Chapter
9
Sales Force
Compensation
How Little you know about the
age you live in if you fancy that
honey is sweeter than cash in
hand.
Ovid
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
Fig 9-1 What a Good Sales
Compensation Plan Should Do
Efforts +
Results =
Reward
Control
activities of
sales reps
Treat
customers
properly
Motivate the
salesperson
Good sales
compensation plan
Security and
incentive
Fair
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
Simple
Attract and
keep good
people
Economical yet
competitive
Flexible and
stable
Potential conflicts in Compensation Plan Design
Characteristics of Plan
1
2
3
4
5
6
7
8
9
10
11
1.
Reward results
__
2.
Reward efforts
C
__
3.
Provide steady income
C
__
__
4.
Provide incentive
__
C
C
__
5.
Fair
C
C
C
C
__
6.
Flexible
__
C
C
__
__
__
7.
Simple
C
__
__
C
C
C
__
8.
Economical
__
C
C
__
C
__
C
__
9.
Competitive
__
C
C
__
__
__
C
C
__
10.
Controls and directs
C
__
__
C
C
C
__
__
__
__
11.
Consistent w/ company objectives
C
C
C
C
__
__
C
__
__
__
__
12.
Stable
C
C
__
C
C
C
__
C
__
C
C
C = Potential for conflict
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
12
__
Fig 9-2 Steps in designing a sales
compensation plan
Review job
description
Develop the method
of compensation
Identify plan’s
objectives
Decide on indirect
monetary compensation
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
Establish level of
compensation
Pretest and
install plan
Fig 9-4 Building Blocks for a Sales
Compensation Plan
Others
Profit sharing
Pension
Profit Sharing
Salary
SECURITY
Moving Expenses
Others
Entertainment
Lodging
Company
Car
Bonus
Insurance
Lodging
Commission
Paid Vacation
Travel
INCENTIVES
BENEFITS
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
EXPENSES
Method
Advantage
Straight
salary
Provides security and
stability for reps
Better for directing and
controlling sales
activities
Ensures proper
treatment of customers
Straight
commission
Disadvantage
Best Used
Direct incentive is easily
lost if not administered
properly
For products that require a lot of
presale and/or post-sale service
Represents a fixed cost
For building long-term customer
relationships
Requires supervision to
When supervision is available for
direct, control, and evaluate new recruits
For new territories
Provides a strong
incentive
Difficult to direct and
supervise sales people
For missionary sales
When a strong incentive is needed to
attain sales
Sales people have
more freedom
Customers’ best interests
may be ignored
For products that require little
presale and/or post-sale service
Acts as a screening
method
Sales people’s earnings
may fluctuate widely
The sale is a one-time sale
Adequate field supervision is not
available
Company is in a weak financial
position
Bonus
Added incentive
Added cost
Can be used for specific
activities - flexible
May be seen as
inequitable if not
administered properly
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
Company uses part-time or
independent sales people
To encourage above-normal
performance of specific activities
Possible Combination
Compensation Plans
COMMISSION
SALARY
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
BONUS
Drawing Account Examples
Non-Guaranteed Plan
Month
Draw
Sales
Volume
Commission
Earned
End-of-Month Payment to Rep
January
$1,800
$40,000
$4,000
$2,200 ($4,000 - $1,800 = $2,200)
February
$1,800
$15,000
$1,500
$0 (rep owes $300)
March
$1,800
$30,000
$3,000
$900 (computed as follows)
Commission = $3,000
Less draw - 1,800
Less February debt
Net
-
300
$
900
Guaranteed Plan
Month
Draw
Sales
Volume
Commission
Earned
End-of-Month Payment to Rep
January
$1,800
$40,000
$4,000
$2,200 ($4,000 - $1,800 = $2,200)
February
$1,800
$15,000
$1,500
$0 (rep owes $0)
March
$1,800
$30,000
$3,000
$1,200 ($3,000 - $1,800 = $1,200)
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
Compensating Cross-Functional Teams
Shared
Reward
Role-reward congruence
Team-member input
Peer evaluations
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.