McGraw-Hill/Irwin
Copyright 2006 by The McGraw-Hill Companies, Inc.
Chapter 11
Salesperson Compensation and
Incentives
McGraw-Hill/Irwin
Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved.
Learning Objectives
• Discuss the advantages and limitations of straight salary,
straight commission, and combination plans.
• Explain how and why a bonus component to
compensation might be used as an incentive.
• Understand the effective use of sales contests, as well
as the potential pitfalls of their use.
• Identify key nonfinancial rewards, and how and why they
might be important.
• Recognize key issues surrounding expense accounts in
relationship selling.
• Discuss making decisions on the mix and level of
compensation.
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Key Compensation Questions
• Which compensation method is most
appropriate for motivating specific
activities in specific situations?
• How much of the total compensation
should be earned through incentives?
• What is the best mix of financial and
nonfinancial compensation and
incentives?
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Key Definitions
• Salary – a fixed sum of money paid at
regular intervals
• Commission – a payment based on shortterm results, usually a dollar or unit sales
volume
• Bonus – a payment made at
management’s discretion for achieving or
surpassing some set level of performance
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Compensation Methods for
Salespeople
Compensation
Method
Especially
Useful For
Advantages
Disadvantages
Straight Salary
New sales reps
New sales
territories
Many required
nonselling
activities
Maximum
security
Control over
reps
Easy to
administer
Predictable
expenses
No incentive
Requires close
supervision
Selling
expenses
remain same
during sales
declines
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Compensation Methods for
Salespeople
Compensation
Method
Especially
Useful For
Advantages
Disadvantages
Straight
Commission
Highly
aggressive
selling
Minimal required
nonselling tasks
When company
can’t closely
control sales
force
Maximum
incentive
Managers can
encourage sales
of certain items
Selling
expenses relate
directly to selling
resources
Little security
Little control
over reps
Reps may
provide
inadequate
service to
smaller
accounts
Selling costs
less predictable
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Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved.
Compensation Methods for
Salespeople
Compensation
Method
Especially
Useful For
Advantages
Disadvantages
Combination
Similar sales
potential across
territories
When company
wants to offer
incentive but
maintain some
control
Some security
Some incentive
Selling
expenses vary
with revenue
Manager has
some control
over nonselling
activities
Selling
expenses are
less predictable
May be difficult
to administer
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Combination Plans
• Offer a base salary plus some proportion
of incentive pay
• Most popular form of compensation
• Well-suited for relationship selling by
compensating for nonselling activities
while providing incentives to motivate
sales
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Design Questions for Combination
Plans
• What is the appropriate size of the incentive
relative to the base salary?
• Should a ceiling be imposed on incentive
earnings?
• When should the salesperson be credited with a
sale?
• Should team incentives be used? If so, how
should they be allocated among team
members?
• How often should the salesperson receive
incentive payments?
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Sales Contests
• Short-term incentive programs designed to
motivate to accomplish specific sales objectives
• Contest winners receive prizes, recognition, and
a sense of accomplishment
• Successful contests require:
• Clearly defined, specific objectives
• An exciting theme
• Reasonable probability of rewards for all
• Attractive rewards
• Promotion and follow-through
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Criticisms of Sales Contests
• May not produce lasting improvements
• Salespeople may borrow sales from
another period to increase sales during the
contest period
• Poorly administered contests can hurt
cohesiveness and morale
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Nonfinancial Rewards
• Recognition is an attractive reward
because it makes a salesperson’s peers
and superiors aware of outstanding
performance
• Effective recognition programs:
• Offer everyone a reasonable chance of
winning
• Recognize the best performers across
several dimensions
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Expense Account Types
• Direct reimbursement – direct and unlimited
reimbursement of all “allowable and reasonable”
expenses
• Limited reimbursement – either sets expense
limits by-item or provides predetermined lump
sum
• No reimbursement – requires salespeople to
cover all expenses; usually combined with
higher total financial compensation plan
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Mix and Level of Compensation
• An appropriate mix and level of
compensation should
– Maximize compensation plan’s motivational
value
– Be fair
– Remain consistent with firm’s resource
capabilities
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Key Terms
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McGraw-Hill/Irwin
compensation plan
salary
incentive payment
commission
bonus
quota
sales contests
benefits
nonfinancial incentives
variable commission rate
draw
perquisites (perks)
expense account
11-20
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Mark W. Johnston
Rollins College
McGraw-Hill/Irwin
Greg W. Marshall
Rollins College
11-21
Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved.