needs. Companies using the cafeteria approach also have ‘awareness programs’ aimed at making employees aware of the benefits available.

Expense Accounts Companies in many parts of the world reimburse expenses of the field sales force. Expense accounts are compensation plans that are designed to compensate sales personnel for the expenses they incur on the job. Almost all companies cover up some part of the job expenses in their compensation plan. The sales managers tend to check the expense accounts and make provisions for reimbursement as long as the sales staff does not abuse the method of compensation. The organizations require the salespeople to submit the expense details and receipts of their expenses so as to prevent padding. Padding is a phenomenon in which the sales staff overcharges the organization for his expenses in order to gain from the reimbursement.

The sales expense plan should be designed in such a manner that it should be fair enough for the salespeople to cover up all their expenses required for their business activity. It should also be fair to the company so that the company does not lose much in the process of reimbursing the expenses. The expense plan should be cost- effective, easy-to-comprehend, and convenient to implement in the organization. There are three types of expense plans followed in sales organizations: the company pays all the expenses, the salesperson bears all the expenses, and the company partially pays the expenses.

Perks Perks are a special category of compensation available to employees with some special status or expertise in the company. There are a number of perks, which are considered part of the compensation plan by the company. They include the provisions for a car, housing, driver, gardener, club membership, and educational opportunities.

Perks are classified as status perks, financial perks, and personal growth perks. The status perks include office location, job title, parking space, and other visible company contributions which reflect the status of the salesperson. They are based on the performance and have a higher motivational power than other categories of perks in the sales organization. The financial perks include the use of the company vehicle, expenses of their support staff, such as drivers and gardeners, and club memberships.

Many companies also pay for the vehicle fuel and the insurance and maintenance cost for the salespeople. The personal growth perks include paying for additional education or sending the salespeople for motivational or training programmes. Companies like Infosys, Patni Computers, Bharat Heavy Electricals, and Marico Industries in India give the perk of additional education to their salespeople to upgrade their skills.

Sales Contests Sales organizations organize sales contests for the salespeople to stimulate sales. They are part of the sales force promotion programme. These programmes are organized to counter the competitive moves in the market, to offload the inventory in the off-season, to gain sales force commitment for an additional product launched, and of course to gain support of the salespeople during the maturity stage of a product life cycle. It is a temporary incentive programme that offers monetary and non-monetary rewards, and is not a part of the regular compensation plan. Contests have multiple purposes, besides one single goal for the salespeople, i.e., to enhance their morale and motivate them for higher sales in the short term. Non-financial compensation in isolation is also an important motivator for the salespeople. It is observed that non-financial compensation methods are always accompanied by financial compensation methods.


NEW TRENDS IN COMPENSATION MANAGEMENT Various trends are emerging in compensation management. As new organizations are emerging, so also are new methods of compensation. Today the sales force is not compensated only on the basis of sales volume. The level of customer satisfaction is an important tool of evaluating and rewarding the salespeople. A company like Xerox is the pioneer in designing a compensation plan based on customer satisfaction. It follows a compensation plan based on customer satisfaction defined by the customer itself. This serves as a challenge for the salespeople to achieve the customer defined satisfaction level. Another emerging trend is team-based compensation. Though the idea has a Japanese origin, it has found acceptance all over the world. Majority of the business-to-business selling is done through the team selling strategy and cross-functional teams are designed for handling customer objections in a better way. More and more key account and national account managers are coordinating with the local salespeople to close a sale at multiple points. Many customers are now operating across the territories and geographical boundaries. The organizations need to address their demands and problems at multiple points and in multi-location situations. Hence, it is important to have sales teams. The performance of the individual salesperson is now linked to the performance of the salespeople in other territories catering to the same set of customers. So companies are adopting team-based compensation, which links the pay of the salespeople with the performance of the customer service personnel, delivery people, and managers heading and supervising the teams. Customers are now spread across the globe and the salespeople serve them by innovative technology and operating across different boundaries and time limits. This has brought the issue of global compensation management systems. Today majority of customer care and sales service jobs are outsourced to third world countries due to availab ility of cheap labour and quality of service output. It is a challenge for management to compensate the global sales force working in different countries in diffe rent cost zones through an equitable and flexible compensation plan.

MOTIVATION Motivation is a goal-directed behavior, underlying which are certain needs and desires. Specifically, as applied to sales personnel, motivation is the amount of effort the salesperson desires to expend on the activities associated with the sales job, such as calling on potential accounts, planning sales presentations, and filling out reports. Expending effort on each activity making up the sales job leads to some level of achievement on one or more dimensions of job performance – total sales volume, profitability, sales to new accounts, quota attainment, and the like. Most sales personnel require motivational help from management to reach and maintain acceptable performance levels. Four aspects of the salesperson’s job affect the quality of its performance. Each is an important reason why sales personnel require additional motivation. Inherent nature of the sales job: Every sales job is a succession of ups and downs – a series of experiences resulting in alternating feelings of exhilaration and depression. Salespersons are particularly frustrated when aggressive competing sales personnel vie for the same business, and they meet numerous turndowns. Furthermore, sales personnel spend considerable time away from home causing them to miss many attractive parts of family life. Salesperson’s boundary position and role conflicts: The salesperson occupies a ‘boundary’ position in the company and must try to satisfy the expectations of people both within the company and in customer’s organizations. There is a linkage with four groups – sales management, the company organization that handles order fulfillment, the customers, and other company sales personnel. Each group imposes certain behavioral expectations on the salesperson, and in playing these different roles, the sales person faces role conflicts. Tendency towards apathy: Some sales personnel naturally become apathetic. Covering the same territory and virtually the same customers year after year, salespersons tend to lose interest and enthusiasm. Gradually their sales calls degenerate into routine order taking. Maintaining a feeling of group identity: The sales person, working alone, finds it difficult to develop and maintain a feeling of group identity with other salespeople. Team spirit, if present at all, is weak. Thus, the contagious enthusiasm – conductive of improving the entire group’s performance – does not develop. Some Common Motivational Theories and their Implications for Sales Management

Physiological needs

Safety needs

Social needs

Esteem needs

Self-Actualisation

Maslow’s

Hierarchy of needs

Herzberg’s

Two factors theory

Hygiene Factors

(Job Context)

Motivators

(Job Content)

Achievement Recognition

Advancement Work itself

Growth Potential Responsibility

Interpersonal Relations Peers, Supervisors, Subordinates

Company Policy Job Security

Work Conditions Salary

Personal Life

David McClelland’s

Achievement-Motivation theory

If individuals with high nAch can be best performers in

sales jobs, then management might target its recruiting

towards such people.


CONTROLLING

Analysis of Sales

Appropriately designed and skillfully implemented control mechanisms increase the chances that the sales

organization will focus upon achieving selling and profit objectives. The sales budget is the key control

mechanism, and quotas, properly set and administered, stimulate sales personnel to achieve sales and profit

objectives. Sales territories make the control of sales operations more effective.

Still other control mechanisms contribute to the effectiveness of the personal-selling effort. Sales Audit is one

of them. Sales audit is a systematic and comprehensive appraisal of the total selling operation. It appraises

integration of the individual inputs to the personal selling effort and identifies and evaluates assumptions

underlying the sales operation. Sales audit is a systematic, critical, and unbiased review and appraisal of the

basic objectives and policies of the selling function and of the organization, methods, procedures, and personnel

employed to implement those policies and achieve those objectives.

Three other major variables are measured for evaluating and controlling a sales force. Companies conduct sales

analysis, cost analysis and behavioral analysis to monitor sales programs. These control mechanisms help sales

executives to monitor profitability of the operation.

Each salesperson’s sales volume can be monitored and measured against the quota allocated to him. These sales

figures can be broken by territory, by product line, by customer types and results can be compared with quota

and forecasted sales in these areas. This method is called Sales Analysis. The costs can be evaluated in Cost

Analysis on the basis of an individual salesman, territory, product line and customer type. When these data are

combined with the sales analysis, a sales manager can find out not only the profitability on segment to segment

basis but also the overall customer profitability. The third kind of analysis is called Behavioral Analysis. A sales

person’s actual behavior should be evaluated with the sales volume and profit generated by each one of them.

There are several techniques such as self-ratings, supervisor’s evaluation, self appraisals, field observations, and

survey of customer satisfaction used in behavioral analysis. Although sales analysis is a traditional method of

performance evaluation, more and more modern organizations are using a combination method of performance

evaluation.

Through sales analyses, management seeks insights on strong and weak territories, high-volume and low-

volume products, and types of customers providing satisfactory and unsatisfactory sales volume. If sales

management depends solely on summary sales data, evaluation is often incomplete. Sales analysis uncovers

details that otherwise lie hidden in the sales records. The fact that sales increased by 2 percent over last year but

profit decreased by 1 percent would be a cause of concern but of no help in determining how to reverse the

profit decline. Sales analysis provides additional information, for example, that the increased sales volume came

from products carrying lower-than-average gross margin.

The original sources of data for sales analysis are the sales invoices. Detailed data from sales invoices are

transferred to computers. The information on each transaction identifies the customer details such as name,

geographical location, type of account and others as well as sales person details such as name, territory etc. The

information also includes such sales data as order date, products sold, quantities, price per unit, total amount of

sales per order etc. With information stored in this detail, sales analyses are performed quickly and at low cost.

Costs and Profitability

Marketing Cost Analysis analyzes sales volume and selling expenses to determine the relative profitability of

particular aspects of sales operations. The first step in marketing cost analysis is sales analysis by territories,

sales personnel, products, classes of accounts, sizes of order, marketing channels, and other categories.

Marketing cost analyses determines the relative profitability of particular aspects of sales operations. Having

broken down sales volume, for instance, by sales territories, the next step is to break down and assign selling

expenses by sales territories. The outcome indicates relative profitability of the sales territory. The specific

objective is to suggest answers to questions like: Which sales territories are profitable or unprofitable? What are

the profit contributions of individual sales personnel? What is the profitability of different products? What is the

minimum size of a profitable account? Which marketing channels provide the most profit for a given sales

volume? How small can an order be and still be profitable? Answers to more complex questions, requiring

cross-analysis of expense allocations, are also suggested.


EVALUATION OF THE SALES FORCE Performance evaluation and control of the sales force is the key prerequisite for effective sales force management. By

evaluating the performance of the sales force, a sales manager can test the effectiveness of the sales program and the

quality of implementation of the program by the sales people.

Performance Appraisal

Performance appraisal, a crucial part of evaluation, is the process of identification, measurement, and

management of

Relative and Absolute Judgements In the relative judgement method, the sales manager is asked to compare the salesperson’s performance with that of other

salespeople on the job. A rank order for salespeople from the best to the worst performer is developed. Salespeople may

also be classified into groups such as top three, middle bracket, and a lower set. This kind of a system enables the sales

manager to differentiate performers among salespeople. The problem with this method is that there is no clarity as to how

big/small the differences are between groups of employees.

In the absolute judgement method, the sales manager is asked to make judgements about the salesperson’s performance.

This is based on the sales performance measured in sales volume, market share, or revenue realization. The dimensions

relevant to the sales job are listed and all the salespeople are rated according to their performance. The problem with this

method is that there is a likelihood of differences in the evaluation standards of different sales managers.

Trait-based The sales force can be evaluated based on some criteria related to traits, outcome, and the behavior of the sales force. Trait

appraisal instruments are used to make judgements about a salesperson’s traits and selling characteristics that tend to be

consistent and enduring. The most commonly used traits for this purpose are decisiveness, reliability, energy, and loyalty.

Outcome-based Performance criteria based on outcomes measure the results of the selling process. The most common approaches used in

this method are called management by objectives (MBO) and natural outcome measures. MBO is a goal-directed

approach to performance appraisal in which salespeople and managers together set goals for the upcoming evaluation

period. A rating is then done by deciding whether these goals are met. In the natural outcome method, the performance

measure is assumed to be acceptable to the salespeople. Both the measures provide clear and unambiguous criteria by

which the performance of the sales force can be judged.

Behavior-based This method focuses on the behavior of the salespeople instead of focusing on the traits or performance outcome. The

behavioral measure is related to selling activities and for this the sales manager records how frequently behaviors listed in

a checklist of ratings have occurred. These ratings assess the value of the behavior measures rather than their frequency of

occurrence and include product knowledge, presentation quality, closing ability, service performed, the number of active

accounts, and relationships with customers. Other behavioral measures that are rated include the number of calls made per

day, and number of working days in a specific period of time.

Deciding on the criteria for

measuring performance

Deciding on the conduct of the

performance appraisal

Deciding on evaluation of individuals

and teams

Comparison of actual performance

with standards

Deciding on the frequency of the

performance appraisal

The external variables and their

influences

Sales Force

Performance Appraisal Process management of a sales force in an organization. Performance appraisal is the process

of evaluating the performance and qualifications of the sales force in terms of the

requirements of the job to ensure effective administration, including the selection for

promotion, rewards and other recognitions in the organization. A sales manager takes

decisions related to performance appraisal in a sales organization on the basis of the

criteria used for measuring performance, conducting of performance appraisal, and

evaluating individuals and teams. The sales manager also uses suitable criteria for

comparing actual performance with established standards, frequency of performance

appraisal, and the decisions taken on other external influences in the evaluation

process.

Appraisal Criteria

The first step in appraisal of performance is identification of what is to be measured.

Here, those aspects or dimensions of the performance need to be identified which

determine effective job performance. This may be in terms of the quantity or the

quality of work done and interpersonal effectiveness. Measuring the performance of

salespeople involves assigning a relative score to reflect a salesperson’s performance

on the identified dimensions or characteristics. Sales managers can choose the

performance measure technique from a wide array of formats available. These

techniques are classified on the basis of the type of judgement required for evaluation

(relative or absolute) and the focus of the measure (trait, outcome or behavior).


Performance Rating

Various instruments are used for the purpose of performance appraisal. These instruments include rating forms,

forced choice scales, behavioral observation scales (BOS), self-assessment questionnaires, and customer

surveys.

Rating forms are statements in the form of an inventory or a list of adjectives about the sales job that a sales

manager uses to evaluate each salesperson. These forms are easy to fill up and cover a broad range of selling

activities and have the ability of providing uniform and consistent information about salespeople.

Forced choice scales allow the sales managers

to rate salespeople on a series of objectives that

explain a salesperson’s performance. The scores

and rates are predefined and the sales manager

is ‘forced’ to give a score or weight out of the

assigned weights. A series of activities are then

undertaken to design a forced choice scale.

These include essay writing by sales managers

in which the characteristics of both effective

and

Inventory of Objectives for Evaluation

Behavioral Rating Scale and ineffective salespeople are explained. Outside experts

read the essays and build a set of inventories of adjectives

used in the essay as a measure of evaluation and then assign

weights to the adjectives used to explain both effective and

ineffective salespeople. Neutral weights are given to

adjectives that are common to both effective and ineffective

salespeople.

BOS are purely based on significant job incidents, which

describe behaviour that can either enhance or reduce the

level of performance. This method has got several

advantages over the rating scale. The evaluator focuses on

special behaviors that influence the level of performance of

a salesperson. The sales manager is asked to identify only

that behaviour which significantly influences performance.

This helps in identifying certain behaviors which are both

desirable and undesirable in the context of the job. While

the rating scales could not tell what it means to be

friendly to the customers, the BOS method clearly

indicates indicates to the salesperson what actions lead to more customer friendly behaviour.

Call reports are periodic accounts and customer

statements prepared by salespersons of how they

are dividing their working time between various

aspects of the job like prospecting,

demonstration, and follow-up. Call reports are

categorized on the basis of accounts and client

size. These reports help the sales management in

recording the status of the customer dealing and

sales realization and in finding out the processes

involved in serving a customer.

When a salesperson is terminated or transferred

from one territory to another, the sales manager

can evaluate the call reports and assign the client

to new recruits. They also provide a detailed

description of the activity of the salesperson

during his working with a company to augment

the process of evaluation. They also help the

management in forecasting the sales for future

years by using the sales force composite method.


Silent call monitoring scores consist of a sales manager's rating of the salesperson's performance during

actual calls to the customers. The rating can cover a wide range of issues like greeting, ascertaining

customer needs and demands, courtesy, and the level of communication and listening skills.

Customer satisfaction surveys are either random or periodic, where customers are both randomly and

continuously tracked. Companies also conduct satisfaction surveys by mass mailing questionnaires to

customers. Mailing to respondents is extensively used by airlines. For example, Jet Airways, a private

Indian airline, collects customer satisfaction data in a regular manner inside the flight and analyses it to

evaluate the performance of their sales, ground, and in-flight staff.

Combinational methods used in many modern-day organizations are combinations of outcome and

behaviour-based rating models. In a combination plan,

Conduct of Performance Appraisal

A sales manager can either conduct a performance appraisal or the salespeople can do a self-appraisal. The

primary evaluator should be the immediate supervisor of the salesperson in the organization since the

immediate supervisor has the knowledge of the salespeople, his territory, and work experience as a

salesperson himself.

Problems with a salesperson's evaluation are known as biases in evaluation. A bias occurs when sales managers

inflate or deflate the subordinate's performance rating. A bias is either conscious or unconscious. Anchoring

occurs when sales managers rate salespeople using a scale. The anchor is the starting point of the scale

on which the salesperson is evaluated. If there is a five-point Likert scale where the value of 3 stands as

average, the sales manager tends to evaluate every salesperson from a score of 3 and then rates the

salesperson to reflect his activity observed during the time period of study. The bias happens when the

sales managers adjust ratings in an unjustified way. A salesperson who has received a high rating in one

period is likely to be rated higher in subsequent periods due to the halo effect, even when his

performance is not of that order.

Individual versus Team Appraisal

Most of the performance appraisals are done on an individual basis. The appraisal systems are developed

to evaluate the contribution of each member of the sales force towards organizational objectives. However,

a modern-day selling organization has brought the idea of team selling to the forefront.

Activity reports explain the unusual events

and incidents that occur in the field as

reported by a sales manager and

salespeople, including peers. This includes

events like the launch of a major price war

by the competitor, increase in the dealer

push money of the competitor, and the

entry of a new competitor. Activity reports

also explain changes in the purchase

practice of the customers, a change in the

decision-makers at the customers place

resulting from a transfer, promotion, or

movement of the purchase manager. The

sales managers develop guidelines for

activity reports in order to differentiate

them from call reports.

a sales manager evaluates the overall

performance of the sales force on the

basis of a combination of parameters.

These include the work experience, sales

aptitude, and level of knowledge related

to the company.


Many organizations have thus built up a culture of team-based selling. In this method, a set of salespeople

from diverse functional backgrounds constitute a sales team. For example, the sales team may include a

salesperson, service engineer, technical support staff, and a customer service member. Such kind of teams are

able to answer all the pertinent questions related to the sale that covers areas like technological specifications,

financing pattern, and after-sales service issues. Therefore, a sales team services a customer better than an

individual salesperson.

Sales managers build a role result matrix for team evaluation. The role result matrix is a specification of the

manager can use the relative weights based on the importance of each role and activity in achieving the desired

outcome. The sales manager can list the roles of each of the positions in a sales team for the purpose of

developing a new business and servicing the existing customers. For example, the role of a key account

manager in building new business will be high, but his role will be limited in the case of existing customers,

who interact with the customer's service staff on a regular basis.

Actual Performance vs Standards

The next important task for the sales manager is to evaluate the salesperson's actual performance against

either the industry standard or standards set by the organization. Many salespeople try to collect actual data

over a set of territories and calculate the average performance of all the territories and then compare each

salesperson with the average of the performance of all the salespeople.

The ranking method ranks salespeople according to their success in the territory in comparison to the

other salespersons. A comparison with the norm approach evaluates each salesperson on the basis of

either industry norms or the norms set by the firm. The sales manager fixes an evaluative norm boundary

and if the salesperson falls within the boundary, he is termed as operating within an acceptable level. The

sales manager fixes an upper and lower boundary level and evaluates the salesperson's performance. On a

rating scale, the upper boundary level is three standard deviations above the mean and the lower

boundary is three standard deviations below the mean. The sales manager should try to increase the

average mean score and narrow the control limits so that salespeople find their job challenging.

Frequency of Appraisal

Performance appraisal of salespeople is undertaken on an annual basis. However, more and more

organization's now measure the performance of salespeople on a quarterly basis. The annual review

system is conducive to many organizations because it matches an annual sales cycle planning. An annual

review gives an observable period for reviewing the behaviour of the salesperson, which is too short to

observe in a quarterly method. When the top management thinks that the sales force needs tighter control,

they ask for evaluations that are more frequent. When a company has a large number of new employees,

it needs to do a more frequent evaluation so that sales manager can guide them for improving their

performance and change undesired behaviour so that marketing problems can be avoided. The more the

frequency of the appraisal, the more is the administrative and paperwork involved for the sales manager.

Even if the sales in a quarter goes down due to some or the other reason, the salespeople can still adjust

the sales level in subsequent quarters to reach the annual targets specified. It also helps in the

identification of a base rate of performance. An annual review reduces the level of paper work for the

sales manager, which he would have to do in shorter cycles. One period of evaluation is called a

performance cycle and is related to specific product goals or job activities. A company can decide to have

three or four performance cycles per year depending on the product and sales goals set for the cycles.

Such cyclical evaluations provide an adequate input for a semi-annual and an annual review of sales

performance.

roles played by each member of the

cross- functional team and indicates

the expected results from each of the

team members. It outlines the

individual responsibilities for the

success of the team and the

organization. The matrix plots the

people, tasks, and results expected

from each team member. The sales

manager

The Role Result Matrix


Influence of External Variables

There are various external influences on the performance appraisal system of an organization. The most

common influencing factors are the legal and ethical issues involved in evaluation. The appraisal system

leads to employee reorientation, training, and in many cases, the termination of employees who are found

to be underperforming for a continuous period. The biases that sales managers possess result in a

disputed evaluation of employees and in some cases can lead to legal battles. If the company loses the

court battle, the employee will be reinstated and it may lead to loss of esteem for the sales manager.

There are various wage rules that guide the termination of employment guided by a performance

appraisal, failing which the sales manager may take the company to the court. Barriers

Rater errors occur very frequently and adversely affect the effectiveness of the evaluation system. A halo

error, a common error, is a tendency to evaluate salespeople similarly, across all the ratings dimensions.

This causes a greater concern for sales managers in deciding promotions and wage hikes. There are at

least two causes of a halo error. The sales manager may make an overall judgement about the salesperson

and then conform all dimensional ratings to that judgement. The restriction of range error is another type

of rater error, where the manager restricts all his ratings to a small portion of the rating scale on which all

salespeople are rated similarly.

There is an adverse influence of the likings and dislikes of the sales managers, which influence the

evaluation process. These kinds of errors are caused when raters allow their likes or dislikes of an

individual salesperson to influence their assessment of that individual's performance. Liking has the

potential to playa great role in rating because both are person-focused. Sometimes, the performance

ratings are fully based on how much a sales manager likes an employee. Sometimes, the objective

indicators are seriously deficient as indicators of performance. A number of important characteristics

may be dropped while taking objective indicators. Sales managers also like good performers and dislike

poor performers.

It is appropriate if sales managers like better performers, but their judgement is biased when sales

managers like or dislike employees for reasons other than their performance. The maintenance of a

performance record on a regular basis, though time-consuming will always be helpful. Such a recording

of behaviour will help in eliminating errors and biases and justifying the ratings given. In many organizations, clear standards for performance evaluation may not be desirable.

Political influences and motives may introduce some ambiguity in rating standards. Appraisal in most

organizations can be motivated, as political perspective assumes that the performance of a salesperson

depends on the agenda or goals of the sales manager. In such a situation, the goal of performance

appraisal is not accuracy, but the maximization of benefits over costs. The sales managers and the

salespeople must be motivated to attain this goal.

SUPERVISION COMPENSATION OF SALES FORCE...Sales and growth goals are reached at low cost, and...

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