Part VPart VSALES FORCE SALES FORCE LEADERSHIPLEADERSHIP

Part VPart VSALES FORCE SALES FORCE LEADERSHIPLEADERSHIP

Chapter 12:Chapter 12:

Compensating Compensating SalespeopleSalespeople

Acceptable ratio of costs to sales force Acceptable ratio of costs to sales force output output in volume, profit, or other objectivesin volume, profit, or other objectives

Encourage activities consistent with firm’s Encourage activities consistent with firm’s overall, marketing, and sales force objectives overall, marketing, and sales force objectives

and strategiesand strategies

Attract and retain competent salespeople, Attract and retain competent salespeople, thereby enhancing long-term customer thereby enhancing long-term customer relationshipsrelationships

Be clear and be flexible enough to allow Be clear and be flexible enough to allow adjustments that facilitate administrationadjustments that facilitate administration

Goals of a Sales ForceGoals of a Sales ForceReward SystemReward System

ConvergenceConvergenceSellingSelling

AccountAccountManagementManagement

LeverageLeverageSellingSelling

New BusinessNew BusinessDevelopmentDevelopment

New

Current

CUSTOMERSCUSTOMERS

Current NewPRODUCTSPRODUCTS

Figure 14-1: The Customer-Product Matrix

The Customer-Product The Customer-Product MatrixMatrix

Compensating SalespeopleCompensating Salespeople

ComponentsComponents NeedsNeeds

SALARY Motivate effort on non-selling activities Adjust for differences in territory potential Reward experience and competence

COMMISSIONS Motivate a high level of selling effort Encourage sales success

INCENTIVE PAYMENTS

Direct effort toward strategic objectives Provide additional rewards for top (Bonus)

performers Encourage sales success

SALES CONTESTS

Stimulate additional effort targeted at specific short-term objectives

PERSONAL BENEFITS

Satisfy salespeople’s security needs Match competitive offers

Aligning Pay With StrategyAligning Pay With Strategy

Government Computer Sales, Inc.’s Government Computer Sales, Inc.’s compensation plan compensation plan ties a portion of reps' pay to the information they ties a portion of reps' pay to the information they obtain from their clients.obtain from their clients.

Mandates reps to dig deeper and put Mandates reps to dig deeper and put GCS in the minds GCS in the minds of the government agencies and educational of the government agencies and educational institutions that use its products.institutions that use its products.

If a rep has $15,000 of available commission for the If a rep has $15,000 of available commission for the first ½ of the year the plan would work as follows:first ½ of the year the plan would work as follows:

40% ($6,000) is tied to account management (i.e., customer information)

60% ($9,000) is tied to a profit dollar quota Reps who meet the documentation requirements receive all $6,000; those who meet less than 85% do not receive the

$6,000.

Use of Compensation PlansUse of Compensation Plans

Percentage of Percentage of Companies UsingCompanies Using

Straight Salary 18

Straight Commission 19

Combinations Plans (63%)

Salary Plus Bonus 24

Salary Plus Commission 20

Salary Plus Bonus Plus Commission 18

Commission Plus Bonus 1

TOTAL 100%

Compensating SalespeopleCompensating SalespeopleCompensation Compensation

PlanPlan AdvantageAdvantage DisadvantageDisadvantage

Salary No motivation Favors unproductive

sales people High costs when

sales are low

Compensating SalespeopleCompensating SalespeopleCompensation Compensation

PlanPlan AdvantageAdvantage DisadvantageDisadvantage

Salary Reduced turnover Simple Easy to administer Good when difficult

to determine who made the sale

Good when service is required

Promotes long-term goals

Good during drastic business swings

Easier to transfer salespeople

No motivation Favors unproductive

sales people High costs when

sales are low

Compensating SalespeopleCompensating SalespeopleCompensation Compensation

PlanPlan AdvantageAdvantage DisadvantageDisadvantage

Commissions Motivational Relates directly to

performance Unlimited income

(assuming no cap) Good for saving

money on unproductive salespeople

Perceived fair

Compensating SalespeopleCompensating SalespeopleCompensation Compensation

PlanPlan AdvantageAdvantage DisadvantageDisadvantage

Commissions Motivational Relates directly to

performance Unlimited income

(assuming no cap) Good for saving

money on unproductive salespeople

Perceived fair

No loyalty Little security Short range view High turnover Management has

less control

10,000

20,000

30,000

40,000

10% Com

miss

ion

Tota

l co

st p

er

pers

on

(th

ou

san

ds

$)

Sales Per Person in Thousands

50,000

Comparing Salary and Commission PlansComparing Salary and Commission PlansUse of Compensation PlansUse of Compensation Plans

0 100 200 300 400 500

StraightSalary

Advantages of Frequent vs. Advantages of Frequent vs. Infrequent Incentive Infrequent Incentive Payments Payments

Frequent Payment Advantages Frequent Payment Advantages (Monthly/Quarterly)(Monthly/Quarterly)

Infrequent Payment Infrequent Payment Advantages Advantages (Semiannually/Annually)(Semiannually/Annually)

Salespeople receive frequent feedback and rewards when selling cycle is short.

Rewards are close in time proximity to the successes that provided the reward.

Strong link between successful behavior and reward – motivation increased.

Payments at bonus time are larger and have greater impact.

Performance is more stable because short-term sales variations are smoothed over the longer time horizon.

Incentives are not paid till end of year – smoother cash flow.

Customer Satisfaction and Customer Satisfaction and Compensation Compensation

IBM places significant resources toward monitoring customer IBM places significant resources toward monitoring customer satisfaction.satisfaction.

All customers are surveyed annually on:All customers are surveyed annually on:– Overall customer satisfaction– The rep’s knowledge of the customer– The transaction or solution itself– How satisfied the customer is with the solution– The installation process (smooth or disruptive), including how long it took– The extent and clarity of the education provided– The time needed to get the application(s) up and running– The capability and speed of technical support

Results are benchmarked against prior IBM performance, as well as Results are benchmarked against prior IBM performance, as well as the competitionthe competition

Results are used for compensating sales reps and managers.Results are used for compensating sales reps and managers.

Gross MarginGross MarginCommission ProblemCommission Problem

Assume the following:Assume the following:

The salesperson makes 20% commission on the gross margin

It costs $80 to make the product.

Overhead is $10.

Marketing Marketing PlanPlan

Discounted Discounted PricePrice

% % DeclineDecline

Selling Price $100 $92 8%

Gross MarginGross MarginCommission ProblemCommission Problem

Marketing Marketing PlanPlan

Discounted Discounted PricePrice

% % DeclineDecline

Selling Price $100 8%

Cost of Goods Sold (80)

Gross Margin $ 20

GM% Commission x 20%

$ Commission $ 4.00

Contribution 16.00

Overhead Costs (10.00)

Net Profit (Loss) $ 6.00

Gross MarginGross MarginCommission ProblemCommission Problem

Marketing Marketing PlanPlan

Discounted Discounted PricePrice

% % DeclineDecline

Selling Price $100.00 $ 92.00 8%

Cost of Goods Sold 80.00 80.00

Gross Margin $ 20.00 $ 12.00

GM% Commission x 20% x 20%

$ Commission $ 4.00 $ 2.40 40%

Contribution 16.00 9.60

Overhead Costs 10.00 10.00

Net Profit (Loss) $ 6.00 $ (0.40) 106%

Research on Pricing Research on Pricing and Profitsand Profits

Average

Sales Rep

Poorly Performing Rep

Midlevel Performing Rep

Top Performing Rep

Sales

Executive

Base Salary Bonus + Commission

$119,600$119,600

$71,000$71,000

$94,800$94,800

$161,500$161,500

$147,800$147,800

Compensation Levels for Firms Compensation Levels for Firms Using Salary Plus IncentivesUsing Salary Plus Incentives

Selecting BenefitsSelecting Benefits

Salespeople expect carsSalespeople expect cars

Insurance and travel are very commonInsurance and travel are very common

Some plans offer a choice of alternativesSome plans offer a choice of alternatives