CHAPTER TWO
LITERATURE REVIEW AND THEORY BACKGROUND
The objective of this thesis is to identify and to study the sales performance
among the incentive program, the core competence, the corporate strategy, and the
company culture to meet a company sales performance target.
Becker & Hustelid (1998) proposed a 7 steps framework for measuring human
resource strategies to drive and to measure an organization performance. Roger and
Wright (1998) proposed a theoretical outline for defining firm performance.
According to the theory of Bucknall & Ohtaki (2005), the best practices for
developing a high-performance salesforce are as follows:
1. Training salespeople to become specialists
2. Have executives sponsor key global accounts
3. Teaching salespeople to interact with customers in various manners
4. Developing good listening and questioning skills to discover customers needs
5. Establishing mentoring relationship between junior and senior salespeople
6. Sharing the best practices
7. Providing product training through the intranet
8. Setting expectation via standardized orientation
9. Enforcing on-the-job training via sales manager
10. Coaching the sales team by sales manager
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2.1 Theory of Sales Motivation and Performance Measurement
Theory of Individual Motivation
In order to decide the method to motivate people, salespeople need to know what
they like and everyone has different motivators. In the following section, we will
discuss some motivation theories.
Maslow’s Hierarchy of Needs
According to Maslow (1987), Maslow expressed two kinds of needs: deficiency
needs and growth needs. The deficiency needs are physiological needs, safety needs,
and social needs.
The growth needs are ego needs and self-actualization.
The
related examples are addressed in Table 2.1.
Table 2.1: Maslow’s Hierarchy of Needs
Motivators
Examples
Physiological Needs
Food, sleep, clothing, water, shelter, and sex
Safety Needs
Security from danger, threat and deprivation
Social Needs
Love, acceptance, kinship, belonging
Ego Needs
Recognition, achievement, status
Self-actualization Needs
Fulfill one’s potential
Source: Maslow (1987)
According to Zoltners et al. (2001), the relative benefits are also addressed in
Table 2.2. Most companies provide programs to fit physiological needs, safety needs,
and self-actualization needs but very few companies do have the programs to fit ego
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needs or social needs for recognition awards or work/life program.
Table 2.2: Maslow’s Hierarchy of Related Benefits
Motivators
Related Benefits
Physiological Needs
Wages
Safety Needs
Insurance Benefits, Retirement Plans
Social Needs
Work/Life Programs, Employee Assistance plans
Ego Needs
Recognition Awards
Self-actualization Needs
Training & Development, Health Promotion, Work/Life
Balance, Job Satisfaction
Source: Zoltners, Sinha & Zoltners (2001)
McGregor’s Theory X and Theory Y
If you trust your employees, they turn out to be more trustworthy than the one if
you do not trust them. Theory X managers are controlling and manipulating; Theory Y
managers are empowering.
Under theory X, the main phenomena will be described as follows:
1. General people work as little as possible
2. They lack ambition and responsibility and prefer to be leaded by others
3. They are selfish and indifferent to organization needs and goals
4. They are resistant to change by nature
5. They can be easily cheated and controlled
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Under theory Y, the main phenomena will be described as follows:
1. People are not passive by nature. They become a consequence of the way they are
treated in organization
2. People have the potential to develop and to carry responsibility, behave in
accordance with organization goals. Managers need to know each employee’s
potentials and make it possible for employees to develop them by themselves
3. Management shall structure organization policies so that each employee can
achieve their personal goals while pursuing the goals of the organization
Expectancy Theory
Refer to the following diagram on Fig. 2.1, if a person succeeds, the success acts
as a positive reinforcement. Success will bring success in a positive circle. If the
person believes he is growing and learning, the person will continue in improvement.
Expectancy theory models the motivation process; the capability and motivation
affect efforts.
If the salesperson feels that “working harder does not increase sales, others get
credit for the efforts, or the bonus is not worth getting”, then motivation will diminish.
A good incentive compensation program and performance management will keep
motivation working properly.
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Goal
Capability
Satisfaction
Motivation
Valence
Efforts
Rewards
Expectancy
Instrumentality
Performance
Fig. 2.1:
Expectancy Theory Performance Model
Source: Vroom (1964), Oliver (1974), Chen & Miller, (1994)
Why Sales Job is Special?
The sales job is a customers-oriented job and will face more rejections than
people in any other job functions. The salespeople need to overcome lots of
frustrations in the selling process and daily activities. They also need to interact with
marketing, advertising (Mar-Com), customer service, delivery, billing, division, etc.
The company often provides training of the selling skills, product & quality
knowledge, project management, time management, etc, which are very beneficial to
most salespeople. Success is normally measured by actual sales. The compensation is
usually tied to performance and is reflected on commissions and bonuses.
Competitive salespeople who are aggressive will be attracted to sales job since it can
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provide the self satisfaction.
The sales team’s turnover rate used to be higher than
that of other divisions, since the selling skills and the built-up of customers’
relationships are so valuable to most companies.
Good incentive program is a
motivator to keep the best salespeople.
Recruiting the Right Staffs
Hiring the right person is the good approach to build up a motivated sales force.
It is tough to change a person’s deep mind internally, so it is best to utilize intrinsic
motivation to adapt to company target and strategy. If the employee’s motivations fit
the company culture, this person is a good candidate to fit the job. For highly
ego-driven persons do not fit the salaried sales force, and people who are motivated
by social affiliations will be attracted by a team based organization. A careful
recruiting process and culture development program will produce a unified and
motivated sales force.
Recruiting & Training
It is very important to recruit the best salespeople who have the characteristics of
the strong working ethic, right integrity, good communication skills, and willingness
to listen. Salespeople with good personality stay in their current jobs because they are
easily adapted to any working environment so that cost of recruiting wrong person
can be avoided by hiring experienced personnel with good characteristics. After we
recruit the right persons, we do need the right training program, because it will
enhance their social affiliation, power, ego, and achievement drives and will reduce
survival fear. Training gives salespeople more comfortable zones within his or her
capability.
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Culture (norm and value), team spirit, attitude
The culture is the gene of the company. It is unwritten rules that guide behavior
of salespeople’s behavior. Culture is often reflected in norm, work style, and values.
Sales will be motivated if the company work culture is consistent with salespeople’s
beliefs and their sense of belonging to the company will be cultivated. Salespeople
face so many challenges that they have to make many choices in every day. Their
choices are leaded to either positive or negative behaviors or activities, which will
affect customers’ impression to the company.
A right company culture provides guidance for salespeople to make appropriate
choice easily. The culture is based on norms and values which affect the daily
activities. A norm represents how a person behaves when facing a choice, whereas a
value expresses how a person desires to behave when facing a choice. The company
culture is rooted in organizational history and will be continuously modified or
reinforced. It can also communicated explicitly by mission statements and mottoes.
The incentive or reward programs define the success and how the companies
recognize salespeople’s accomplishment. We need to know how to retain the best
people with a good incentive program. Refer to Table 2.3, the common criteria and
impact on favored incentive or favored salary will be compared.
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Table 2.3: Common Criteria and Impact on the Incentive/Salary
Favored Incentive
Favored Salary
Short-term results are rewarded
Long-term results are rewarded
Focus on results
Focus on activities or overall
Hunters-> selling new business is
Farmers-> maintaining existing business
important
is important
Salespeople are empowered
Strong controls are in place
People-oriented is favored
Team-oriented is favored
Hired into the sales force
Developed within the company
Try to be adaptive
Stability is a concern
The sales receive incentive to be
Salespeople shall be treated the same as
measured by results
everyone in the company
Source: Zoltners, Sinha & Zoltners (2001)
The sales culture can be thought of the genes of the sales force. The culture
builds up the sales decision makings and behaviors. Value and culture will decide
what is important and the guiding behaviors. The incentive plan shall match and
reinforce the company’s culture. In Table 2.4 shows how the criteria to evaluate bonus
and commission plans also suggest the type of people who will be attracted by which
plan.
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Table 2.4: Criteria for Evaluating Bonus & Commission Plans
Perspective
Bonus Plan
Commission Plan
Selling
The selling process is complex
Selling process is simple
Process
A team-selling environment
Individual selling environment
Long selling cycle
Short selling cycle
Low sales force causality
High sales force causality
High carryover sales
Low carryover sales
Sales Force
Sales effort control is desired
Hard to control selling force
Culture
Cost control is not essential
Cost control is needed
Sales
Performance measures are
Performance measures are
Management
complex
simple
Multiple performance measures
A single performance measure is
are used
used
Fair and measurable goals
Revenue is the focus
Source: Zoltners, Sinha & Zoltners (2001)
A bonus plan will be provided when a target or goal is accomplished. In contrast,
commissions give continuous feedbacks when sales are made and can be highly
motivational. The sales territories shall be balanced or adjusted; otherwise a
commission plan will be unfair. Setting an appropriate goal on each territory may
reduce some unfair concerns. In Table 2.4, it demonstrates many criteria for
evaluating whether a bonus or a commission plan is more suitable.
Designing salespersons’ compensation or incentive program is an important task
since it will affect motivation of the sales and profitability of the company.
The
basic components of most sales compensation plans are fixed pay (salary), variable
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salary, commission, bonus, benefit, etc.
Salary is the fixed component of pay for a
sale person. The fixed pay gives the sale person an incentive to perform the
non-selling duties of the job, including after sales service, searching for new sales
opportunities, etc. Commission is classified as incentive payments since it gives the
salesperson a special incentive to perform the selling job function. Commission can
be exercised as a percentage of dollar sales volume or unit sales volume. The bonus is
another form of incentive program, although it is not closely related to sales volume
as that in commission. Sometimes bonus will be paid according to the whole company
or team performance. Also bonuses are paid less frequently than commissions (often
bonus paid quarterly or yearly but commission is paid monthly or quarterly).
Competitive advantage refers to a company’s ability to maintain market share
and profitability over a period of several years. Employees are key resources
necessary for company’s success.
From management point of view, we need to consider the company’s overall
strategy, internal and external environments & competitions, the marketing strategy,
the role of personal or team selling, the breakdown of incentive & non-incentive
components.
Based on analysis of value chain, division of the sales & marketing, R&D,
manufacturing, purchasing, human resources, and finance each one plays some roles
within a company. Some companies separate sales and marketing into different teams.
Depending on company’s characteristics, it may be either R&D, sales, finance, or
marketing, which plays the most important role in a company. For a start-up company,
the R&D and finance may play the most important role in new created products with
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enough money. For a mature company, the sales team plays an important role since its
regular cash inflow can keep the company alive.
Some characteristics associated with sales performance or compensation plans.
From the cooperation point of view, segmentation and breadth of product line will
decide the sales force allocation and compensation or incentive program. For
companies, the product may vary from commodity to niche technology, from
telecommunication to industrial equipment, from automotive application to medical
device, from digital component to analog component, etc. Some salespeople may
like to promote commodity instead of niche components or new products since it is an
easier job. Will the company base its performance on the sales volume, margin, or the
product segmentation?
Shall the whole sales teams promote all products or each
team promotes the specific product segment? For various product segments, most
companies do have different marketing teams to promote their specific fields or
segments, but it is a tough job for salespeople to understand all various products. Such
situation will be even more critical for a big multinational company. Some companies
ended up with dedicating sales team for each market or product segment. Could you
utilize the same sales team to promote all different products? For technology intensive
projects, it may take longer to design the project and finally get orders (revenues). As
to commodity parts, it may take few days to win the business. The breadth of
company product lines affects the total package offered to sales persons when the
salespeople depend on their efforts made on particular products. A good compensation
plan shall have incentive & objective to promote some intensive designed products
which require lots of efforts. If a project needs lots of people (Sales, FAE, PM, etc.) to
sell a product, then all the actions and team efforts will affect the final result.
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For the last decade, lots of multinational or transnational companies have lots of
branches or subsidiaries all over the world (Yu, Chou-Ming, 2005). We need to set up
a marketing team to have close interactions on price verification since some
companies take advantage of different regions on the price checking and negotiation.
Sometimes it is easier to set up a global account team to control global accounts
activities for better service and price consolidation.
Different regional sales teams or
branch offices may compete with each other for sales revenue. Interdependence
among the different sales persons and different regions will be common in a company.
A dedicate incentive plan can meet special demand for promotion on various products
with more salespeople’s efforts.
Company’s strategy and objective can affect types of compensation offered to the
salespeople.
The growth rate of sales revenue, the sales gross profit margin,
operation net profit margin, and EPS are the key criteria as the indicators of a
company performance. In U.S., most companies care about the profit but in Japan or
Europe, most companies care about the stability of a company due to social and
welfare system. If a company focuses on the margin or new market segments, some
special compensation programs will be implemented for certain product promotions.
If a company cares more about the market share or growth rate, the commission
system will be implemented. We can not take it for granted that any compensation or
incentive program may work well in any circumstances because it depends on the
industry, product segment, region, environment, etc. The maximization of profits can
be diversified by the product portfolios. Due to the risk aversion, some sales may
prefer to sell commodity as an easier job.
Branding effects and existed reputations will help salespeople to sell the products
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more efficiently. The less established is the company’s reputation, the more important
is the sales effort in generating sales. For a start-up company or an un-established
firm, the good incentive program or compensation plan will play a major role for the
sales team.
Another important concern is to identify the nature of selling task. Will the
salespeople need to educate the public, to carry the technical assistance, or just to sell
the products?
Will any after-sale service required during the warrantee period or the
whole product life cycle? If a salespeople’s responsibility is to create sales of
products, the incentive will be tailored to generate sales of products.
Some scholars suggested that higher percentage of total pay came from sales
creation rather than customer services or technical service (Smyth, 1968). In some
fields, the technical services will be very important so that the theory may be applied
for only specific segment. For high-end technology, it will require many technical
services or equipment business which needs on-site installation or service; it may
need the team efforts to achieve the sales.
Market
Structure of markets will affect overall compensation package. If the
competitors’ products are homogeneous on the basis of quality and price, sale efforts
will be so important that the incentive pay can be based on volume sold. For the
dominated market such as Intel in CPU market, sales persons can have more
flexibility in controlling price discount and matching company’s overall objectives.
In the beginning, we need to decide which market segmentation and then to determine
market positioning. After market positioning, we shall have product positioning. The
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right product positioning will determine the future incentive program.
As to market characteristics, several factors which affect the incentive program
shall be identified such as: the time span & efforts to sell a product, product life cycle,
expertise or knowledge of sales, and technical complexity of product. If a sale person
is a risk aversion person, he may choose easy products to sell. The incentive
program shall consider whether there are positive or negative impact on sale by
industry economic trends or other factors such as earthquake, hurricane, or political
issues.
In some industries of telecommunication testing equipment (Agilent, Simen) or
DSP (TI, ADI), total solution or turn key solution may be required. Their promotion
may be lasted for a few quarters or years. If there is no time lag, the incentive may be
paid by monthly base. If there is a significant time lag (a longer time to get order), a
suitable incentive program shall be implemented. For any new products in the initial
stage, its marketing and sales efforts will be more important since there are less
people who are familiar with these products. In the mature stage of product life cycle,
basic service will fit customers’ demands, so the intensive incentive program may not
be required. Do we need different incentive programs for various products?
The
answer may be “No” since most companies have lots of different products and they do
need good computer system to keep track of product items they have sold.
If a
company tries to get into a new market segment, a good incentive program shall be
important since it will build up motivation for the sales team.
Structure and complexity of company products will affect total sales
compensation and overall package since different expertise are needed to deal with
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various sales. Most companies need to decide whether all salespeople are responsible
for the promotion of all products or each team members promote their own products.
The more expertise the salespeople have, the more total package (fixed pay plus the
incentive pay) he will get.
The more complex the products are, the more important
the well-designed compensation programs are likely to be. In this thesis, we will
discuss various key factors to drive corporation’s sales performance.
Sales Role in Demand Creation
Prominence represents the ability of each salesperson to affect results and to
control customers’ relationship. In the high prominence environment, the sales people
do have the skills, motivations, and efforts to have more sales revenue. In the low
prominence environment, other factors have more significant impacts such as brand
name, competitive pricing, advertising, economic, competitors’ move, etc.
Salespeople with higher pay levels are required to have advanced knowledge,
skills, and capabilities to do their job effectively; on the other hand, salesperson with
lower pay are not required to have complicated product knowledge. Straightforward
selling skill is enough for them to sell consumer products. Corporation shall take the
environment and strategic choice into consideration with compensation strategy. The
strategic choice will influence both firm structure and performance.
Incentive Mix
Salary portion is called fixed pay, and the incentive portion is often referred to
variable pay. Depending on the different market segments and sales environments, the
portion of pay will be different. For consumer products or office suppliers, most sales
will be involved in the short term and simple process. The sales people interacted with
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customers via a sales kit to take an order and they need to contact with customers
from time to time to discuss promoted products and make sure that customers’ needs
are met. Under this situation, most income came from the variable pay which based
on commission rate times profit margin and/or volume sold.
For some highly technical related industries, most sales people require sale skills,
knowledge or know-how to serve the end customers. Some non-selling efforts such as
technical service, equipment installation, and training will be required. Maintaining
good relationship with end customers is important for technical industry. In this
category of business, large portion of the total income will be base salary.
To analyze pay mix structure, sales manager shall pay attention to what the
salespeople want to approach or retain and whether the pay mix can match with
company strategy, company culture, organization structure, and management system.
A good pay mix can be a powerful tool to drive the sales force direction and
motivation. The right pay mix attracts and keeps salespeople with the best skills,
capabilities, and expertise that company needed. Some of variable pay can be a
hidden salary since sales revenue can be the result of strong brand identity, marketing
efforts, excellent products, or carryover from prior year’ efforts. True performance
pay shall be linked to salesperson’s sales revenue only (earn them by generating
sales).
Salary and incentive play an important role as the controller of sales force
activity. The pay plan can define sales behavior to align with company objective and
strategy.
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Stock Option Plan
For most U.S. companies, they have been considering the stock option in the
total package concept. The stock option plan will be meaningful if the company
continues to keep growing and make profits with the stock price keep on rising. The
stock option can be vested after a few years (normally 3 to 5 years) after the grant
date.
Originally this is a good incentive for management levels to guide the
company in a right direction. All the employees receiving stock options can stick
together for the advancement of the company. The stock option can be considered as
the reward for the team work or the whole company efforts instead of sales efforts.
For the last few years, lots of U.S. companies have changed from stock option plan to
restricted stock option due to the flat stock price. Under the restricted stock option
plan, the employee will get the full price after vesting date instead of the stock price
difference between the grant date and vested day. The restricted option shares will be
reduced to about 30 to 40% of the share number of original stock option plan.
If a
company in an early stage of booming stage, most employees will prefer to have stock
options plan due to the leverage effect. For a stable and mature company (without lots
of new products or fancy innovations), most employees will prefer to go through
restricted stock option plan. Most U.S. public companies have changed their company
option plan to restricted option plan in 2006.
Performance can not be judged without the right evaluative criteria. Selecting the
performance measures is a critical decision. Companies use two complementary
effective drivers to influence sales behaviors: sales incentives and sales performance.
Sales incentives affect a sales variable pay (commission or bonus) but performance
measurement consists of regular feedback, coaching, and guidance in the whole
periodic review process. We need to know the achievement of sales revenue goal for a
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short term result and the activities goal/customers relationship for long term target.
Refer to Table 2.5, the basic sales management system will include the
estimation of sales force size, sales’ capability and altitude, sales’ activities,
customers’ expectations, and company’s expected targets to accomplish. This is a
good guideline for sales management level to go through.
Table 2.5: The Basic Sales Management System
Sales force
Salespeople
drivers
Evaluation of
Knowledge
Sales force
Customer
Company
activities
result
result
Planning
Satisfaction
Sales
sales force size Skills
Calls
Retention
Margin
and control of
Altitude
Needs assess
Loyalty
Orders
sales force
Behaviors
Proposal
Penetration
Market share
Motivation
Customer
Sales growth
Value
Turnover
Service
Complaints
Source: Zoltners, Sinha & Lorimer (2006)
Incentives programs are most effective if it is based on the measurable criteria
with short-term result. If income is linked to the criteria which can not be measured
accurately, the desired motivational impact will be lost and also demoralize the sales
force. Customer’s response and company’s profit are the most effective measures for
incentive plan. If the right measurements are not available, the company shall design a
strong performance management system to pay the salespeople with a higher
percentage on salary and a lower percentage on incentive. The front line managers
have the responsibility to recruit and retain the high quality people and to develop the
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competency and skills for the front line sales force. Every sale people shares the
reasonability for customer’s responses and company’s profits. The good incentive
performance measure shall be adaptive to business strategy change and sales force
activities. It shall be fair and accurately measurable. One point to keep in mind is to
keep performance measure simple and specific since too many measures will confuse
the sales force and send mixed signals on company strategy and directions.
Refer to Fig. 2.6, four dimensions of performance measures in sales performance
(margin, market share, etc.), perspectives in specific target, focus on special markets
or products by regular appraisals.
Table 2.6: Four Categories on Performance Measures
Metrics
Perspectives
Focus
Timing
Sales revenue
Comparison level
Market segment
Monthly
Gross margin
Growth
Product
Quarterly
Net margin
Target/goal
Channel or direct
Annually
Market share
Ranking level
Team work
Cost satisfaction
Sales capabilities
Source: Zoltners, Shina & Lorimer (2006)
Refer to Fig. 2.7, the advantage and disadvantage of common performance
measures are discussed in volume, revenue concern, profit, or market share concern.
Under different product stage (early adopter, growth, mature, or decline), the
company may have different performance measurement strategy to fit the real needs.
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Table 2.7: Advantage and Disadvantage of Performance Measures
Performance
Advantage
Disadvantage
Measure
Volume
- Easy to understand
- Not link to business results
- Reduce potential price
- Impractical for a large number
difference on sales results
of different products
- Work well in commission
program
Revenue
- Strong link with business
- Distorted by price change
results
- Not directly linked to business
- A common measure for
profitability
different products
Market share
- Meaningful for new and high
- No sense for fragmented markets
growth markets
- Impractical for lots of dissimilar
- Provide an external focus
products
- Data may not be available
Profits
- Align with business strategy
- Many sales have no way to
- Easier to link the roles of sales
drive profitability
- A profit measure is not aligned
with some sales role
Source: Colt (1998), pp. 102.
Linking incentives to company overall results can motivate sales force to
accomplish short-term company financial goal. The plan does not pay until the
anticipated results are achieved. The incentive can be rewarded at the personal level,
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account level, team level, district or regional level, and so on up to the whole
company level. Salespeople are more likely motivated by money and recognition than
job satisfaction and personal growth.
“What gets measured gets done” said William Hewlett, co-founder of
Hewlett-Packard Company. If the company wants to “reach the customer first”, then it
is logical to make the incentive consistent with the objective. It is easier to get
business from existing customers and keep relationship with important customers. In a
commodity market, the customer relationship may be the differential competitive
advantage. Salespeople’s capability will focus on the knowledge, skills, and attitudes
of each sales force. A good sales manager needs to recruit the right people in the right
team.
What are we going to address here is the team work performance measurement.
Team-based incentive plans are harder to comprehend and manage than individual
performance alone. Team-based incentive plans can attract security-minded
salespeople instead of someone who like to become superstars. Team-based incentive
plans can create “free-rider” effect, where few non-performers benefit from
productive members. The supervisor needs to know who the superstars are and make
sure the superstars are rewarded or recognized by salary raise or extra bonus pay.
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2.2
The Sales Growth Incentive Plan
Will the direct sales force have the different sales incentive from the distribution
sales force?
I do believe distributors need different incentive program compared to
vendors do.
Why a company shall pay differently from the way it pays other employees? In
some situations, the right sales incentive can guide the salespeople to have the strong
motive to follow company priorities and directions. The salespeople can create some
added values to persuade the customers to meet their needs. If a company has some
indistinguishable products or services for the salespeople to create some added values
for customers’ needs, we may need to pay salespeople differently. The sales
compensation plan may be used to reinforce the salespeople to accomplish sales
related activities such as company strategic sales (focus on volume, profit, product
mix, or new product introduction) or marketing plan.
Changing the compensation plan may be tough since we need to communicate
with the salespeople and get their inputs. Changing from a salary plan to a variable
(commission or bonus) will be challenging. One good approach is to hold the salary
raise and use the money saved for incentive pay. Another worse idea is to cut the
salary and fund for the incentives. Definitely, most people will prefer the first one.
Changing from a commission plan (variable plan) to a salary pay (fixed plan) is
easier if the plan is a flat commission with well balanced sales territories (no bias on
territory). Salary levels are difficult to decrease since most salespeople prefer to
have more stable income from salary.
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From Fig. 2.2, we know that commission and bonus will be less permanent
which depend on personal performance or team performance. On the other hand, total
compensation package will be most difficult to change since it has been confirmed
before new employees being hired.
Most difficult to change
Total compensation package
Commissioned plan bonus plan
Salary Plan
Bonus Levels
Commission
Least permanent
Fig. 2.2: Salary Plan the Degree of Adaptation
Source: Zoltners, Sinha & Zoltners (2001)
Setting up The Goal
Complex plans may need extra administrative costs. If a manager did a poor
job on forecasting, the salespeople are doing either too poor or too well. Goals need to
be raised up if the target is too low, on the other hand, need to be lowered if the goal is
too high. The regular forecast may be referred to the previous quarter and is raised up
6% if it is expected to increase 25% per year. Sometimes it will depend on the
economics situation and the industry environment. The managers do have the
responsibility to do the right forecast to bind with the incentive program for the sales
promotion. The goal setting process typically involves in assigning sales quota among
sales territories.
It takes attention to see what you can produce or to sell what the
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customers’ needs. Last year’s sales revenue represents foundation for the planning
process. Most companies use top-down approach to assign the quota for each territory;
otherwise bottom-up approach can be based on the customers’ demand and
competitive pricing.
Goals energize salespeople and organization. Organizations and individuals who
are goal or objective oriented are normally more successful in the long run.
Organizations use a goal to express what their expectations are. Salespeople who
accomplish their goals are considered as the winners. Everyone wants to be successful
in some domains by the same token the realistic goal can energize most salespeople.
The design of a sales incentive plan shall match company’s objective, marketing
strategy, and the various customers’ needs. The business objectives decide the
measurement of the success or failure for the company, the marketing strategy decides
the products, services, technologies, market segments, channels, and capabilities your
company shall develop, the types of customers you must attract and retain to
accomplish the company objective.
Plan Design
Prominence is the key concept of compensation program. The higher prominence
means more control and direct responsibility from salespeople. In the extreme case,
the high prominence sales job means only variable income (commission) exists. The
high prominence jobs need significant incentive opportunity. The second criterion is
the entry barrier of degree, knowledge and skills to get into this field. The skills and
experiences command some fixed income since these people can access alternative
employers in labor markets. In general, as entry barriers increase, the level of fixed
31
income also increases. Similarly, as the prominence increases, the amount of variable
compensation will increase. In Table 2.8, we express the common characteristics from
the sales personal prominence and industry’s entry barrier.
Table 2.8: Common Characteristics of Basic Barrier/Prominence Relationship
High Barrier/Low Prominence
High Barrier/High Prominence
- Expert or experienced rep
- Minimally trained rep
- Product, company, application must be
- Heavy prospecting
sold
- Multiple suppliers
Low Barrier/Low Prominence
Low Barrier/High Prominence
- Technically skilled rep
- Minimally trained rep
- Complex product, need seen, few
- Familiar products
suppliers
- Established customers
Source: Colt (1998)
2.3
The Benefit of a Non-Commission Sales Force
For semiconductor industry, most companies do have a commission program to
stimulate sales force to increase sales revenue. Most companies will pay sales
commission based on sales revenue and personal contributions, so most salespeople
will try to win the design and book the orders under his name. This will force each
salesperson to have more bookings under his or her territory.
Most companies base on split-commission system to decide which region does the
design efforts and which region does the fulfillment. The weighting factors will be
normally depended on the design-in contributions & fulfillment-efforts by the 50/50
rule. In some companies, they focus more on the design efforts instead of the sales job
32
fulfillment.
The payment is still based on sales revenue and individual’s contribution to win
the design in terms of percentage of efforts vs. other persons’, to book the order, and
to support the purchasing location. Under either commission system or
split-commission one, it will encourage the sale individuals to maximize their income.
There are very few companies which apply non-commission policy in the
semiconductor business (Jones & Sanghi, 2006). Based on the company’s overall
performance, it will enhance global contribution for design support, order completion,
and post sales support. This approach will encourage the sales individual to practice
good business ethics and team efforts to support the customers.
Very few companies’ salespeople are non-commission salespersons. This allows
everyone to spend necessary time to make sure that customers’ needs are met
worldwide. We don’t spend time looking for ways to make commission, or trying to
prove that one region does more work than the others do regarding an account. We
spend the time on what is important to the customers. If the customers have a problem
somewhere in the world, we can communicate with our counterpart there and address
it immediately. We will provide our best service which other companies can not
provide. For Microchip, the customer is the most important focus.
We do need to meet with design engineers, purchasing division, manufacturing
division, customer, corporate headquarter, etc. Each staff shall be confident enough to
have the knowledge to support issues which different divisions may bring up. The
non-commission sales managers shall promote team supports and make sure of the
33
uniqueness and differentiation from the competitors.
The open and free communication within Microchip plays a large factor in
opening things up and also shows that pricing will not be compromised. Microchip is
a global company which does not pay commission, so the mission of its salespeople is
to help customers no matter where they are located. We do not charge for any supports,
it is a service we provide on a worldwide basis to ensure our customers get what they
need, no matter where they are or what function is performed at that location.
There is no selfish motive to support the customers, whether they are in the local
areas or overseas. Any concern of support anywhere is immediately solved and the
reason is made clearly to give it a lot of credibility. Also the benefit of the system and
the bonus plans show Microchip as one team to customers.
Customers themselves have started telling us how much they appreciate the
benefits of our non-commissioned sales world. The marketing, finance, and legal
teams have super customer focus which has become a true differentiator in the
process. The factory, planning, and quality teams all stick together to meet every
challenge and the field sales team has been excellent due to their team effort spirit.
In the last few years Microchip has refocused, reorganized, refined and
reinvented the global sales process. A stable, solid, highly dedicated and driven team
has been established. The details the concept will be described further on. “One
world, one team, one goal” is not just a slogan but actually implemented in the daily
activity.
34
Due to the Microchip’s culture, consistent compensation plan will work for
employees, development tool team, silicon team and applications team all work
together to ensure customer’s satisfaction.
We are a global company and are all part of the system so that we are not
compensated by sales commission; our only concern is to support the customers who
need us in any corner of the world.
This objective is to serve the customers no matter where they are located, in fact
we are not even paid based on sales in our own geography, no matter where you
design, manufacture, or purchase, there makes no difference to us. The designers get
the answers quickly and build up confidence from the sharing information.
The Disadvantage of Commission Based System
There is a lack of trust and communication between design responsibility and
purchasing region responsibility. The split-commission salesperson is interested in
just booking the business and not reassuring the support of purchasing in other areas
outside of his/her own responsibility. Customers feel uncertain about supports when it
is dependent upon someone other than the commission salesperson in that region.
The purchasing will appreciate for the non-commission salesperson to provide
accurate information, as well as to confirm that if there is a problem of global support.
The salesperson established the relationship where can guarantee his/her
commission. The salespeople offer whatever the customers’ wants to assure their
commission will finally be paid. Normally the purchasing division is concerned about
35
its supports but the customer’s response is very limited.
The designer gets frustrated with the commission-based sales person who tries to
force the purchasing staff to step into his own geography and the designer may not
use the parts from that company since it is obvious that there will be very little if any
supports provided from this sales person/team.
The designer gets frustrated with the split commission sales person who tries to
make sure the amount of production will be exactly so, which can be identified and
the design can be tracked to get split commission. It is quite often that the customer is
not the focus of attention.
Here the purchasing division is concerned about the after-sales supports,
however it is interested that there is the possibility of getting a lower price from the
commission salesperson. The commission salesperson is only interested in making the
sales and receiving his/her commission. Unlike the purchasing division, the
commission salesperson may have no influence in the process.
It is quite obvious that there is a lack of trust & communication between the
design division and the purchasing one. The commission-based salesperson is
interested in just booking the business and not assuring the supports of purchasing in
other areas outside of his/her own responsibility. Customers feel uncertain about
support merely from certain salesperson other than the sales region. The commission
salesperson has truly no reason to visit a corporate headquarters, mainly due to the
fact that he/she has to rely on someone to provide important information which the
corporate headquarters would be interested in primarily global support. The
36
commissioned salesperson is interested only in securing the business and receiving
the commission.
The corporate headquarter realizes that the commission salesperson is concerned
about his/her commission instead of teamwork with the design effort. The
commission salesperson basically will not go to a corporate headquarter because he
and she realize that they cannot provide an adequate level of global supports.
Advantages and disadvantages of group incentive plans will be discussed in the
next section.
Advantages will be as follows:
1. Positive impact on organization and individual performance
2. More easier to develop performance measures than individual plans
3. Teamwork meets with enthusiastic support from most employees
4. Increase participation of employees in decision-making process
Disadvantages will be as follows:
1. Employees will find it is more difficult to see their individual performance which
affect their incentive payouts
2. It may increase turnover rate among top performers who are discouraged because
they must share with lesser contributors
3. It increases compensation risk for employees because of lower income stability
4. It may influence applicants to apply for jobs in firms where base pay is consisted
of larger compensation component
37
Key features of gain-sharing plan will include the following four paragraphs:
1.
A productivity, quality, and cost reduction formula to recognize employees for
their efforts by increasing productivity, improving quality, saving on shop
suppliers.
2.
Teamwork and employee participation are the key criteria of the plan. Both
ensure all the supports and commitment in order for the program to be successful.
3.
The expansion of merit incentive program combining sales growth, gross margin,
operating expense, EPS, and some specific focus segments targets, each with
some weightings to give employees with an opportunity to increase the
productivity in sales revenue.
4.
Cash bonus will depend on new record levels in net sales, gross operation margin,
net income and earnings per share.
Merit Incentive Formula
The merit incentive formula will be based on the base salary multiplied by
individual target rate with each region performance payout. The formula will be
calculated as follows:
Base Salary x Individual Target Rate (% shown on employment letter) x each region
payout
From Table 2.9, an example for merit criteria can explain company’s focus
factors on sales growth, gross margin, operating expense, operation margin, specific
products, and EPS. These criteria can be adjusted to corporate strategy and market
38
demands.
Table 2.9: An Example of Merit Criteria
TARGET
TARGET
QTR 2 FY 07
QTR 2 FY 07
MEASUREMENT
POINTS
PERFORMANCE
CALCULATION
5.00%
10
2.10%
4.20
40.00%
5
53.06%
6.63
GROWTH(SEQUENTIAL)
8.00%
5
2.23%
1.39
GROSS MARGIN %
57.00%
15
60.45%
32.25
OPERATING EXPENSES %
24.00%
15
24.05%
14.63
OPERATING PROFIT %
30.00%
15
36.40%
25.67
EPS
39
15
38.0000
12.44
SALES
GROWTH(SEQUENTIAL)
16 BIT SALES
GROWTH(SEQUENTIAL)
ANALOG SALES
Discretionary
20
15.8
100.00
113.00
Source: One Company’s Q2FY07 Merit Incentive Plan
The different weightings have been identified for the importance of these criteria.
We can see that the higher the sales gross margin, the lower the operation cost with
the higher operating profit for most companies. For most U.S. global companies, these
performance criteria will be applied, but for some Japanese or European companies,
they may take the social stability into consideration (Yu, Chou-Ming, 2005). There are
two specific products have been identified as the focus: 16 bit MCU and analog
products. The main goal is to keep the sales growing with higher margin, higher
growth rate, and with lower operation cost.
39
2.4 Corporate Sales Strategy
If an organization wants to meet challenge of a changing world, it must be
prepared to change everything about itself except its basic beliefs. The only
sacred cow in an organization should be the basic philosophy of doing business.
- Thomas J. Watson
In a dynamic marketplace, every business runs the risk that its current business
model will become obsolete. No corporate strategy will be lasted forever. Companies
which get all the components of their business model working together can often
drive their success for many years (Johnson & Bate, 2003). The investigation on the
factors to drive a company successfully is a hot topic.
Corporate sales strategy is the choice of competitive methods which will be used
to compete in the market place and shall be reflected on the organizational strategy.
Competitive methods are the mix of products and services to produce a competitive
advantage.
A clear business strategy is the driver of an effective sales system. It translates
both overall company strategy and results of the customer segmentation analysis into
corporate selling strategy of entering into market. As to corporate strategy, there are
many theories in the past. Since this study focuses on the sales performance, we like
to stick to the sales strategy only.
Sales strategy defines which firms is the target to sells to, which products or
services these customers are likely to buy, which channels or distributions we should
40
focus, how we establish our competitive differentiation, and how the selling is done.
Developing a sales strategy is the first step in sales force design. Firstly, the market
must be segmented into different segments. Next, the firm must decide the best
services and products for each market segment. Finally, the appropriate sales process
must be defined for the right product & service for each market segment. Customer
segmentation helps corporations to meet the diverse customers’ needs. Customers
may have different buying processes.
Some customers make purchasing decisions
centrally; others assign purchasing power to each division. Successful sales strategy
uses customer variations to improve sales impact and efficiency.
A large and
profitable customer gets more attention than a small, less profitable customer does.
From Table 2.10, we can see company’s sales strategy to affect the customers’
purchasing behaviors.
If we place all customers into the same segment and apply one standard sales
strategy, it will be the easiest and most efficient way to approach customers but the
customers’ difference will not be recognized. Each customer has its own customized
sales process.
From Fig. 2.3, a company needs to decide sales strategy to fit mass market or
individual customers. Commodity products may fit the mass market but for unique
products may fit specific customers. A company sales strategy defines the sales
process to link the right customers with the right products and services.
41
Table 2.10: Impact of Customer Differences on Sales Strategy
Factors
Results
How much a customer buys
How much sales and marketing effort a
How much can a customer buy
company invests
How profitable a customer is
How loyal a customer is
What mix of sales and marketing
activities is used
How a customer makes buying decisions
What the sales process is
Where a customer gets information
What channels are used to provide
information
Why a customer buys or would buy
What the sales message is
How eager a customer is going to try
The product’s life cycle that the
new products
customer is approached
How price sensitive a customer is
What products and services are offered,
How much service and support a
and what the value proposition is for the
customer needs
customer
Where a customer buys
How sales channels are designed
Source: Zoltners, Sinha & Lorimer (2004)
42
Different sales strategy for individual customer
Mass
markets
Segmented
markets
Micromarkets
Individual
customer
Same sales strategy for all customers
Fig. 2.3: Range of Customers Segmentation Approaches
Source: Zoltners, Sinha & Lorimer (2004)
From (Zoltners, Sinha & Lorimer, 2004), seven sales strategy insights are listed
as follows:
1.
Looking beyond the product to create superior value for customers.
Understanding the total cost of the product for the buyer and also how the
customer benefits from the product will help supplier to create add-on value for
that customer.
2.
The sales process can be a source of customer value. Successful salespeople
deliver value through personal interaction with customers via new
technology to enhance the end customers’ business.
3.
Understanding customers’ potential leads to better sales strategies. When the
customer’s potential is known, suppliers can allocate resources more effectively.
4. Focusing sales strategies dominates scattered sales strategy. Profit-maximizing
strategy focuses resources on the targeted products and customers. The 80-20 rule
43
will be applied in the process all the time.
5. New markets and new products typically require significant investment.
Developing a new customer used to take three to six times efforts compared to the
interactions of existing one. A new product launch will take 50% of a sales force’s
time.
6. The penetration into new markets and the launch of new products will reduce the
time and money for existing products and markets, so the new marketing or sales
investment will be required.
7. Looking into the future by predicting the future revenue for each customer
segment can help allocating resources more effectively.
How to reach the end customers, we need to decide whether to go through direct
sales organization or distributor channels. Internal resources include direct sales force,
product specialists, services specialists, telesales, and e-channels. External resources
include distributors, design-house, representatives, partners, wholesalers, value-added
resellers, etc. The customers’ needs and economics of scale will decide the channel
selection. Due to technology change (internet), end customers can reach most of the
approaches more effectively. We need to reassess the existing channel strategy at least
every other year in order to know the customer needs, competitors, environment,
corporate strategy, and performance challenges.
44
2.5 Corporate Culture
As the business grows more competitively, companies are increased in
challenging to make sure consistency between the characteristics of the market and
the cooperate culture. The customers’ needs will be more important than their own
needs.
Culture is a term used by many businesses to describe the overall picture of an
organization or business unit. It is the set of signals regarding ways for its employees
to think and act of how the company does business (Jensen, McMullen & Stark,
2007). An organization’s cultural attributes have been set down by an organization’s
leadership or top levels. The corporate culture reflects a code of conducts which the
organization supports, encourages, and rewards. The culture within a company also
reflects its values, beliefs, and attitudes of employees. From the anthropological point
of view, culture reflects the set of traditional way of thinking, feeling, and reacting
that a particular society faces its problem (Kluckholn, 1951).
Harrison (1972) suggested four types of corporate culture: achievement culture,
support culture, power culture, and role culture. The achievement culture is based on
self-expression of value growth and success. The support culture is based on
integration, mutual communication and interaction. The power culture is based on the
strength and determination. The role culture is based on stability, control and profit.
Old fashion culture is rule-based by procedure orientation of central control and
top-down communication. New-fashion culture is adaptive and customer-oriented
with decentralized and open communication process.
45
From the article “The Conference Board, Research Report 12-1302-01-RR”
(2001), corporate culture is identified as one of the key resource of a business, along
with capital, labor, products, services, profits, and operational infrastructure which
finances, builds, markets, sells, and delivers. Managers shall be aware that culture can
be managed to guide the organization’s performance in a shifting or dynamic market.
Culture will continue to grow and evolve in the organization with self-reinforcing
attitude.
Examples of factors which might shape a corporate culture include:
Internal competition among employees
Operating independence
Creativity and innovation
Respect for the individual
Self-confidence
Informality
Openness of communications
Employee and customer participation
Customer service orientation
Propensity for action and change
Decentralization of decision making
Orientation to risk
Quality and seniority
A company with a good corporate culture will affect compensation strategy to
attract and retain employees. It is believed that the good compensation strategy and
46
reward system will influence and stimulate company’s culture on the employee’s
behavior and attitude. It is important to take firm culture into consideration when
designing compensation strategy to make sure the consistency between each other.
Some scholars have different opinions on the consistency between the compensation
strategy and firm culture. If the company rewards the employee for any risk-taking
opportunities, innovative culture will be cultivated. If the company does not reward
the risk-taking behavior or does punish for failure, the risk-aversion culture or
conservative culture will be formed.
The compensation system may build upon hierarchy based culture (clan) or
performance (market) based culture. For performance based culture, the
compensation will depend on the individual performance. In the commodity industry,
some salespeople earned more money than their boss due to personal sales
performance. For team work or group based organization, the hierarchical based
culture will be more appropriate since collaboration and team harmony are more
important than personal contribution. The seniority and job levels play some key roles
on hierarchy base culture company.
their hierarchical positions.
Managers are paid more bonuses to emphasize
For market or performance based culture, there are less
team interactions and less interpersonal communication since individual contribution
is more valuable than team success. You may combine both hierarchy based culture
and performance based culture to count each team’s performance. Every team
member may get the rewards from the rank of his position or the performance of each
person to calculate the reward.
47
If a company implements the compensation strategy successfully, they shall
convey the company objective to employee clearly. If employees are rewarded
appropriately, the performance can be accurately evaluated, and the team spirits can
be established, the right corporate culture will be built up. From Table 2.11,
corporation market segment and technology capability will have different selling
characteristics.
Table 2.11: Linkage between Culture and Selling Environment
Corporate Culture
Characteristics of Selling Environment
Manufacturing and
There is repetition of sales
technology
Products are substitutable
The salesperson’s role is minor
Numbers
Selling cycles are short
The sales are predictable
There is a high number of transactions
Market based
The incidence of sales is unpredictable
Selling is indirect
Sales situations are multifaceted
The customer is seeking solution, not products
Source: Colt (1998)
48
2.5 Core Competency
Every manager knows this motto: “To be successful, your firm must have a core
competency.” Core competencies do not guarantee profits. Throughout the 1990s,
American Airline ranked among industry leaders in efficiency and customer
satisfaction. Even so, the industry pricing pressure has forced American Airline to
seek bankruptcy protection (Dranove & Marciano, 2005). The company must avoid
the severe competition and must survive the threat of entry. The company shall decide
the value of its competence. Value is the difference between the benefits enjoyed by a
firm’s customers and the cost of production. In a competitive market, a firm can earn
a profit only if it creates more value than its rivals.
Core competence is often derived from the overall strategic statements of
companies. For example, General Electric (GE) emphasizes three strategic goals for
corporate growth: Globalization, Product Services, and Six Sigma (quality
improvement). GE’s top levels rely and drive the business growth on four “E’s”: high
Energy, the ability to Energize others; Edge (the ability to make tough calls), and
Execute (the ability to turn vision into results) (Martocchio, 2001).
Core competencies are things which a company does better than others. The
combination of competitive methods and core competencies shall produce a
competitive advantage which can not be easily copied or be substituted and is
sustainable.
To create a sustainable competitive advantage, it shall create the core competence
in each firm. Prahalad and Hamel (1990) believed that core competence is the source
of competitive advantage and also defined the core competence as the accumulated
49
learning effects for an organization. They classified core competences into three
categories: market-access, product-access, and functional-related competence.
Gallon, Stilman, and Coates (1995) divided the core competence into technical
competence and marketing competence. From the value chain analysis, we can clarify
the most distinctive part or the bottleneck of value chain as the competitive
advantages (Coyen, Hall & Clifford, 1997).
From knowledge point of view, the accumulated knowledge will help the
company to improve the core competence eventually (Hamel, 1994). For a core
competence to become the sustainable advantage, the core competence shall be
valuable for both the company and customers and can be applied to real products
(Hamel and Prahalad, 1995). Swink and Heagarty (1998) classified core competence
into two types: innovation core competence and marketing core competence. The
innovation core competence will focus on capability to develop new products or
markets, on the other hand, the marketing core competence will be based on better
product promotion, service, delivery, and support. The innovation differentiation will
be based on performance. Refer to Table 2.12, innovative company prefers
employee’s involvement to have better performance in a competitive industry. For
hierarchical company, it will stress on organizational efficiency to follow standard
process and internal consistency.
There are some studies on the relationship among core competence and corporate
strategy (Meyer & Lopes, 1995) as well as human resources strategy (Base & Lawler,
2000). The core competence will be executed by top levels in order to combine
different business units or organization structures. The headquarter needs to establish
a solid plan and set up a goal for core competences in common core technologies,
50
branding effects, marketing advantages, and external networking (SeeToo Dah Hsian,
Strategic Management, 2005).
Table 2.12: Two Types of Core Competences Related to Corporate Strategy and
Compensation Strategy
Core
Characteristics of Corporate
The Relationship between
Competence
Strategy
Corporate Strategy and
Compensation Strategy
Innovation
Marketing
- Focus on research &
- Performance based
development, product and
- High percentage of variable
customer service
pay
- Encourage creativity &
- Commission
flexibility
- High employee involvement
- Try to fit end customers’
- Stress on external
needs
competitiveness
- Stress on organizational
- Seniority and hierarchy
efficiency
- Great portion on fixed salary
- Clear job assignment
- Low employee involvement
- Standard processes and
- Stress on internal consistency
procedures
- Strict cost control
Source: Swink & Hegarty (1998)
51
2.6 Sales Corporate Structure
In the book of Competitive Strategy (Porter, 1980), Porter argued that firms
should choose among three generic positions: cost advantage, differentiation
advantage, and niche advantage. These generic strategies are often a cornerstone of
strategy analysis.
Kaplan and Norton (2003) have written many articles on strategy-focus organization.
They emphasized that company’s vision and strategy must be translated into
manageable targets and performance indicators. If they are properly aligned and
implemented by common vision and strategy, they can enhance operational excellence
and increase customer value through a well-organized supply chain (Chien, Shih &
Chu, 2005).
A company’s structure is how the company can efficiently, consistently and
effectively allocate its scarce resources to implement the competitive methods. A sales
force must be well designed to meet customers’ needs efficiently and effectively for
the selling of firm’s products and services. Efficiency reflects the rate at which the
sales force converts its money investment into calls (make customers phone
efficiently). A highly efficient sales force has a high level of call activity for its
investment. Effectiveness reflects the buyer’s response to the calling level of the
selling organization.
As shown in Fig. 2.4, the sales force structure affects many sales force decisions.
The structure affects the performance, training program, evaluation systems,
compensation plan, territory alignment, etc.
52
Structure
Hiring
Training
Compensation
Sales manager
Productivity
Enhancement
Programs
Fig. 2.4: Sales Force Structure Affects Many Sales Force Decision
Source: Zoltners, Sinha & Zoltners (2001)
A good sales structure is adaptive, efficient, and effective. If a sales structure is
adaptive, the firm can react quickly to market and product changes within the existing
sales structure. Efficiency represents the rate at which the sales force converts its
money investment into calls. Effectiveness reflects the buyer’s response to the calling
level of the selling organization. A highly effective sales force has high impact per
call; they generate high sales for the call investment. To become effectively,
corporation needs to focus on specific market segments on specific products with
specific sales force investment. The need for specialization on market, product, and
selling activity can build up values if the corporation wants to add values for
customers.
Refer to Fig. 2.5, there are four sales force structures: generalist, market-based,
product-based, and activity-based. The product based organization shall have broad
product line, diverse products or complex products. The market-based organization
shall have many market segments, many diverse buyers and influences, and complex
53
markets. The activity-based organization shall have many different activities or
complex activities. In U.S., some big companies design the sales force via
geography, market segments, and various activities. Specification produces gains from
effectiveness gains. The best organization shall have the right balance.
Calls
Sales force
investment
Market
Efficiency
Sales $
Effectiveness
Fig. 2.5: Channel Efficiency and Effectiveness
Source: Zoltners, Sinha & Zoltners (2001), pp. 113
Designing a good sales force structure is an art. The best sales structure may not
exist. Refer to Fig. 2.6, if the salespeople understand their product lines, markets
segments, and selling activities well, they will not be afraid of structure change since
they can adapt quickly.
Changing the sales force structure will be faced many challenges; however, the
sales manager shall not be afraid to change a structure which is outdated. Good sales
force structures are adaptive to ongoing change, allowed salespeople to effectively
and efficiently meet customers’ needs and free to sell company’ products and services.
54
Study the products, markets,
and activities
Develop a coverage matrix
Generate sales force structure
alternatives
Evaluate the different sales
force structures
Fig. 2.6: A Process for Developing Efficient and Effective Sales Force Steps
Source: Zoltners, Sinha & Zoltners (2001), pp. 127
55
2.7 Sales Compensation Strategy
On average, in U.S. General Motors (GM) spent about 1783$ per car in this year
for health-care expenses (The Asia Wall Street Journal Newspaper, May 4, 2007),
which was more than it spent per car on steel. Between 25 and 30 percent of an
employee’s total remuneration may likely be benefits, not cash. From General
Motors’ current situation, you can imagine how seriously it will affect the corporate
performance from the previous compensation, benefit, and pension program.
Balkin and Mejia (1990) discussed the base pay, incentive pay, and benefit to
encourage employees. He also addressed the importance of combination of variable
pay and fixed pay. The matching of compensation with organizational strategy had
also been discussed. Milkovich and Newman (1996) assumed only when the
compensation strategy can work with organizational structure and firm’s strategy, and
then the corporation will have a better sales performance. To build up the competitive
advantage, there are two key factors: 1). Compensation policy can attract salespeople,
retain existing employees, control cost, and stimulate employees 2). The
compensation policy which can match with corporate strategy and human resources
activities, it will be difficult for competitors to imitate.
The good design of compensation strategy will motivate and build up employee’s
behaviors, which then leaded to accomplishment of organization objective (Schuler,
1972). The salespeople will sell the products and/or services reinforced by corporate
compensation plan (Simpkins, 2004). In order to set up a sales compensation plan will
involve in deciding how much the salespeople can earn total dollars or total package.
The balance among the fixed pay, variable pay, or benefit will depend on the factors,
including: the needs of the company, the needs of the salesperson, the levels of
56
salesperson you want to attract, the salesperson’s capability to influence the sales, the
type of products or services sold, and the specific competences required for success.
The compensation plan shall be clear, concise, and measurable to all involved
parties or salespersons. The company’s short and long-term objectives, the value of
sales department, the value of products and services, the competitive environment,
relationship with the customers will all reflect on the compensation plan. Refer to
Table 2.13, we need to make sure that the total compensation package will be in line
with a continuous changing business environment. There are four areas such as fixed
pay, variable pay, benefits, and reimbursement expense needed to be considered.
Table 2.13: The Total Compensation Package
Fixed pay
Salary
Variable pay
Performance or at-risk commission, deferred bonus, merit pay
Benefits
Social security, health insurance, profit sharing, stock option,
tuition reimbursement
Reimbursement Travel expense, car allowance, entertainment, communication,
expenses
office or miscellaneous expense
Source: From this research study
A compensation plan has a contractual connotation: If you do this for me, you
will get a reward. A bonus is a discretionary reward: Do good things for me in the end
of the year, which depends on overall business performance. I will see that there is
something in it for you. With incentives, the measures and targets are straight forward;
with bonus pay, the measures may be established up front, and there are often no
specific targets.
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When we design compensation program, we need to consider all these major
fields: such as the needs of the organization and salespeople. The weighting
between the fixed pay (salary) and variable pay (commission) will depend on the
strategic characteristics – defender or prospector in Fig. 2.14.
Table 2.14: Corporate Strategy and Compensation Strategy on Sales Characteristics
Defender
Prospector
Corporate
-Stable environment
-Dynamic environment
strategy
-Limited products or services
-Wide range of products or services
-Stress on cost control
-Stress on innovation
-Focus skills
-Flexible technologies
-Centralized control
-Decentralized control
-Seniority & hierarchy
-Performance based and measured
Compensation -Moderate bonus
-Great size of bonus
strategy
-Moderate merit differentiation
-Greater merit differentiation
-Focus on short-term performance
- Focus on long-term performance
-Stress on internal pay equity
-Stress on external pay equity
-Personal bonus plan
-Group bonus plan
-Moderate use deferred
-Use deferred compensation to
compensation to encourage
encourage employee stability
employee stability
Source: Carroll (1987); Miles & Snow (1978); Huang (2003)
We can see the compensation strategy will be strongly tied to corporate strategy.
Since each company has its specific company objectives, the corporate structure,
culture, compensation strategy will support the implementation of each firm strategy.
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