Amity Business School

Amity Business School

- Sales force compensation


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Sales is one of the few jobs where you
earn your money every day.

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Compensation is more than money
Any type of sales organization can reward
sales performance in three fundamental and
interrelated ways:
1.Direct financial rewards.
2.Career advancement and personal development
opportunities.
3. Non financial compensation.

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A sales reward system is not the only means of
motivating salespeople, but it is the most
important.
Measuring sales performance but not properly
rewarding it severely limits the achievement
level for salespeople.

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Purposes Of Compensation

Connects individual with organization.
Influence work behavior.
Organizational choice.
Influence satisfaction.
Feedback.
Reinforcement.

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Designing A Compensation Program

Compensation plans should have general and
specific objectives:
Attaining yearly sales volume and gross
margins (general).
Attaining monthly sales volume and sales on
specific products (specific).
Market penetration and exploiting the
territorys potential (general).

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Steps In Designing The Compensation Plan

Review J ob Description

The first step is to reexamine the nature of the
sales job. Up-to-date written job descriptions
are the logical place to start. Revise in order
the complete descriptions of the sales job
objectives and work.

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Consider Compensation Patterns in Community and
I ndustry
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 patterns?

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Provide for the various Compensation Elements
A Sales compensation plan has four basic
elements:
Fixed element-Straight Salary Plan, Drawing
Accounts
Variable element- Commission , bonus
An element covering the fringe benefits
An element providing for reimbursement of
expenses or payment of expense allowance.

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Determine Compensation Level

Management weighs the worth of individual persons
through estimating the sales and profit that would be
lost if particular salespeople resigned.
Another consideration is the compensation amount of
the company can afford to pay.

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Consult the present sales force

Management should encourage sales
personnel to articulate their likes and
dislikes about the current compensation
plan and to suggest changes in it.

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Test & Establish administrative process
Even the best compensation plan will crumble if
it cannot be administrated.
The acid-test is to take actual sales performance
from the prior year and compute the
compensation impact with the new plan.
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I mplement the plan and Provide for Follow-up

The sales personnel are made to understand
what management hopes to accomplish
through the plan and how this is to be
done ,provisions for follow-up are made.

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Types Of Compensation Plans

STRAIGHT SALARY

Of all the compensation plans, the straight
salary plan is the simplest: The salesperson is
paid a specific amount at regular intervals.


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Profile Of A Straight Salary Company

Dominant market share in mature, stable
industry
Highly defined and stable customer base
Strongly centralized and closely managed
selling effort
Significant number of house accounts
Highly team-oriented sales effort
Service versus selling emphasis

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Advantages of a straight salary plan
Provides secure income
Helps develop a sense of loyalty
Makes salespeople willing to perform non selling
activities
Helps increase customer loyalty
For the company, its simpler to administer
Disadvantages of the straight salary plan
No financial incentive to exert more effort& improve
performance
Fixed salary a burden to new firms & non profitable
companies
Leads to adequate but not superior performance
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Straight Commission Plans

The straight commission plan is a complete incentive plan. If
salespeople do not sell anything, they do not earn anything.

Paying salespeople according to the amount of their sales in
given time period. Commission may be based on percentage of
sales or on a sliding scale

Requires highly aggressive selling and minimal non selling
tasks. Provides salespeople with maximum incentive but low
financial security
The sales manager has to decide commission base, rate, start
& payout

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Advantages of a straight commission plan
Gives strong financial incentive
Attracts high performers & removes ineffective salespersons
Controls selling costs
Requires less supervision
Disadvantages of a straight commission plan
Focus on getting sales rather long term customer relationships
Less control on the salesman for non selling activities
Little loyalty of salesperson
In the absence of a cap on the commission , at times the
executive may draw a higher commission than their manager
and therefore may not respond to directions of such managers

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Situations where commission plans can
be used
Little non selling, missionary work
involved.
The company cannot afford to pay a salary
and wants selling costs to be directly related to
sales.
The company uses independent contractors
and part-timers.
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Profile Of A Commission Plan Company

Low barriers to entry into the job
Limited corporate cash resources
Small entrant into an emerging market or market
segment
High risk reward sales force culture
Undefined market opportunity or customer base
Inability to set quotas or other performance criteria
Volume-oriented business strategy

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Combination


A type of compensation plan in which a
proportion of the pay is guaranteed and the rest
is incentive to pay.

The salary constitute living wage and the
incentive should allow the top performers to
earn somewhere between 25 50% of their
salary in incentives.


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Most popular compensation method
Paying salespeople a fixed salary plus a commission
or bonus based on sales volume
Provides financial security and some incentive

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Numerous types of combination salary plans
exist. The more popular plans are:
Salary and commission
Salary and bonus: individual or group bonus
Salary, commission, and bonus: individual or
group bonus

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Advantages of a combination plan
Management has control over salespeople
Flexibility to reward desirable activities of salespeople
Feeling of security
Allows rewards for frequent & specific sales behaviour
Different combination plans can be developed for diff.
category of salespeople
Disadvantages of the combination plan
Plan is more complex & difficult to administer
May not achieve the desired objectives if not carefully planned
& implemented

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Profile Of A Combination-pay Plan
Company

Established company with growth potential,
many products, and active competition
Need to direct a complex set of behaviors
Need for a variable pay component that will
ensure top performers are rewarded
commensurately

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When to Use a Combination Salary Plan
To motivate the sales force.
To attract and hold good people.
To direct the sales force efforts in a
profitable direction.

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Sales Contests

Sales contests are special sales programs offering
salespeople incentives to achieve short-term
work goals.

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How To Calculate Incentives

Factors on which to base quotas:
The past years sales.
The sales forces forecast of the coming
years sales.
Corporate marketing targets.
A specific net profit target.
Geographic market potentials.

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Consider Profitable Products

The profitable products can carry a higher
commission or incentive reward.
The more profitable products can be weighted
so one of them counts as much as two or three
of the routine products.
Separate quotas can be set for each product line.
Salespeople can be paid on the basis of their
individual contributions to profit.

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Sales Force Expenses

Expense plans have the same basic objectives as
a compensation system, that is, to motivate the
salespersons behavior in terms of
membership, performance, and attendance.

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Criteria for an effective expense plan
Fair for the salesperson.
Fair for the company.
Cost effective.
Understandable.
Convenient.

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Types of Expense Plans

The company pays all expenses.
The salesperson pays all expenses.
The company partially pays expenses.

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Fringe Benefits

Five basic classifications of salespeoples
benefits and services are:
Benefits that are required legally
Pension and retirement programs
Nonworking time
Insurance
Miscellaneous services

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Types of Fringe Benefits
Time
Holidays, Sick Leave, Pregnancy Leave etc.
Retirement Programs
Pension Plan, Profit Sharing
Insurance and Medical
Life Insurance, Physical Examinations, Unemployment
Insurance.
Miscellaneous
Parking, Lunch, Career Counseling, Child Care Payments

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Appraisal of compensation system
Key questions in terms of the success of a
plan:
Are the compensation objectives being met?
Is the firm able to attract new salespeople
with this plan?
What is the relationship of compensation to
turnover?