9be5bSales Force Compensation

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Amity Business School


- Sales force compensation




“Sales is one of the few jobs where you

earn your money – every day.”




Compensation is more than money

Any type of sales organization can reward

sales performance in three fundamental and

interrelated ways:

1.Direct financial rewards.

2.Career advancement and personal development

opportunities.

3. Non financial compensation.




• A sales reward system is not the only means of

motivating salespeople, but it is the most

important.

• Measuring sales performance but not properly

rewarding it severely limits the achievement

level for salespeople.




Purposes Of Compensation – Connects individual with organization.

– Influence work behavior.

– Organizational choice.

– Influence satisfaction.

– Feedback. – Reinforcement.




Designing A Compensation ProgramCompensation plans should have general and

specific objectives:

– Attaining yearly sales volume and gross

margins (general). – Attaining monthly sales volume and sales on

specific products (specific).

– Market penetration and exploiting theterritory’s potential (general).




Steps In Designing The Compensation Plan

Review Job Description

• The first step is to reexamine the nature of thesales job. Up-to-date written job descriptions

are the logical place to start. Revise in order

the complete descriptions of the sales jobobjectives and work.




Consider Compensation Patterns in Community and

I ndustry

• Management needs answers to four questions:

• What compensation systems are being used?

• What is the average compensation for similar

positions?

• How are other companies doing with their plans?• What are the pros and cons of departing from

industry or community patterns?




Provide for the var ious Compensation Elements

• A Sales compensation plan has four basic

elements:

• Fixed element-Straight Salary Plan, Drawing

Accounts

• Variable element- Commission , bonus

• An element covering the fringe benefits

• An element providing for reimbursement of

expenses or payment of expense allowance.




Determine Compensation Level

• Management weighs the worth of individual personsthrough estimating the sales and profit that would belost if particular salespeople resigned.

• Another consideration is the compensation amount ofthe company can afford to pay.




Consult the present sales force

• Management should encourage salespersonnel to articulate their likes anddislikes about the current compensationplan and to suggest changes in it.




Test & Establish administrative process

• Even the best compensation plan will crumble ifit cannot be administrated.

• The acid-test is to take actual sales performancefrom the prior year and compute thecompensation impact with the new plan.




Implement the plan and Provide for Follow-up

• The sales personnel are made to understandwhat management hopes to accomplishthrough the plan and how this is to bedone ,provisions for follow-up are made.




Types Of Compensation Plans

STRAIGHT SALARY

Of all the compensation plans, the straight

salary plan is the simplest: The salesperson is

paid a specific amount at regular intervals.




Profile Of A Straight Salary Company

• Dominant market share in mature, stable

industry

• Highly defined and stable customer base

• Strongly centralized and closely managed

selling effort

• Significant number of house accounts• Highly team-oriented sales effort

• Service versus selling emphasis




Advantages of a straight salary plan

• Provides secure income• Helps develop a sense of loyalty

• Makes salespeople willing to perform non sellingactivities

• Helps increase customer loyalty• For the company, it’s simpler to administer

Disadvantages of the straight salary plan

• No financial incentive to exert more effort& improve performance

• Fixed salary a burden to new firms & non profitablecompanies

• Leads to adequate but not superior performance




Straight Commission Plans• The straight commission plan is a complete incentive plan. If

salespeople do not sell anything, they do not earn anything.

• Paying salespeople according to the amount of their sales in

given time period. Commission may be based on percentage ofsales or on a sliding scale

• Requires highly aggressive selling and minimal non selling

tasks. Provides salespeople with maximum incentive but lowfinancial security

• The sales manager has to decide commission base, rate, start& payout




Advantages of a straight commission plan• Gives strong financial incentive• Attracts high performers & removes ineffective salespersons

• Controls selling costs

• Requires less supervision

Disadvantages of a straight commission plan• Focus on getting sales rather long term customer relationships

• Less control on the salesman for non selling activities

• Little loyalty of salesperson

• In the absence of a cap on the commission , at times theexecutive may draw a higher commission than their managerand therefore may not respond to directions of such managers




Situations where commission plans can

be used – Little non selling, missionary work

involved.

– The company cannot afford to pay a salaryand wants selling costs to be directly related to

sales.

– The company uses independent contractors

and part-timers.




Profile Of A Commission Plan Company

• Low barriers to entry into the job

• Limited corporate cash resources

• Small entrant into an emerging market or marketsegment

• High risk reward sales force culture

• Undefined market opportunity or customer base

• Inability to set quotas or other performance criteria

• Volume-oriented business strategy



Amity Business SchoolCombination

• A type of compensation plan in which a

proportion of the pay is guaranteed and the rest

is incentive to pay.

• The salary constitute living wage and the

incentive should allow the top performers to

earn somewhere between 25 – 50% of their

salary in incentives.




• Most popular compensation method

• Paying salespeople a fixed salary plus a commission

or bonus based on sales volume

• Provides financial security and some incentive



Amity Business SchoolContd.

Numerous types of combination salary plans

exist. The more popular plans are:

– Salary and commission

– Salary and bonus: individual or group bonus

– Salary, commission, and bonus: individual or

group bonus




Advantages of a combination plan

• Management has control over salespeople

• Flexibility to reward desirable activities of salespeople

• Feeling of security• Allows rewards for frequent & specific sales behaviour

• Different combination plans can be developed for diff.

category of salespeople

Disadvantages of the combination plan• Plan is more complex & difficult to administer

• May not achieve the desired objectives if not carefully planned

& implemented




Profile Of A Combination-pay PlanCompany

• Established company with growth potential,

many products, and active competition

• Need to direct a complex set of behaviors

• Need for a variable pay component that will

ensure top performers are rewarded

commensurately




When to Use a Combination Salary Plan

– To motivate the sales force. – To attract and hold good people.

– To direct the sales force efforts in a

profitable direction.



Amity Business SchoolSales Contests

Sales contests are special sales programs offering

salespeople incentives to achieve short-termwork goals.




How To Calculate Incentives – Factors on which to base quotas:

– The past year’s sales.

– The sales force’s forecast of the coming

year’s sales.

– Corporate marketing targets.

– A specific net profit target.

– Geographic market potentials.




Consider Profitable Products

– The profitable products can carry a higher

commission or incentive reward.

– The more profitable products can be weighted

so one of them counts as much as two or threeof the routine products.

– Separate quotas can be set for each product line.

– Salespeople can be paid on the basis of theirindividual contributions to profit.




Sales Force Expenses

Expense plans have the same basic objectives as

a compensation system, that is, to motivate the

salesperson’s behavior in terms ofmembership, performance, and attendance.




Criteria for an effective expense plan

– Fair for the salesperson.

– Fair for the company.

– Cost effective.

– Understandable.

– Convenient.




Types of Expense Plans

– The company pays all expenses.

– The salesperson pays all expenses. – The company partially pays expenses.



Amity Business SchoolFringe Benefits

Five basic classifications of salespeople’s

benefits and services are:

– Benefits that are required legally

– Pension and retirement programs

– Nonworking time

– Insurance

– Miscellaneous services




Types of Fringe Benefits

• Time

– Holidays, Sick Leave, Pregnancy Leave etc.

• Retirement Programs

– Pension Plan, Profit Sharing• Insurance and Medical

– Life Insurance, Physical Examinations, Unemployment

Insurance.

• Miscellaneous – Parking, Lunch, Career Counseling, Child Care Payments




Appraisal of compensation system

• Key questions in terms of the success of a

plan:

– Are the compensation objectives being met?

– Is the firm able to attract new salespeople

with this plan?

– What is the relationship of compensation to

turnover?

9be5bSales Force Compensation

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