AND DEVISING THE SALES COMPENSATION PLAN

INTRODUCTION:
A SALES COMPENSATION PLAN HAS 3 MOTIVATIONAL ROLES: 1. Provide a living wage. 2. Adjust pay levels to performance. 3. Provide a mechanism for demonstrating the congruency between attaining company goals and individual goals.  A properly designed sales compensation plan fits a companys special needs and problems. And from it floes attractive returns for both the company and its sales personnel.

REQUIREMENTS OF A GOOD SALES COMPENSATION PLAN:

1. 2.

3. 4.

5. 6. 7.

Provides a living wage. The plan fits with the rest of the motivational program, no conflicts . The plan is fair, does not penalize sales personnel. Easy to understand, personnel are able to calculate their own earnings. The plan adjusts pay to changes in performance. It is economical to administer. It helps in attaining the objectives to sales organization.

 DEFINE
1. 2.

THE SALES JOB:

3.

4.

5.

6.

The first step is to re-examine the nature of sales job. Up-to-date written job descriptions are the logical place to start. Other aspects are: sales dept. objectives are analyzed for their effect on the salespersons job Sales volume objectives , no. of dealers and distributors, as a group and individually. Impact of sales related marketing policies, distribution policies, credit policies, price policies and other policies affecting the salespersons job. Current and proposed advertising and sales promotional programs assist in clarifying the nature of the salespersons goals, duties and activities.

Four

job evaluation methods:

Two are nonquantitative1. Simple ranking:  Inexpensive job evaluation method.  Widely used by small businesses.


2. 

Classification or grading: Utilizes a system of grades and grade descriptions, against which individual jobs are compared. Grades are called classes, in terms of job responsibility, skills required, supervision given and received. Job descriptions are then classified into appropriate grades. All jobs within a grade are treated alike with respect to base compensation.

Two are quantitative1. Point system:




Involves establishing and defining the factors common to most jobs that represents the chief elements of value inherent in al jobs. Generally include mental and physical skills. Responsibility, supervision, personality requirements. Each factor is assigned a minimum and maximum no. of points, different ranges are associated in line. Bands of points are decided upon and become different compensation classes.

2. 

Factor- comparison method: scheme of ranking and cross-comparisons to minimize error from faulty judgment.

 

Job evaluation and sales position. There are formal and informal wayz of job evaluation.

 1. 2. 3. 4.

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 patters. Sales personnel are related to external supply-anddemand factors. Current rates for sales personnel should be taken into account. The relation of external compensation practices to those of the company is considered.

  

1)

STRAIGHT SALARY PLAN

2)

STRAIGHT COMMISSION PLAN

3) COMBINATION SALARY PLAN

The management has to determine how much compensation should be given to the sales personnel.  Management weighs the worth of sales personnel through estimating the sales and profit.  Another consideration is the amount the company can afford to pay.


4 elements:1. Fixed element; salary, drawing account 2. Variable element; commission bonus 3. Fringe or plus factor ; paid vacation, sickness, LIC etc. 4. Reimbursement of expenses

The proportion that elements bear to each other is 60:40, 80:20

Increases marketing effectiveness.  To adjust the compensation plan to stimulating the selling of better balanced orders.  Design a plan that encourages sales personnel to write larger orders.  Plan should have customer clarification and call scheduling system.


Securing retail displays is a task that sales personnel may neglect.  Incentive payment for obtaining retail displays is incorporated in the plan.  Plans may also assist:

1. new customers and new business 2. Improving quality of salespeoples reports 3. Expenses of handling complaints & adjustments

. Eliminating price shading by sales staff 5. reducing travelling and other expenses 6. making collections & gathering credit info.
However mgmt, should recognize other means exist for dealing with these problems and that repeatedly tampering with the sales compensation plan results in complexities.

The sales force should be encouraged to articulate their likes and dislike about the sales plan. They should give their suggestions and what changes could be made.

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To remove the inconsistencies, the plan is put into writing. Then it is presented If the sales pattern has shown fluctuation, calculations are made for periods representative for average, good or bad business. New and old plan is taken and applied to the future periods

Plan is revised to eliminate trouble spots or deficiencies. If alterations are extensive the future plan goes to further pretests. But if only minor changes, further testing is not necessary.

The plan is implemented andexplained to the sales personnel If plan is complex special training sessions are given to sales personnel

Provisions or follow- up are made, need for further adjustments is detected. Periodic checks are done.

SIMPLEST COMPENSATION PLAN. 17.5% OF THE ORGANISATIONS USE IT ITS IMPORTANCE IS DECLINING COMMONLY USED FOR COMPENSATING SALES PEOPLE. IT IS A LOGICAL PLAN

1) STRONG FINANCIAL CONTROL

2) FLEXIBILITY IN ADJUSTING FIELD SALES WORK

3) ECONOMICAL TO ADMINISTER

4) STABILITY OF INCOME

1) NO DIRECT MONETARY INCENTIVES.

2) PAY INEQUTIES LASTING LONG CREATES ISSUES

3) DIFFICULTIES IN SHARING THE COMPANIES SHARE OF RISEING INDUSTRY VOLUME.

PAID ACCORDING TO PRODUCTIVITY DEPENDS ON THE SALES VOLUME TWO TYPES :1) STRAIGHT COMMISION WITH SALES PERSONNEL PAYING THEIR OWN EXPENSES . ADVANCES MAY OR MAY NOT BE MADE AGAINST EARNED COMMISIONS. 2) STRAIGHT COMMISION WITH THE COMPANY PAYING EXPENSES, WITH OR WITHOUT ADVANCES AGAINST EARNED COMMISIONS.

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ADVANTAGES 1) PROVIDES MAXIMUM DIRECT MONETARY INCENTIVE FOR THE SALESPERSON. 2) CHARACTERIZED BY GREAT FLEXIBILITY

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DISADVANTAGES 1) LILLTLE FINANCIAL CONTROL OVER THE SALESPEOPLES ACTIVITIES, 2) SALESPERSON FEEL THAT THEY ARE DISCHARGING THEIR FULL RESPONSIBILITY.

1) DETERMINING COOMMISION BASE

2) DRAWING ACCOUNTS

TAKES THE POSITIVES OF BOTH THE PLANS MENTIONED BEFORE.  SALES PERSONNEL HAVE BOTH SECURITY OF STABLE INCOME AND STIMULUS OF DIRECT FINANCIAL INCENTIVE  DISAVANTAGE IS THAT CLERICAL COSTS ARE HIGHER.


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Different form of commission. Amount paid for accomplishing a specific task Bonuses are never used alone : appear with one of the sales compensation methods. Bonus in other words is an additional financial reward.

Fringe benefits are compensations made to an employee beyond the regular benefit of being paid for their work Does not bear direct relationships to job performance. Cafeteria approach to fringe benefits

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For Employment Security For Health Protection For Old Age and Retirement For Personnel Identification, Participation and Stimulation

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Sales compensation plans play three motivational roles Sales compensation elements Sales compensation policies facilitate sales force management Helps increase turn over , reduces wastage of time and effort.

Sales expenses reimbursement can be either on basis of sales person paying own expenses or reimburse them for all or part of expenses  Incase of reimbursement: 1. Reimbursement expenses should be adequate to permit performance of all assigned duties 2. All expenses incurred while away from home should be reimbursed


   

Flat Expense Account Flexible Expense Account Honor System Expense Quota

 An

amount per defined period decided. Salesman at liberty to utilize it under heads he deems fit  Most sales people try to over economize, thus adversely effecting companys work

Sales people are reimbursed for all allowable expenses:  Know salesmans total probable expenses  Classify into allowable and non allowable  Develop expenses report form  Establish procedures for checking expenses for each head

The honor system is also called a trust system granting freedom from customary surveillance with the understanding that the employees who are so freed will be bound by their honor to observe regulations and therefore not abuse the trust placed in them. A person engaged in an honor system has a strong negative concept of breaking or going against it. The negatives may include community shame, loss of status, loss of a personal sense of integrity and pride or in extreme situations, banishment from one's community.

The expense quota is a compromise plan for reimbursing expenses.It controls sales personnels total expenses over long periods but permits week -by week variations in the amounts reimbursed. Under the expense Quota Plan, sales personnel receive prompt and full reimbursement, regardless of how allowable expenses vary from week to week. The budgeted figures are planned amounts only, and management does not hold rigidly to the upper limits. But because upper limits are established, sales personnel have a moral obligation to keep expenses under control. The principal drawback of the expense quota is that the burden for controlling expenses is upon the sales personnel rather than upon management.

1)

The two general policy alternatives on reimbursing sales expenses are : Have sales personnel pay their own expensesThe main advantage of the pay-your-own-expenses policy, from managements standpoint, is that no expense records are necessary in as much as sales personnel control their own expenses.

2)

Reimburse sales personnel for all or part of their expenses- When expenses are reimbursable ,sales
management needs expense control. Funds used to defray sales expenses are deductions from gross profits.

Two common principals guide management in formulating expense-reimbursement policies:

Reimbursable expenses should be large enough to permit the performance of assigned duties in the expected manner All expenses incurred because sales personnel are away from home on company business should be reimbursable NOTE : Reimbursement policies should keep expenses reasonable; they should not cause bad feeling among the sales staff. They should be economical to administer, that is , they should require only minimum supervision and record keeping.

1)

2)

Calculating Exact automobile expenses is complicated. Three categories of expense are involved : 1)Variable Expenses Includes costs of gasoline, lubricating oil and grease and tires all varying with the miles travelled. 2)Fixed Expenses Includes the cost of insurance coverage , license fees, and inspection fees. 3)Semi variable expenses Includes the charges for depreciation and obsolescence.
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Flat Mileage rates :Most companies use a flat mileage rate

system and reimburse automobile expenses at a fixed rate per mile travelled. Users of this system must set the mileage rate high enough to cover all expenses of automobile ownership and operation, yet low enough to permit the company to buy transportation economically. Graduated mileage rates : Under this system, different rates apply ranges, for example 25 cents per mile up to 5000 miles annualy, 22.5 cents per mile from 5000 to 10,000 miles, and 20 cents per mile over 10,000 miles.

Fixed periodic allowance : Some companies pay sales

personnel a fixed allowance for each day, weak month or other period during which they use their personal automobiles on company business. The fixed periodic allowance assumes that total automobile expenses vary with duration of use rather than mile expenses.

Combination fixed periodic allowance and mileage rate : In this system a fixed periodic allowance (to cover fixed
and semi variable expenses such as insurance premiums, license fees and depreciation ) is combined with a mileage payment ( for operating expenses, including costs of gasoline , oil, and tires.

Runzheimer Plan : The Runzheimer Plan, originated by the

consulting firm of Runzheimer and Company , is a combination fixed periodic allowance and mileage rate system. But it is superior to most combination systems in that it takes account of geographical variations by dividing the United States into twenty nine auto-use basic cost areas . Allowances are on a per diem basis and include provisions for insurance premiums, state licenses, title and drivers fees, and depreciation. Mileage rates cover expenses of gasoline ,oil, grease, washing, service maintenance and tires. Allowances are computed to allow for operation of different makes and models of cars. Since the plan was started in 1933, the service has been greatly extended and refines , and is now used by several hundred companies.

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Sneha Sharma- 0911683 Karan Miglani- 0911616 Payal Kumar- 0911655 Shreya Khurana- 0911570 Zarka Sami- 0911576 Komal Malu- 0911559