Professor Chip BesioSales ManagementMarketing 3345

Customer Satisfaction and Compensation

Convergenceselling

Accountmanagement

Leverage selling

New businessdevelopment

New

Current

Customers

Current NewProducts

The Customer-Product Matrix

Comp Type Best Performance Impact * Motivate effort on non-selling

activitiesSalary * Adjust for differences in territory

potential* Reward experience and

competence

Commissions * Motivate a high level of selling effort

* Encourage sales success

Compensating Salespeople

Comp Type Best Performance Impact * Direct effort toward strategic

Incentive objectivesPayments * Provide additional rewards

for (Bonus) top performers* Encourage sales success

Sales * Stimulate additional effortContests targeted at specific

short- term objectives

Compensating Salespeople

Comp Type Best Performance Impact Personal * Satisfy salespeople’sBenefits security needs

* Match competitive offers

Compensating Salespeople

Straight Salary 17Straight Commission 19Combination Plans (83%)

Salary Plus Bonus 24Salary Plus Commission 20Salary Plus Bonus Plus Commission 18Commission Plus bonus 1Total 100%

Percentage ofCompanies Using

Use of Compensation Plans

Source: Adapted from Sales Compensation Concepts and Trends (New York: Alexander Group, 2004).

Comparing Salary and Commission Plans for Field Sales Representatives

0 100 200 300 400 500

10,000

20,000

30,000

40,000

Straight Salary

10% Commission

Tot

al c

ost p

er p

erso

n(t

hous

ands

$)

Sales Per Person in Thousands

50,000

Comparing Salary and Commission Plans

IBM places significant resources toward monitoring customer satisfaction.

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

Customer Satisfaction and Compensation

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

Results are used for compensating sales reps and managers.

Customer Satisfaction and Compensation

TotalSalary Incentive Compensation

Position ($000) ($000) ($000)

Top Sales Executive $91.0 $29.0 $120.0National Account Manager 72.2 26.0 98.2Regional Sales Manager 74.5 21.9 96.4District Sales Manager 64.5 20.3 84.8Key Account Rep 57.4 22.9 80.3Senior Sales Rep 47.5 26.0 73.5Intermediate Rep 36.1 15.3 51.4Entry Level Rep 29.7 13.4 43.1

Compensation Levels for Firms using Salary Plus Incentives

Sales & Marketing Management Compensation Survey, 2012

•ENTERPRISE RELATIONSHIPS $121,800•Customer solution more important than price; team selling approach

$64,400

$43,300

•CONSULTATIVE RELATIONSHIPS $97,100•Creates new value; tailors product to customer needs

$62,700

$42,300

•TRANSACTIONAL RELATIONSHIPS $83,300•Sells on price; product is a commodity

$52,500

$36,700

Top-LevelMid-LevelEntry-Level

Compensation Levels by Account Relationships, 2012

Salespeople expect cars or allowances

Insurance and travel are very common

Some plans offer a choice of alternatives

Selecting Benefits

A. Straight Salary Control wage levels easier to control rep’s activities increases loyalty to firm fails to provide incentives high costs when sales are low most common in complex

business selling

Compensation Methods

B. Straight Commission maximum incentive all variable cost low costs when

sales/salesperson is low

Compensation Methods

B. Straight Commission hard to control reps low loyalty pay low when business is weak used in small firms, door-to-door,

retail sales, insurance, stock brokerage, printing

Compensation Methods

C. Combination Plans Most common today1. Salary + Commission

base for non-selling activities commission for incentive to push complex

industrial accounts

Compensation Methods

C. Combination Plans Most common today2. Salary + Bonus

base for non-selling activities bonus to reward completion of special

tasks in consumer products selling3. Salary + Commission + Bonus

rewards every activity, BUT costly to administer

Compensation Methods

Trend toward TEAM selling difficult to reward team members for

group effort usually emphasize shared commissions /

bonuses

Other Considerations

Profit-based Commissions Gross margin commissions

Salesperson & firm attempt to maximize same $$

raise wages for salespeople often at expense of company profits

tends to increase industry price competition

tends to raise price elasticities in the long run

Other Considerations

Percentage Size Gross Percentage CommissionOrder Gross Margin of Margin to Commission on Paid toNumber on Each Order Order Company Gross Margin Salesperson

1 10 $1,000,000 $100,000 15 $15,000 2 20 $500,000 $100,000 15 $15,000

Comparing Gross Margin Commissions on Two Orders

Marketing Plan

DiscountedPrice

%Decline

Selling Price $100 $92Cost of Goods Sold 80 80Gross Margin 20 12GM% Commission 20% 20%$ Commission $ 4 $ 2.40 40%Contribution 16 12Overhead Costs 10 10 Net Profit $ 6 $ 2 66%

Gross Margin Commission Problems

Objective -- enough, but not too much. Types of plans

Unlimited Low supervision easy to abuse

Per diem controls costs but may restrict coverage

of distant accounts needs constant adjusting

Expense Accounts & Benefits

Types of plan (Cont’d.) Limited

can lead to wasted time on “cheat sheets”

limits for each category

Expense Accounts & Benefits

Hospital costs 90%Life insurance 77Dental plan 69Long-term disability 56Pension plan 55Short-term disability 49Profit sharing 44Thrift savings 22Employees stock purchase plan 21

Percentage ofFirms OfferingBenefit

Benefits Offered by Companies