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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

Motivate the
salesperson

Security and
incentive

Control
activities of
sales reps

Treat
customers
properly

Good sales
compensation
plan

Fair

Simple

Attract and
keep good
people

Economical yet
competitive

Flexible and
stable

Designing the Sales Compensation Plan

Review Job Description
Identify Plans Objectives
Establish Level of Compensation
Develop the Method of Compensation
Decide on Indirect Monetary Compensation
Pre-test and Install Plan
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

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

Compensating Salespeople
Components

Needs

SALARY

COMMISSIONS
INCENTIVE
PAYMENTS
SALES
CONTESTS
PERSONAL
BENEFITS

Motivate effort on non-selling activities

Adjust for differences in territory potential
Reward experience and competence
Motivate a high level of selling effort
Encourage sales success

Direct effort toward strategic objectives

Provide additional rewards for top performers
Encourage sales success
Stimulate additional effort targeted at specific
short-term objectives
Satisfy salespeoples security needs
Match competitive offers
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Building Blocks Sales Compensation Plan

Others
Medical

Others

Stock Options

Pension

Entertainment

Profit Sharing

Leaves

Company Car

Cost of Living
Allowance

Bonus

Insurance

Lodging

Salary

Commission

Paid Vacation

Travel

SECURITY

INCENTIVES

BENEFITS

EXPENSES

Compensation Methods for Salespeople

Compensation
Method

Straight
Salary

Especially
Useful For

Advantages

Maximum security
Control over reps
New sales
Easy to administer
reps
Predictable expenses
New sales
Positive impact on
territories
consumers
Many
Good when difficult to
required
determine who made
non-selling
the sale
activities
Suits times of drastic
business swings

Disadvantages
No incentive
Requires close
supervision
Favours
unproductive
sales people
Selling
expenses
remain same
during sales
declines

Compensation Methods for Salespeople

Compensation
Method

Especially
Useful For

Straight
Commission

Highly
aggressive
selling
Minimal
required nonselling tasks
When company
cant closely
control sales
force

Advantages

Disadvantages

Little security
Motivational
Little control
Managers can
over reps
encourage
Reps may
sales of certain
provide
items
inadequate
Relates
service to
directly to
smaller
performance
accounts
Perceived fair Selling costs
less predictable

Straight Commission Plans

Base for measurement of performance units
or revenue
Rate Amount paid for each unit based on
Level 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

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Compensation Methods for Salespeople

Compensation Especially Useful
Method
For

Sales plus
Commission

Advantages

Disadvantages

Some security
Similar sales
Some incentive
potential across Selling
Selling
territories
expenses vary
expenses are
When company
with revenue
less predictable
wants to offer
Manager has
May be difficult
incentive but
some control
to administer
maintain some
over noncontrol
selling
activities

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Bonus
Discretionary 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 For

Advantages

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
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Compensation Methods for Salespeople

Compensation Especially Useful
Method
For

Advantages

Sales plus Office

equipment and
Commission
business
Plus Bonus
services

Too complex with

too many
Rewards every
variables
activity
performed by More expensive to
administer
sales person
Confusion among
Flexibility to
sales persons
balance team
resulting in
work, customer concentration on
satisfaction
less difficult
activities

Disadvantages

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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?

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Impact of Sales Force Quotas

Focus
Manager
Attention

Provide
Standards
for
Evaluation

Measure
Accomplishment

Quotas

Motivate
Sales People

Direct Sales
Person
efforts

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Types of Quotas
Sales Volume
Quotas
Profit Based
Quotas
Activity
Quotas

Volume targets for each territory and each product for

a specific period of time. May be in numbers or in
revenue terms.

Look at contributions rather than volumes

Number of calls made

New accounts covered
Product demonstrations
POP displays

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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?

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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?

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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.

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Sales Contests
Short-term incentive programs designed to motivate
to accomplish specific sales objectives
Contest winners receive:
Cash prizes
Merchandise
Travel awards
Special honours or privileges

Successful contests require:

Clearly defined, specific objectives
An exciting theme
Reasonable probability of rewards for all
Attractive rewards
Promotion and follow-through

Most contests run from one to three months

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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

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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.

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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.

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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

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Our men give their

talent to the
company and their
genius to their
expense accounts.
Life

Sales Force Expenses

Local
Transportation
Office
Expenses

Meals

Expenses

Communication

Travel,
Lodging,
Boarding

Entertainment

Gifts

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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?

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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

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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
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