8 Compensation

How Little you know about the

age you live in if you fancy that

honey is sweeter than cash in

hand.

What a Good Sales Compensation

Plan Should Do

Efforts +

Results =

Reward

Control

activities of

sales reps

Treat

customers

properly

Attract and

keep good

people

Motivate the

salespersonGood sales

compensation

plan

Economical yet

competitive

Fair SimpleFlexible and

stable

Security and

incentive

2

Designing the Sales Compensation Plan

Pre-test and Install Plan

Decide on Indirect Monetary Compensation

Develop the Method of Compensation

Establish Level of Compensation

Identify Plan’s Objectives

Review Job Description

3

Identify Specific Objectives

Increase

Profits

Sales volume of a specific class

Increase volume of existing accounts

Improve customer satisfaction

Stimulate missionary work

Develop a new territory

Should be based on factors:

Controllable by sales person

Measurable by Company

4

Establishing the Level of Compensation

Average amount earned over a given period

How much should precede the how

Clarify the three components to the sales staff:

Fixed

Variable

Deferred

Highest in financial services with greater emphasis

on performance linked

Lowest in retail with greater emphasis on fixed

element

5

Compensating Salespeople

Components Needs

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 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

6

Building Blocks – Sales Compensation Plan

7

SECURITY

Salary

INCENTIVES

Profit Sharing

Bonus

Commission

BENEFITS

Medical

Pension

Leaves

Insurance

Paid Vacation

EXPENSES

Travel

Lodging

Company Car

Entertainment

Others

Others

Stock Options

Cost of Living

Allowance

Compensation Methods for Salespeople

Compensation

Method

Especially

Useful ForAdvantages Disadvantages

Straight

Salary

• New sales

reps

• New sales

territories

• Many

required

non-selling

activities

• Maximum security

• Control over reps

• Easy to administer

• Predictable expenses

• Positive impact on

consumers

• Good when difficult to

determine who made

the sale

• Suits times of drastic

business swings

• No incentive

• Requires close

supervision

• Favours

unproductive

sales people

• Selling

expenses

remain same

during sales

declines

8

Compensation Methods for Salespeople

Compensation

Method

Especially

Useful ForAdvantages Disadvantages

Straight

Commission

• Highly

aggressive

selling

• Minimal

required non-

selling tasks

• When company

can’t closely

control sales

force

• Motivational

• Managers can

encourage

sales of certain

items

• Relates

directly to

performance

• Perceived fair

• Little security

• Little control

over reps

• Reps may

provide

inadequate

service to

smaller

accounts

• Selling costs

less predictable

9

Straight Commission Plans

Base – for measurement of performance – units

or revenue

Rate – Amount paid for each unit based onLevel of desired income for sales team

Profitability of different products

Difficulty in selling a product

Class of customer

Rates may be Constant

Progressive

Regressive

Split commissions for geographical location

situations 10

Compensation Methods for Salespeople

Compensation

Method

Especially Useful

ForAdvantages Disadvantages

Sales plus

Commission

• Similar sales

potential across

territories

• When company

wants to offer

incentive but

maintain some

control

• Some security

• Some incentive

• Selling

expenses vary

with revenue

• Manager has

some control

over non-

selling

activities

• Selling

expenses are

less predictable

• May be difficult

to administer

11

BonusDiscretionary payments for reaching specified goals.

The goals are normally volume or profit quotas

Normally announced in advance and paid annually

Not to be confused with Bonus laws in India

Compensation

Method

Especially

Useful ForAdvantages Disadvantages

Salary plus

Bonus

• FMCG

products

where

advertising

has pre-sold

most of the

items

• Balance

expense

control and

reward system

• Lower turnover

amongst reps

• Size of the bonus

tends to be arbitrary

• Rationale behind

bonus plans

normally not clarified

to reps

• Reps tend to take it

slightly easy in the

first quarter

12

Compensation Methods for Salespeople

Compensation

Method

Especially Useful

ForAdvantages Disadvantages

Sales plus

Commission

Plus Bonus

• Office

equipment and

business

services

• Rewards every

activity

performed by

sales person

• Flexibility to

balance team

work, customer

satisfaction

• Too complex with

too many

variables

• More expensive to

administer

• Confusion among

sales persons

resulting in

concentration on

less difficult

activities

13

Problem

You join a company as General Manager Sales

The company wants to be more customer driven and give better

service

You also feel that sales persons should go after new business

The commission structure is therefore changed from 100% on quota

to 50% on quota, 20% on new business generated and 30% on

service (to be measured through repeat business and surveys

At the end of three months sales start falling and morale is low.

Sales persons tell you that it is very difficult to meet quotas with

higher levels of service and prospecting

What would you do?

14

Impact of Sales Force Quotas

Quotas

Focus Manager Attention

Measure Accomplishment

Direct Sales Person efforts

Motivate Sales People

Provide Standards

for Evaluation

15

Types of Quotas

• Volume targets for each territory and each product for a specific period of time. May be in numbers or in revenue terms.

Sales Volume Quotas

• Look at contributions rather than volumesProfit Based

Quotas

• Number of calls made

• New accounts covered

• Product demonstrations

• POP displays

Activity Quotas

16

Sales Quotas

Can be made effective by:Providing timely feedback

Gaining goal commitment

Building self-confidence

Normally administered by:– Increase over sales last year

– Connecting to sales potential

What are the advantages and

disadvantages of both?

17

Design Questions for Combination Plans

What is the appropriate size of the incentive relative to the base salary?Should a ceiling be imposed on incentive earnings?When should the salesperson be credited with a sale?Should team incentives be used? If so, how should they be allocated among team members?How often should the salesperson receive incentive payments?

18

Customer Satisfaction and Sales Force

Compensation

Compensation plans lay emphasis on performance

possibly at the cost of customer satisfaction.

Sales persons also tend to manipulate data to show

better results.

Companies are now using customer satisfaction

surveys to calculate a reasonable part of the bonus.

Some sales persons feel that this brings in elements

such as product quality which are not in their control.

This element enhances relationship selling.

19

Sales Contests

Short-term incentive programs designed to motivate to accomplish specific sales objectivesContest winners receive:

Cash prizesMerchandiseTravel awardsSpecial honours or privileges

Successful contests require:Clearly defined, specific objectivesAn exciting themeReasonable probability of rewards for allAttractive rewardsPromotion and follow-through

Most contests run from one to three months

20

Criticisms of Sales Contests

May not produce lasting improvements

Salespeople may borrow sales from another period

to increase sales during the contest period

Poorly administered contests can hurt cohesiveness

and morale

Senior sales persons do not take contests seriously

Contests normally result in higher outstanding and

over stocking of dealers

Negative impact on losers

21

Sales Contests:

Recommended Guidelines

1. Minimize potential motivation and morale problems

by allowing multiple winners. Salespeople should

compete against individual goals and be declared

winners if those goals are met.

2. Recognize that contests will concentrate efforts in

specific areas, often at the temporary neglect of other

areas. Plan accordingly.

22

Sales Contests:

Recommended Guidelines

3. Consider the positive effects of including non-selling

personnel in sales contests.

4. Use variety as a basic element of sales contests.

Vary timing, duration, themes, and rewards.

5. Ensure that sales contest objectives are clear,

realistically attainable, and quantifiable to allow

performance assessment.

23

Indirect Monetary Compensation

Non financial compensation in form of honours,

recognition, or promotion

Indirect monetary benefits

Group insurance

Pension

Provident fund

ESOP

Profit sharing

Paid holidays

24

Our men give their

talent to the

company and their

genius to their

expense accounts.

Life

Sales Force Expenses

Expenses

Local Transportation

Office Expenses

Entertainment

Gifts

Travel, Lodging, Boarding

Communication

Meals

26

Sales Force Expenses

Travel(including boarding and lodging) and

conveyance expenses are normally more than the

salary plus commission

Should lay out clearly class of travel and the amount

to be spent on lodging/boarding

How often should it be reviewed?

27

Sales Force Expenses

• Local transportation:

•Fixed

•Per Km

•Advantages / Disadvantages

Characteristics of a Sound Expense Plan

•No net gain or loss

•Equitable treatment

•No curtailment of beneficial activities

•Simple and economical

•Avoidance of disputes

•Company control of expenses and elimination of padding

Methods of Controlling Expenses

Sales persons pay own expenses

Flexibility to decide level of expenses

Income tax advantage

Unlimited payment plan – No limits

Limited payment plan

Limit on individual items of expense

Flat sum over a period of time

Combination plan

Linked to quota or net sales

30

Other Methods of Expense Control

Training and enforcement

Credit cards

Expense bank account

Change in nature of entertainment

Telemarketing

Careful travel planning

Next Session

Evaluating

Performance and

Sales Force

Automation

32