Name: Sushma B

SRN: PES1201802598
Q2. Why should some companies choose to pay their sales people on a salary plan whereas
others pay theirs by commission?
Consider the job of salespeople in the field. They face direct and aggressive competition daily.
Rejection by customers and prospects is a constant negative force. Success in selling demands a
high degree of self-discipline, persistence, and enthusiasm. As a result, salespeople need
extraordinary encouragement, incentive, and motivation in order to function effectively.

A rule of thumb: Commissions motivate employees to sell harder, while salaries create loyal
employees.

Before choosing the right compensation model, we should weigh several factors, including the
type of salesperson we want, the kind of product we sell, our target customer and the length of
our sales cycle.

Generally speaking, if we are paying 100 percent commission, we will attract aggressive,
independent "hunters." On the other hand, if we are offering a large base salary, we will attract
more security-oriented "minders." They may not be as driven, but they may excel at service and
building relationships.

When compensation is largely commissions, salespeople tend to feel ownership of "their"

accounts. As a result, they may be more prone to leaving you, taking your customers with them.
In contrast, a salaried salesperson will not be as dangerously possessive. If you do base
compensation on commissions, we must be sure to have a strong non-compete clause in
our employment contract.

Striking the balance: For most employers, offering a base salary with commission is the best
solution, because it motivates performance while building company loyalty. A winning
compensation formula will benefit both your company and your salespeople. It will inspire
individual achievement, while strengthening your organization as a whole. When it comes to
sales compensation, the best approach is to strike a balance.

The basic kinds of plans:

Salary Plan

This kind of plan, in which salesmen are paid fixed rates of compensation, may also include
occasional additional compensation in the form of discretionary bonuses, sales contest prizes, or
other short-term incentives. The plan works well when the main objective is missionary work or
requires a lot of time for prospecting, or if the salesman’s primary function is “account servicing.”
Secondary objectives of increasing sales from existing accounts and opening new accounts
require special incentive treatment.

Many durable goods industries experience cyclical sales patterns, which makes a salary plan more
compatible with the salesman’s efforts and avoids the sharp swings in income that can occur in a
commission plan.

The basic advantages and disadvantages of the salary plan approach:

The salary plan has advantages for both salesmen and their companies because it:

 Assures a regular income.

 Develops a high degree of loyalty.
 Makes it simple to switch territories or quotas or to reassign salesmen.
 Ensures that non-selling activities will be performed.
 Facilitates administration.
 Provides relatively fixed sales costs.

However, the salary plan does have disadvantages, in that it:

 Fails to give balanced sales mix because salesmen would concentrate on products with
greatest customer appeal.
 Provides little, if any, financial incentive for the salesman.
 Offers few reasons for putting forth extra effort.

Commission Plan

In this type of plan, salesmen are paid in direct proportion to their sales. Such a plan includes
straight commission and commission with draw. The plan works well at the start of a new
business where the market possibilities are very broad and highly fragmented. In such situations,
territory boundaries are usually rather fluid and difficult to define. Therefore, quota and customer
assignments are difficult to determine, making other types of compensation plans too costly or
too complex to administer.

When management desires to maximize incentive, regardless of compensation

levels in other company functions, or prefers a predictable sales cost in direct relationship with
sales volume, the commission plan is appropriate. However, use of the straight commission
approach has declined in popularity over the past several years and is not currently preferred.

The advantages of the commission plan:

 Pay relates directly to performance and results achieved.

 System is easy to understand and compute.
 Salesmen have the greatest possible incentive.
  Unit sales costs are proportional to net sales.
 Company’s selling investment is reduced.

The disadvantages of commission plan are:

 Emphasis is more likely to be on volume than on profits.

 Little or no loyalty to the company is generated.
 Wide variances in income between salesmen may occur.
 Some salesmen may be tempted to “skim” their territories.
 Service aspect of selling may be slighted.
 Problems arise in cutting territories or shifting men or accounts.
 Pay is often excessive in boom times and very low in recession periods.
 Salesmen may sell themselves rather than the company and stress short-term rather than
long-term relationships.
 Highly paid salesmen may be reluctant to move into supervisory or managerial positions.
 Excessive turnover of sales personnel occurs when business turns bad.

The benefits of paying salary:

Paying employees by salary can be beneficial in a business where you want to offer strong
customer support without pushing sales on your customers. By giving employees a salary, it
removes the motivation to simply sell the most expensive products to a customer without truly
considering her needs. Having salaried employees can, therefore, lead to better customer
satisfaction.
Salaried pay offers advantages to the employee because it provides regular, dependable
income. An employee with a salary knows exactly how much each paycheck will be worth. This
means that the employee can budget around her salary without worrying that her income will
fall short at any given time.
A steady salary provides employees with stability and security. A substantial base salary can be
used if your sales representatives need technical knowledge to sell your products or services or
of they have to establish a long term relationship with clients. When salary is the main
compensation method for sales team, it is a good idea to inculcate the performance standards
for both customer service and sales targets.
Benefits of Commission:
Pay based on commission is beneficial to employees because they receive pay based on their
skills and the work that they do. For employees who work hard and who are skilled in sales,
they will be rewarded for their efforts. This can motivate employees to go above the minimum
requirements, knowing that their efforts will result in higher pay.
This group will typically have some basic technical knowledge, but their skill is more focused on
finding customers, pitching our products or services and closing the deal. Others in the
company will have more in-depth technical skills and provide direct service to the customer.