MODULE 15 : DESIGNING COMPENSATION AND INCENTIVE PROGRAMMES
A major purpose of any sales compensation programme is to stimulate and influence the sales force to do
what management wants, how it wants it to be done and within the desired time.
In order to decide what activities the firm’s compensation programme wants to stimulate, an assessment of the
sales force’s current allocation of effort and levels of performance is done and then compared with the firm’s
marketing and sales objectives.
Procedures for Designing Compensation and Incentive Programmes
(i)
Assess the firm’s marketing and sales objectives, account management policies, and current performance
of the sales force.
(ii)
Determine aspects of the job performance to be rewarded (desired instrumentalities)
(iii)
Assess personal characteristics of salespeople and their valences for alternative rewards
(iv)
Determine most attractive and motivating mix of rewards
(v)
Decide on most appropriate level of total compensation
(vi)
If Incentive compensation is agreed upon, then, decide upon the form of compensation like commission,
bonus, contest (short-term incentive rewards)
(vii) Determine appropriate proportion of total compensation to be accounted for by incentives
(viii) If there is no incentive compensation, decide on the appropriate types of non-financial incentives like
promotion opportunities and career paths and recognition programmes.
(ix)
Communicate the programme to the sales force.
Sales activities and performance outcomes that might be encouraged by compensation and incentive
programmes
- sell a greater overall dollar volume
- increase sales of more profitable products
- push new products
- push selected items at designated seasons
- achieve a high degree of market penetration of products, kinds of customers or territories
- secure large average orders
- secure new customers
- service and maintain existing business
- reduce turnover of customers
- encourage cooperation among members of sales or account management teams
- achieve full-lined (balanced) selling
- reduce direct selling costs
- increase the number of calls made
- submit reports and other data promptly
However, it is a mistake to try and motivate salespeople to do too many things at once. When rewards
are tied to numerous different aspects of performance, the salesperson’s motivation to improve
performance dramatically in any one area is diffused. Also, when rewards are based on many different
aspects of performance, the salesperson is more likely to be uncertain about how total performance
will be evaluated and about what rewards can be obtained as a result of that performance. In other
words, complex compensation and incentive programmes may lead to inaccurate instrumentality
perceptions by salespeople. Consequently, most authorities recommend that compensation and
incentive plans be linked to only two or three aspects of job performance. They should be linked to
those aspects that are consistent with the firm’s highes priority sales and marketing objectives. Other
aspects of the salesforce’s behaviour and performance should be directed and controlled through
effective training programmes and supervision by field sales managers.
One reason for the reluctance of firms to base their awards on customer satisfaction is the difficulty of
measuring changes in satisfaction over time. Also, though satisfaction-based incentives improve
customer service by sales people, they may distract sales reps from the tasks necessary to capture
additional sales volume in the short term. To offset this problem, some firms combine customer
satisfaction-based incentives with bonus or commission payments tied to sales quotas or sales revenue.
However, such mixed incentive plans can create confusion in the sales force – and even lead to
reductions in customer service levels.
Internal measures of effective customer service include percentage of on-time deliveries and/or
installations; merchandise returns; customer credits; and the number of customer complaints received.
For measuring customer satisfaction, companies typically rely on information gained from periodic
customer surveys using focus groups, telephone interviews, or mail questionnaires.
A promising approach in designing incentives is to link incentive rewards for customer satisfaction to
the salesperson’s overall sales volume performance. This can be done by making the reward for
customer satisfaction contingent on the salesperson’s sales volume.
Assigning sales reps’ valences and determining the most attractive mix of rewards
A wise preliminary step in designing a sales compensation and incentive package is for a firm to
determine its salespeople’s current valences for various rewards. This could be done with a simple
survey in which each salesperson is asked to rate the attractiveness of specific increases of various
rewards on a numerical scale.
DECIDING ON THE APPROPRIATE MIX OF COMPENSATION
The total amount of compensation a salesperson receives affects satisfaction with pay and with the
company, as well as the valence for more pay in the future. Thus, the decision about how much total
compensation (base pay plus any commissions or bonuses) a salesperson may earn is crucial in
designing an effective motivation programme. The starting point for making this decision is to
determine the gross amount of compensation necessary to attract, retain, and motivate the right type of
salespeople. This, in turn, depends on the type of the sales job in question, the size of the firm, the size
of the salesforce and the firm’s sales management policies.
More complex and demanding sales jobs, which require salespeople with special qualifications, offer
higher pay than routine jobs. To compete for the best talent, firms should determine how much total
compensation other firms in the industry or related ones pay in similar jobs. Then the firm can decide
whether to pay its salespeople an amount average in relation to what others are paying or above
average. Few companies consciously pay below average because below-average compensation
generally cannot attract the right level of selling talent.
The decision about whether to offer average total pay or premium compensation depends on the size
of the firm and its salesforce. Large firms with good reputations in their industries and large
salesforces (more than 75 or 100 salespeople) generally offer only average or slightly below average
compensation. Such firms can attract sales talent because of their reputation in the marketplace and
because they are big enough to offer advancement into management. Also, such firms can hire
younger people as sales trainees and put them through an extensive training programme. This allows
them to pay relatively low gross compensation levels because they do not have to pay a market
premium to attract older, more experienced salespeople. Smaller firms cannot attract extensive training
programmes. Consequently, they must often offer above-average compensation to attract experienced
sales reps from other firms.
Dangers of Paying too Much
Some firms regardless of their size or position in their industries, offer their salespeople opportunities
to make very large amounts of financial compensation. The rationale for such high incomes is that
opportunities for high pay will attract the best talent and motivate members to continue working for
higher and higher sales volumes.
Dangers of Paying too little
Overpaying salespeople relative to what other firms pay for similar jobs and relative to what other
employees in the same firm are paid for nonsales jobs can cause major problems. For one thing,
compensation is usually the largest element of a firm’s selling costs. Therefore overpaying salespeople
unnecessarily increases sales costs and reduces profits. Also, it can cause resentment and low morale
among the firm’s other employees and executives when salespeople earn more money than even the
top management. It then becomes impossible to promote good salespeople into management positions
because of the financial sacrifice they would have to make. Finally, it is not clear that offering
unlimited opportunities to earn higher pay is always an effective way to motivate continually
increasing selling effort. Need theory suggests that when salespeople reach a compensation level they
consider satisfactory, their valences for still more money are likely to be reduced.
However, holding down sales compensation may appear to be a convenient way to hold down costs
and enhance profits, but this is usually not true in the long run. If poor salespeople are hired at lower
pay, poor performance will almost surely result.
FINANCIAL INCENTIVES : CHOOSING THE MOST EFFECTIVE FORM OF FINANCIAL
COMPENSATION
Components and Objectives
The foundation of most compensation plans is a package of benefits. These are designed to satisfy the
salesperson’s basic needs for security. They typically include such things as medical and disability
insurance, life insurance, and a pension plan. The type and amount of benefits included in a
compensation plan are usually a matter of company policy and apply to all employees. However, the
benefit package a firm offers its salespeople should be reasonably comparable to those offered by
competitors to avoid being at a disadvantage when recruiting new sales talent.
The core of sales compensation plans consists of a salary or commissions. A commission is a payment
based on short-term results, usually a salesperson’s dollar or unit sales volume. Since there is a direct
link between sales volume and the amount of commission received, commission payments are
particularly useful for motivating a high level of selling effort.
A salary is a fixed sum of money paid at regular intervals. The amount of salary paid to a given
salesperson is usually a function of the salesperson’s experience, competence, and time on the job, as
well as superior’s judgments about the quality of the individual’s performance. Salary adjustments are
useful for rewarding salespeople for performing activities that may not directly result in sales in the
short term, such as prospecting for new customers or providing postsale service. They can also help
adjust for differences in sales potential across territories.
Many firms that pay their salespeople a salary also offer additional incentive payments to encourage
good performance. Those incentives may take the form of commissions and sales volume or
profitability or bonuses for meeting or exceeding specific performance targets. (eg. Meeting quotas for
particular products within the company’s line for particular types of customers). Such incentives are
useful for directing salespeople’s efforts toward specific strategic objectives during the year, as well as
providing additional rewards for the top performers within the sales force.
Finally, many firms conduct sales contests to encourage extra effort aimed at specific short-term
objectives. Contest winners might be given additional cash, merchandise, or travel rewards.
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(i)
(ii)
(iii)
Types of Compensation Plans
Three primary methods of compensating salespeople are :
Straight salary
Straight commission
A combination of both salary plus incentive pay, in the form of commissions, bonuses or both.
Straight Salary
Two sets of conditions favour the use of a straight salary compensation plan :
when management wishes to motivate salespeople to achieve objectives other than short-run sales
volume
when the individual salesperson’s impact on sales volume is difficult to measure in a reasonable time.
Advantages
management can require salespeople to spend their time on activities that may not result in immediate
sales. Therefore, a salary plan or a plan offering a large proportion of fixed salary is appropriate when
the salesperson is expected to perform many account servicing or nonselling activities. These may
include market research, customer problem analysis, stocking, or sales promotion. Straight salary
plans are also common in industries where many engineering and design services are required as part
of the selling function, such as in the aerospace and other high-technology industries.
Straight salary compensation plans are also desirable when it is difficult for management to measure
the individual salesperson’s actual impact on sales volume or other aspects of performance. Thus firms
tend to pay salaries to their salesforce when :
their salespeople are engaged in missionary selling, as in the pharmaceutical industry
other parts of the marketing programme, such as advertising or dealer promotions, are the primary
determinants of sales success, as in some consumer packaged goods businesses; or
the selling process is complex and involves a team or multilevel selling effort, as in the case of
computers or atomic reactors.
Straight salary plans provide salespeople with a steady, guaranteed income. Thus, salary compensation
plans are often used when the salesperson’s ability to generate immediate sales is uncertain, as in the
case of new recruits in a field-training programme or when a firm is introducing a new product line or
opening new territories.
Finally, salary plans are easy for management to compute and administer. They also give management
more flexibility. It is easy to reassign salespeople to new territories or product lines because they do
not have to worry about how such changes will affect their sales volumes. Also, since salaries are
fixed costs, the compensation costs per unit sold is lower at relatively high level of sales volume.
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Limitations
Financial rewards are not tied directly to any specific aspect of job performance. Management should
attempt to give bigger salary increases each year to good performers than those given to poor ones.
However, the amount of those increases and the way performance is evaluated are subject to the
whims of the manager who makes the decision. Consequently, salespeople are likely to have lower and
less accurate instrumentality perceptions about how much more money they are likely to receive as the
result of a given increase in sales volume, profitability, or the like. In other words, salaries do not
provide any direct financial incentive for improving sales-related aspects of performance.
Consequently, salary plans appeal more to security-oriented rather than achievement-oriented
salespeople.
Straight Commission
A commission is payment for achieving a given level of performance. Salespeople are paid for results.
Usually, commission payments are based on the salesperson’s dollar or unit sales volume. However, it
is becoming more popular for firms to base commissions on the profitability of sales to motivate the
sales force to extend effort on the most profitable products or customers. The most common way is to
offer salespeople variable commissions, where relatively high commissions are paid for sales of the
most profitable products or sales to the most profitable accounts. Variable commission rates can also
be used to direct the sales force’s efforts toward other straight sales objectives, such as introduction of
a new product line.
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Advantages
Direct motivation is the key advantage of a commission compensation plan. There is a direct link
between sales performance and the financial compensation the salesperson earns. Consequently, sales
persons are strongly motivated to improve their sales productivity to increase their compensation, at
least until they reach such high pay that further increases become less attractive. Commission plans
also have an in-built element of fairness (if sales territories are properly defined with about equal
potential), because good performers are automatically rewarded, whereas poor performers are
discouraged from continuing their low productivity.
Commission plans are usually easy to compute and administer.
Commission costs vary directly with sales volume. This is an advantage for firms that are short of
working capital, because they do not need to worry about paying high wages to the sales force unless it
generates high sales revenues.
Limitations
Management has little control over the sales force. When all their financial rewards are tied directly to
the sales volume, it is difficult to motivate salespeople to engage in account management activities that
do not lead directly to short-term sales. Consequently, sales people on commissions are likely to
“milk” existing customers rather than work to develop new accounts. They may overstock their
customers and neglect service after the sale. Finally, they have little motivation to engage in market
analysis and other administrative duties that take time away from actual selling activities.
Straight commission plans make a salesperson’s earnings unstable and hard to predict. When business
conditions are poor, turnover rates in the sales force are likely to be high, because salespeople find it
hard to live on the low earnings produced by poor sales. Agency theory suggests such problems are
likely to be even more severe when a firm’s salespeople are relatively risk averse; that is, when they
prefer a predictable future income stream to one that offers uncertain chances to earn either unusually
high or unusually low levels of income.
To combat the inherent stability of commission plans, some firms provide their salespeople with a
Drawing Account. Money is advanced to salespeople in months when commissions are low to ensure
they will always take home a specified minimum amount of pay. The amount of the salesperson’s
draw in poor moths is deducted from earned commissions when sales improve. This gives salespersons
some secure salary, and it allows management more control over their activities. A problem arises,
however, when a salesperson fails to earn enough commissions to repay the draw. Then the person
may quit or be fired, and the company must absorb the loss.
Combination plans
This involves combination plans that offer a base salary plus some proportion of incentive pay.
The base salary provides the salesperson with a stable income and gives management some capability
to reward salespeople for performing customer servicing and administrative tasks that are not directly
related to short-term sales. At the same time, the incentive portion of such compensation plans provide
direct rewards to motivate the salesperson to expend effort to improve sales volume or profitability.
Combination plans combine a base salary with commissions, bonuses or both. When salary plus
commission is used, the commissions are tied to sales volume or profitability, just as with the straight
commission plan. The only difference is that the commissions are smaller in a combination plan than
when the slaesperson is compensated only by commission.
A bonus is a payment made at the discretion of the management for achieving or surpassing some set
level of performance. Whereas commissions are typically paid for each slae that is made, a bonus is
typically not paid until the salesperson surpasses some level of total sales or other aspects of
performance. When the salesperson reaches the minimum level of performance required to earn a
bonus, however, the size of the bonus may be determine by the degree to which the sales rep exceeds
that minimum. Thus, bonuses are additional incentives to motivate salespeople to reach high levels of
performance, rather than part of the basic compensation plans.
Other issues in designing combination plans
These include :
(i)
the appropriate size of the incentive relative to the base salary
(ii)
whether there should be a ceiling on incentive earnings
(iii)
when the salesperson should be credited with a sale
(iv)
whether group incentives should be used
(v)
how often should the salesperson receive incentive payments
Relative Proportion of Incentive Pay
One of the most common reasons combination plans are not very effective at motivating salespeople is
that the incentive portion is too small to generate much interest. Generally, if the average successful
salesman working under a sales incentive plan cannot make at least 25 % of his gross earnings as
incentive pay in the form of bonus or commissions, the plan will never be truly successful.
The 25% figure appears to be not only a good rule of the thumb, but also a reasonably accurate
reflection of industry practice. However, the relative size of such payments varies substantially across
different industries and across different types of plans.
A manager’s decision concerning what proportion of the overall compensation package is represented
by incentive pay should be based on the company’s objectives and the nature of the selling job. When
the firm’s primary objectives are directly related to short-term sales, such as increasing sales volume,
profitability, or new customers, a large incentive component should be offered. When customer
service and other non-sales objectives are deemed more important, the major emphasis should be on
the base salary component of the plan. This gives management more control over the sales force’s
account management policies.
Similarly, when the salesperson’s selling skill is the key to success, the incentive portion of the
compensation should be large. However, when the product has been presold through advertising and
the salesperson is largely an ordertaker, or when the salesperson’s job involves a large proportion of
missionary selling or customer service work, the incentive component should be relatively small.
Incentive Ceilings
Part of the variation in how different firms deal with this issue seems to reflect differences in average
compensation levels, with firms in relatively low-paying industries being more likely to impose caps
than those in higher-paying lines of trade. The use of caps also varies by type of compensation plan.
Two thirds of firms with salary plus bonus plans impose incentive ceilings, while only one third of
firms using salary plus commission plans do so.
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Advantages of Incentive Ceilings
They ensure top salespeople will not make such high earnings that other employees suffer resentment
and low morale.
They protect against windfalls – such as increased sales due to the introduction of successful new
products – where a salesperson’s earnings might become very large without corresponding effort.
Ceilings make a firm’s maximum potential sales compensation expense more predictable and
controllable.
Disadvantages of Incentive Ceilings
have an adverse influence on motivation and dampen the salesforce’s enthusiasm.
Some salespersons may reach the earnings maximum early in the year and be inclined to take it easy
for the rest of the year.
Some functions of the ceilings can be accomplished without arbitrarily limiting the motivation of the
sales force if management pretests any new or revised compensation plan before it is implemented.
Managers can do this by applying the plan to the historical sales performance of selected salespeople.
Particular attention should be given to the amount of compensation that would have been earned by
the best and poorest performers to ensure that the compensation provided by the plan is both fair and
reasonable.
When is a Sale a Sale?
Crediting a salesperson with a sale only after the goods have been shipped or payment received from
the customer makes good sense. This is particularly true when the time between receipt of an order
and the shipment of goods is long and the company wants its salespeople to maintain close contact
with the customer in order to prevent cancellations and other problems. As a compromise, some plans
credit salespeople with half a sale when the order is received and the other half when payment is made.
Team versus Individual Incentives
Firms that use teams to sell to or service customers typically adopt one of the following three
approaches for tying incentive rewards to a team’s performance :
(i)
Team performance as the sole determinant
Here all the incentive is based on achievement of predefined team objectives. Incentive rewards may
be allocated equally to all team members or divided among members on the basis of individual
contributions to team results.
(ii)
Team performances as a primary determinant
These plans include two incentives – a larger one based on team performance and a smaller one based
on each member’s individual performance. The two incentives are sometimes linked in such a way
that the magnitude of the team’s bonus directly influences the size of the individual bonuses each team
member can earn. In unlinked plans, the two incentive plans are independent of one another.
(iii) Individual performance as the primary determinant
These plans also include two incentive components that may be either linked or unlinked. However,
they emphasize individual performance by tying larger incentive rewards to individual than to team
outcomes.
Linked Plans are plans in which incentive payout for both components, including the individual
component, depends on achievement of team objectives; sales representatives may receive receive
either a payout based on both individual and team achievement, or no bonus at all. Other members
may receive only the team performance bonus.
The common team bonus is the initial, and most lucrative, component for sales representatives.
Common components link team members to a shared destiny with a unifying objective.
Unlinked Plans
Unlinked plans are plans with additive components; sales reps may earn either bonus or both.
Achievement of team objectives is not required to earn individual bonus.
The common team bonus is the initial, and most lucrative component for sales representatives.
Common components link team members to a shared destiny with a unifying objective.
When should a sales representative receive incentive payments?
In general, plans offering salary plus commission are more likely to involve monthly incentive
payments, while salary plus bonus plans more often make incentive payments on a quarterly or annual
schedule.
Shorter intervals between performance and the receipt of rewards increase the motivating power of the
plan. However, short intervals add to the computation required, increase administrative expenses, and
may make the absolute amount of money received by the salespeople appear so small they may not be
very impressed with their rewards. Consequently, many authorities argue that quarterly incentive
payments are an effective compromise.
SALES CONTESTS
Sales contests are short-term incentive programmes designed to motivate sales persons to accomplish
specific sales objectives. Although contests should not be considered part of the firm’s ongoing
compensation plan, they offer salespeople the opportunity to gain financial, as well as non-financial
rewards. Contest winners often receive prizes in cash or merchandise or travel. Winners also receive
nonfinancial rewards in the form of recognition and a sense of accomplishment.
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Successful contests require the following :
clearly defined specific objectives
an exciting theme
reasonable probability of rewards for all salespeople
attractive rewards
promotion and follow-through
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Contest Objectives
stimulate overall salesvolume
stimulate specific product sales
increase market penetration
introduce new products
acquire new accounts
get balanced sales
emphasize higher profit products
improve service to accounts
overcome seasonal slump
increase activity in new area
ease unfavourable inventory situation
develop or improve sales skills
The time in which the contest’s objectives are to be achieved should be relatively short. This ensures
that the salespeople will maintain their enthusiasm and effort throughout the contest. But the contest
should be long enough to allow all members of the salesforce to cover their territories at least once and
to have a reasonable chance of generating the performance necessary to win. Therefore, the median
duration of sales contests is three months.
Contest Themes
A sales contest should have an exciting theme to help build enthusiasm among the participants and
promote the event. The theme should also be designed to stress the contest’s objectives and appeal to
all participants.
Probability of Winning
There are three popular contest formats. In some contests, salespeople compete with themselves by
trying to attain individual quotas. Everyone who reaches or exceeds quota requirements during the
contest period wins.
A second form requires that all members of the salesforce compete with each other. The people who
achieve the highest overall performance on some dimension are the winners, and everyone else loses.
A third format organizes the salesforce into teams, which compete for group and individual prizes.
The assignment of individual quotas is by far the most popular format. The reliance on individual
quotas allows firms to design contests that focus salesperson’s efforts on specific objectives, do not
put representatives in low-potential territories at a disadvantage, and do not undermine cooperation in
the salesforce by forcing sales people to compete against each other.
Whichever format is used, every member of the sales force should have a reasonable chance of
winning an award. If salespersons perceive their chances of winning as remote, their instrumentality
perceptions of the likelihood of winning are low, and they are not motivated to expend more effort to
win. In this respect, contests that provide rewards to everyone who meets quotas during the contest
period are desirable. The number of contest winners is not arbitrarily limited, and everyone has a
chance for a reward.
Types of Rewards
Contest rewards can take the form of cash, merchandise or travel. All three types of rewards are
commonly used, and a company may vary the kinds of rewards offered from contest to contest.
Whatever form of reward is used, the monetary value must be large enough to be attractive to the
participants, given their level of compensation.
Promotion and Follow Through
To generate interest and enthusiasm, contests should be launched with fanfare. Firms announce
contests at national or regional sales meetings. Follow-up promotion is also necessary to maintain
interest throughout the contest period. As the contest proceeds, salespeople should be given frequent
feedback concerning their progress so that they know how much more they must do to win an award.
Finally winners must be recognized within the company, and prizes should be awarded promptly.
Criticism of Sales Contests
Contests designed to stimulate sales volume may produce results that are largely illusory, with no
lasting improvement in market share. Sales people may borrow sales from before and/or after the
contest to increase their volume during the contest. They may hold back orders before the start of the
contest and rush orders that would normally not be placed until after the contest. As a result, customers
may be overstocked, and sales volume falls off for some time after the contest is over.
Contests may also hurt the cohesiveness and the morale of the company’s sales people. This is
particularly true when plans force individual sales people to compete with one another for rewards and
when the number of rewards is limited.
Finally, some firms tend to use sales contests to cover up faulty compensation plans. Sale spersonnel
should not have to be compensated a second time for what they are already being paid to do. Thus,
contests should be used only on a short-term basis to motivate special efforts beyond the normal
performance expected of the sales force. If a firm conducts frequent contests to maintain an acceptable
level of sales performance, it should reexamine its entire compensation and incentive programme.
NON-FINANCIAL REWARDS
Promotion and Career Paths
Most sales managers consider opportunities for promotion and advancement second only to financial
incentives as an effective sales force motivator. This is particularly true for young, well-educated
salespeople who tend to view their jobs as stepping stones to top management. Many firms do not
provide many promotion opportunities for salespeople. Thus, is a person has been with a firm for
several years without making it into sales management, the individual may start to believe such a
promotion will never happen. Consequently, older salespeople may concentrate solely on financial
rewards or they may lose motivation and not work as hard at their jobs.
To overcome this problem, some firms have instituted two different career paths for salespeople. One
leads to management positions for promising candidates, while the other leads to more advanced
positions within the sales force. The latter usually involves responsibility for dealing with key
accounts or leading sales teams. In this system, even though a salesperson may not make it into
management, the rep can still work towards a more prestigious and lucrative position within the
salesforce. To make advanced positions more attractive as promotions, many firms provide people in
those positions with additional perks, including higher compensation, a better automobile, and better
office facilities.
Recognition Programmes
Effective recognition programmes should offer a reasonable chance of winning for everyone in the
sales force. But if a very large proportion of the sales force achieves recognition, the programme is
likely to lose some of its appeal because the winners feel no special sense of accomplishment.
Consequently, better recognition programmes often recognize the best performers for several different
performance dimensions.
Recognition is an attractive reward because it makes a person’s peers and superiors aware of the
outstanding performance. Communication of the winner’s achievements, through recognition at a sales
meeting, publicity in the local press, announcements in the company’s internal newsletter, or other
ways is an essential part of a good programme. Also, firms typically give special awards as part of the
recognition programme, although these are often symbolic awards with low monetary value, such as
trophies, plaques, or rings. Objectivity and good taste are also important ingredients of effective
recognition programmes, as they are for contests and other incentives.
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Guidelines for effective, formal recognition programmes
The programme must be strictly performance based with no room for subjective judgements.
It should be balanced. The programme should not be so difficult that only a few can hope to win or so
easy that just about everyone does.
A ceremony should be involved.
The programme should be in good taste. If not, it will be subject to ridicule, and rather than motivate
people, leave them uninspired.
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There must be adequate publicity.
THE REIMBURSEMENT OF SELLING EXPENSES
The rapid rise in selling costs has caused many sales managers to question the economic viability of
having field salespeople make face-to-face calls on smaller customers and to turn to telemarketing and
other approaches to reduce expenses involved in servicing smaller firms. A second response to cost
increases has been the search for improved methods of expense control. Many firms have
experimented with a variety of expense reimbursement plans. Such plans range from unlimited
reimbursement for all reasonable and allowable expenses to plans where salespeople must pay all
expenses out of their total compensation.
When deciding which form of expense reimbursement to use, sales managers must make trade offs
between tight control aimed at holding down total expenses and the financial well-being – and the
subsequent motivation level of sales people. Some expense items – such as entertainment expenses,
club dues, and the costs of personal services while the salesperson is away from home – can be
considered either legitimate business expenses that the salesperson should pay. Obviously company
policies and reimbursement plans that treat such costs as business expenses increase the salesperson’s
total financial compensation but also increase the firm’s total selling costs.
Direct Reimbursement Plans
This involves the direct and unlimited reimbursement of all “allowable and reasonable” expenses.
However, reimbursement under such plans is contingent on the salesperson submitting receipts or
detailed records justifying expense claims. So the processing and evaluation of expense claims add to
the firm’s sales administration costs.
Advantages
Such plans give the sales manager some control over both the total magnitude of sales expenses and
the kinds of activities in which salespeople will be motivated to engage. If a particular activity, such as
entertaining potential new accounts, is thought to be an important ingredient of the firm’s account
management policies, salespeople can be encouraged to engage in that activity by being informed that
all related expenses will be reimbursed. On the other hand, managers can discourage their subordinates
from spending time on unimportant tasks by refusing to reimburse expenditures for such activities.
Thus, company policies concerning reimbursable expenses can be a useful tool for motivating and
directing sales effort. Some firms report having adjusted their expense reimbursement policies
according to the differences in the territories covered or the job activities required of different
members of their sales forces.
Limited Reimbursement Plans
Some firms limit the total amount of expense reimbursement, either by setting maximum limits for
each expense item or by providing each salesperson with a predetermined lump sum payment to cover
total expenses. This approach keeps total selling expenses within planned limits, limits that are often
determined by the sales expense budget set at the beginning of that year. In some cases, budgeted
expense amounts may vary across members of the sales force, depending upon the past or forecasted
sales volume or the requirements of the territories.
Unless the budgeted limits are based on an accurate understanding of the costs associated with
successful sales performance in each territory, however, these kinds of plans can hurt motivation and
sales performance. Individual salespeople may believe their ability to do a good job is constrained by
tight-fisted company expense reimbursement policies. Rather than pay for necessary activities out of
their own pockets, salespeople are likely to avoid or cut back on certain expense activities to keep their
costs within their budgets.
No Reimbursement Plans
Such plans usually involve paying the salesperson a relatively high total financial compensation to
help cover necessary expenses. Such plans are most commonly associated with “straight commission”
compensation plans involving high percentage commissions. The rationale is that salespeople will be
motivated to spend both the effort and the money necessary to increase sales volume as long a sthe
resulting financial awards are big enough to be worthwhile.
Since these plans are a variation of the “limited reimbursement” plans, they have similar advantages
and limitations. They help the firm limit sales expenses or – in the case of commission plans – make
them a totally variable cost that moves up and down with changes in sales volume. They also sacrifice
management control over the motivation and types of activities engaged in by members of the sales
force.