Chapter8 CH 12-Sales Force Compensation

Chapter 12
Sales Force
Compensation
PowerPoint presentation prepared by

Dr. Rajiv Mehta
New Jersey Institute of Technology
Chapter Outline
•  Sales Force Compensation Plans
•  Developing the Compensation Plan
•  Advantages and Disadvantages of Different
Compensation Methods
•  Trends in Sales Compensation
•  Expense Accounts and Fringe Benefits
Copyright © Houghton Mifflin Harcourt Publishing Company. All rights reserved. 12 | 2

Learning Objectives
After reading this chapter, you should be

able to do the following:
1. Meet the challenges of developing sales force
compensation plans.
2. Follow the basic steps in developing a compensation
plan.
3. Compare the different methods of sales force
compensation.
4. Evaluate the recent trends in sales force compensation.
5. Control the use of expense accounts and fringe benefits
in compensation planning.

Sales Force Compensation Plans
•  Compensation is defined as all monetary
payments and benefits used to remunerate
employees for their performance.
•  As extrinsic rewards, compensation plans

and financial packages are recognized as
the greatest motivator of salespeople.
•  Here are three methods of financial

compensation:
–  straight salary
–  straight commission
–  combination—mix of salary and commission

Variable Pay Compensation Systems
•  Reward preferences are known to differ as a result of

these factors:
–  changing needs
–  career stage
–  organizational level
•  In designing and implementing compensation systems,

management should allow employees to make their own
choices for these elements:
–  compensation structures
–  benefit packages
–  reward systems

Websites of Firms Specializing
in Developing Sales Force
Compensation Programs
•  Peruse the websites of various firms that specialize in
developing sales force compensation programs at
–  http://www.centive.com
–  http://www.xactlycorp.com
–  http://www.pearlmeyer.com/services/consulting/sales.shtml
–  http://www.synygy.com

Types of Sales Compensation Plans
Nature of reward
Non-incentive based Incentive based Benefits based
hourly wage straight commission health insurance

straight salary performance bonus dental insurance
Compensation Plans
merit pay pension plans
profit sharing social security
pay-for-knowledge
stock options
flexible pay compensation
combination

Types of Compensation
•  Financial compensation:
–  Direct payment of money
•  salary
•  commission
•  bonus
•  sales contests
–  Indirect payment—paid vacations
–  Insurance programs
•  Non-financial compensation
–  Opportunity to advance on the job
–  Recognition inside and outside the firm Source: Nancy Ney
–  Self-respect
–  Other tangible benefits

Sales Force Compensation Plans
Based on Types of Salespeople
1.
Creatures
of habit
5. 2.
Money-oriented Goal-oriented
individuals individuals
Buying centers
4. 3.
Trade-offers Satisfiers

Sales Force Compensation
•  To see a video on creating a sales force
compensation plan, go to
–  http://www.sellingpower.com/video/index.asp?
date=11/8/2007

Developing the Compensation Plan
1. 2. 3. 4.
Prepare Establish Determine Develop
job specific general the
descriptions. objectives. levels of compensation
compensation. mix.
7. 6. 5.
Evaluate Administer Pretest
the plan. the plan. the plan.

Preparing Job Descriptions
•  Sales managers need detailed, meaningful job
descriptions before they can develop a
compensation plan.
Source: Flying Colours Ltd.

Establishing Specific Objectives
•  Compensation plans are
designed to achieve
organizational objectives,
such as these:
–  larger market share
–  higher profit margins
–  introducing new products or
services
–  winning new accounts
–  reducing selling costs

Features of Good Compensation Plans
Standpoint of the firm
control economic motivational simple

over how balancing of for to administer and
salespeople sales costs
and salespeople to explain, and
allocate their increase effort flexible to adjust
sales results
time
Features of good
compensation
plans
reward for
income
superior fairness
regularity
performance
Standpoint of sales representatives

Articles on Sales Force Compensation
•  To read various articles on compensating the sales

force, go to
–  http://www.compensationtechnologies.com/mp5.html
–  http://www.compensatingthesalesforce.com (click on Sales
Compensation Articles link)
•  Read an article on rewarding results, the road to sales
compensation excellence, at
–  http://www.saleslobby.com/Mag/0902/SCBB.asp
•  Read a related article concerning how seven steps can
help improve sales compensation plans at
–  http://denver.bizjournals.com/denver/stories/2007/04/23/
smallb5.html?page=1

Determining General
Levels of Compensation
•  Compensation should be
competitive to attract and
retain competent salespeople.
•  Basic pay level should be
based on the following:
–  skills, experience, and education
required for the job
–  income for comparable jobs in
the company
–  income for comparable jobs in
industry
–  flexibility to adjust to area living
costs
–  ceiling on salesperson earnings
or restrictions against earning
more than bosses
Developing the Compensation Mix
•  A compensation mix of salary, commission, and/or
bonus is more effective in achieving objectives and goals
than salary or commission alone.
1. Costs for alternative compensation mixes

–  Straight-commission plans are most efficient at lower sales
volume levels.
–  A shift from commissions to salaried positions is in order once a
salesperson’s volume has reached a critical level.
2. Proportion for salary

–  Salaries should enable salespeople to meet living expenses.

3. Proportion for incentives
–  Commission and bonus are based on achieving a sales quota.
4. Fixed, progressive, or regressive incentives

–  Fixed commissions do not offer incentives for higher sales.
–  Progressive incentive rates step up the percentage of
commission or bonus awarded as sales volume grows past
designated levels.
–  Regressive incentives decline as sales increase (used if
there are windfall sales and a propensity to overload customer
inventories).

5. Splitting commissions
–  If two or more salespeople worked on
closing a sale, the commissions can
be split.
6. Types of incentives
–  supplemental life insurance
–  tax return preparation
–  supplemental medical insurance
–  personal tax and financial planning
–  country club membership
–  low- or no-interest loans
–  deferred compensation
–  supplemental retirement benefits
–  first-class air travel
–  relocation allowance
–  stock options

Pretesting the Plan
•  Managers must pretest and
evaluate any compensation
plan before adopting it in one or
more sales divisions.
•  Managers need to assess its

probable impact on profits and
organizational objectives.
•  A committee of key employees

should help develop, approve,
and implement any proposed
new plan.
Source: Flyning Colours Ltd.

Administering the Plan
•  A compensation plan
should be fair, easy to
understand, simple to
calculate, and flexible.
•  As market conditions and

organizational objectives
change, the plan may
need to be altered.
Source: Stockbyte

Evaluating the Plan
•  Continually evaluate the
plan for the following:
–  attracting desirable people
–  retaining salespeople
–  motivating salespeople
–  achieving organizational
goals
•  Evaluate the compensation

plan for ongoing effectiveness
on a quarterly, semiannual, or
annual basis. Source: Stockbyte

When Is Straight Salary Best ?
•  team selling situations
•  long negotiating periods
•  mixed promotional situations
•  during learning periods
•  missionary selling
•  special conditions (for example,

introducing a new line of
products, opening up new
territories, calling on new
customer accounts)

When Is Straight Commission Best ?
•  strong incentives needed
•  selling costs need close

control
•  service is less important
•  long-term relationships are Source: PhotoLink
less important

Sales Force Compensation:
Sales Commissions and
the Secrets of Performance Management
•  To see videos on sales commissions and
performance management, go to
date=10/5/2007
date=10/3/2007

When to Use Different
Combination Plans
•  Salary plus commissions
–  when management wants to get
high sales without sacrificing
customer service
–  for new salespeople, since it
provides more security than
straight commission
•  Salary plus bonus

–  for achieving long-run objectives,
such as selling large installations
or product systems or achieving a
desired customer mix

When to Use Different
Combination Plans
•  Salary plus commission
plus bonus
–  for seasonal sales and
frequent inventory
imbalances
–  when management wants
to focus on certain products
or customers
•  Commission plus bonus

–  for team-based efforts, in
which some salespeople
call on central buyers or
buying committees

Combination Plan Advantages
•  greatest flexibility and control
•  provides security plus incentive
•  allows frequent, immediate

reinforcement of desired behaviors

Combination Plan Disadvantages
•  can be complex and difficult to
understand
•  can be expensive to administer
•  likely to fail if not carefully

developed

Software for Developing
Sales Force Compensation Programs
•  Peruse the following website to learn about the Makana
Motivator, a software for developing sales force
compensation programs, at
–  http://www.makanasolutions.com/compensation_software.html
•  Test drive the Makana Motivator at
–  http://www.makanasolutions.com/compensation_planning.html
•  Learn about automating software for objective-based
incentive compensation programs and the performance
management incentive system (PMIS), at
–  http://www.saleslobby.com/Mag/0504/FESC.asp
–  http://www.pmistechnologies.com

Trends in Sales Compensation
•  tying sales compensation
plan to productivity and
retention
•  including customer
satisfaction in the sales
compensation plan
•  adjusting international
sales compensation plans
to meet local conditions
•  commission for sales

managers
Expense Accounts and Fringe Benefits
Expenses only for
sales may
discourage
prospecting for
new customers or
customer service.
Paperwork for
Expensing sales
reimbursement of
task costs should
expenses should
be treated equally.
be minimized.
1.
Flexibility
5. 2.
Affordability Equitability
Designing the
expense plan
4. 3.
Managers should Simplicity Legitimacy
have clear
guidelines for Legitimate expenses
reimbursing should be
expenditures. reimbursed, with
neither profits nor
losses for
salespeople.

Major Types of Sales Expenses
•  meals
•  entertainment
•  travel (air, train, auto)
•  auto rental
•  lodging
Source: S. Pearce/PhotoLink.

Reimbursement Plans
1. Types of 2.
Unlimited reimbursement Limited
reimbursement plans reimbursement
plans plans
3.
Combination
•  Unlimited reimbursement
reimbursement •  Limited
plans
plans cover all reimbursement
selling and travel plans offer flat
expenses with no dollar amounts for
limit being put on food, hotel, travel
total expenses, but •  Combination for a given time
sales reps must reimbursement plans set period (usually a
regularly submit limits on certain items day or week), or an
itemized records of such as food and allowable cost per
their expenditures. lodging but not on item.
transportation.

A Model for Being Well Compensated
•  Compensation is based on the following:

–  the need for what you do
–  your ability to do it
–  the difficulty to replace you
•  Remember this:
–  Income is what you make.
–  Wealth is what you keep.

Ethical Situation: What Would You Do?
Discussion Question
As national sales manager, the CEO of your company has ordered you to reduce the selling costs of
the sales force by 5 percent over the coming year in order to meet profit projections that he’s already
presented to the company’s board. With gasoline prices going up, you know that it’s unrealistic to cut
selling costs by 5 percent, but you know that the CEO is not going to back down from his demand.
You can’t cut the salaries or commission rates for your salespeople without having a major impact on
sales and morale, so your only option, as you see it, is to cut back 5 percent on reimbursement of
expenses for your salespeople. Currently, you have an unlimited sales expense reimbursement plan
which has worked quite well. Occasionally, a salesperson has tried to “game” the plan but he or she
has been quickly brought back in line when the abuse was pointed out. To cut sales expenses by 5
percent, you think you can come up with the excuse to move to a limited reimbursement plan by telling
your subordinate sales managers that too many people have been abusing the unlimited
reimbursement plan and that costs have skyrocketed. You don’t share collective profit and cost
information with your subordinate sales managers, so they won’t be able to challenge your data and
will assume that it’s the other sales managers and their salespeople who are most responsible for this
change in the reimbursement plan. To get the 5 percent cut you need in sales expenses, you plan to
assign limits for hotel, meals, and travel based on consumer price index and cost of living data that is
at least one year old. Making reimbursements based on old data, you know that you’ll be saving at
least 3 to 4 percent based on the prevailing and projected inflation rates, and you think you can round
down the limits for hotels and meals to cut another 1 to 2 percent.

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Chapter 12

PowerPoint presentation prepared by

Copyright © Houghton Mifflin Harcourt Publishing Company. All rights reserved. 12 | 2

After reading this chapter, you should be

Copyright © Houghton Mifflin Harcourt Publishing Company. All rights reserved. 12 | 3

• As extrinsic rewards, compensation plans

• Here are three methods of financial

Copyright © Houghton Mifflin Harcourt Publishing Company. All rights reserved. 12 | 4

• Reward preferences are known to differ as a result of

• In designing and implementing compensation systems,

Copyright © Houghton Mifflin Harcourt Publishing Company. All rights reserved. 12 | 5

Copyright © Houghton Mifflin Harcourt Publishing Company. All rights reserved. 12 | 6

hourly wage straight commission health insurance

merit pay pension plans

profit sharing social security

flexible pay compensation

Copyright © Houghton Mifflin Harcourt Publishing Company. All rights reserved. 12 | 7

Copyright © Houghton Mifflin Harcourt Publishing Company. All rights reserved. 12 | 8

Copyright © Houghton Mifflin Harcourt Publishing Company. All rights reserved. 12 | 9

Copyright © Houghton Mifflin Harcourt Publishing Company. All rights reserved. 12 | 10

Copyright © Houghton Mifflin Harcourt Publishing Company. All rights reserved. 12 | 11

Source: Flying Colours Ltd.

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Copyright © Houghton Mifflin Harcourt Publishing Company. All rights reserved. 12 | 13

control economic motivational simple

Standpoint of sales representatives

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• To read various articles on compensating the sales

Copyright © Houghton Mifflin Harcourt Publishing Company. All rights reserved. 12 | 15

1. Costs for alternative compensation mixes

2. Proportion for salary

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4. Fixed, progressive, or regressive incentives

Copyright © Houghton Mifflin Harcourt Publishing Company. All rights reserved. 12 | 18

Copyright © Houghton Mifflin Harcourt Publishing Company. All rights reserved. 12 | 19

• Managers need to assess its

• A committee of key employees

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• As market conditions and

Copyright © Houghton Mifflin Harcourt Publishing Company. All rights reserved. 12 | 21

• Evaluate the compensation

Copyright © Houghton Mifflin Harcourt Publishing Company. All rights reserved. 12 | 22

• long negotiating periods

• mixed promotional situations

• during learning periods

• special conditions (for example,

Copyright © Houghton Mifflin Harcourt Publishing Company. All rights reserved. 12 | 23

• strong incentives needed

• selling costs need close

• service is less important

• long-term relationships are Source: PhotoLink

Copyright © Houghton Mifflin Harcourt Publishing Company. All rights reserved. 12 | 24

Copyright © Houghton Mifflin Harcourt Publishing Company. All rights reserved. 12 | 25

• Salary plus bonus

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• Commission plus bonus

Copyright © Houghton Mifflin Harcourt Publishing Company. All rights reserved. 12 | 27

• provides security plus incentive

•  As extrinsic rewards, compensation plans

•  Here are three methods of financial

•  Reward preferences are known to differ as a result of

•  In designing and implementing compensation systems,

•  To read various articles on compensating the sales

•  Managers need to assess its

•  A committee of key employees

•  As market conditions and

•  Evaluate the compensation

•  long negotiating periods

•  mixed promotional situations

•  during learning periods

•  special conditions (for example,

•  strong incentives needed

•  selling costs need close

•  service is less important

•  long-term relationships are Source: PhotoLink

•  Salary plus bonus

•  Commission plus bonus

•  provides security plus incentive

•  allows frequent, immediate

•  can be expensive to administer

•  likely to fail if not carefully

•  commission for sales

•  travel (air, train, auto)

•  Compensation is based on the following: