CHAPTER SEVEN

COMPENSATING (REMUNERATING) SALESPEOPLE

Compensation is a systematic approach to providing monetary value to employees in exchange for

work performed. Compensation may achieve several purposes assisting in recruitment, job
performance, and job satisfaction. Reward management is concerned with the formulation and
implementation of strategies and policies, the purposes of which are to reward people fairly, equitably
and consistently in accordance with their value to the organization and thus help the organization to
achieve its strategic goals. It deals with the design, implementation and maintenance of reward
systems (reward processes, practices and procedures) that aim to meet the needs of both the
organization and its stakeholders.

Compensation mean all forms of financial return, tangible services & benefits that employees receive
as part of their employment relationship. Direct financial compensation can be wages, salaries,
commissions, bonuses and indirect financial compensations can be insurance plans, life, health,
dental, disability, social assistance benefits, retirement plans, social security, vacations, holidays, and
sick leave. Non-financial benefits are the job environment which is interesting, challenging, need
more responsibility; and the opportunity for recognition, advancement, feeling of achievement, job
environment policies, supervision, co-workers, status symbols, working conditions, flextime,
compressed work week, job sharing, telecommuting, flexible benefits programs.

7.1 Need for Sound Remuneration Plan

Sales managers should consider carefully the type of compensation plan they wish to use.
This is because there are a number of objectives which can be achieved through a
compensation scheme. First, compensation can be used to motivate a sales force by linking
achievement to monetary reward. Second, it can be used to attract and hold successful
salespeople by providing a good standard of living for them, by rewarding outstanding
performance and providing regularity of income. Third, it is possible to design
compensation schemes, which allow selling costs to fluctuate in line with changes in sales
revenue. Thus, in poor years lower sales are offset to some extent by lower commission
payments, and in good years increased sales costs are financed by higher sales revenue.

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Fourth, compensation plans can be formulated to direct the attention of sales personnel to
specific company sales objectives. Higher commission can be paid on product lines the
company particularly wants to move. Special commission can be paid to salespeople who
generate new active accounts if this is believed to be important to the company. Thus,
compensation plans can be used to control activities.

7.2 The Aims of Reward/Compensation Management

 Reward people according to what the organization values and wants to pay for
 Reward people for the value they create
 Reward the right things to convey the right message( in terms of behaviors and outcomes)
 Develop a performance culture; Motivate people and obtain their commitment and engagement
 Help to attract and retain the high quality people the organization needs
 Create total reward processes recognizing importance of both financial & non-financial rewards
 Develop a positive employment relationship and psychological contract
 Align reward practices with both business goals and employee values
 Operate fairly( people feel they are treated justly)
 Apply equitably( people are rewarded appropriately in relation to others within the organization,
relativities between jobs are measured as objectively as possible and equal pay is provided for
work of equal value;
 Function consistently – decisions on pay do not vary arbitrarily and without due cause between
different people or at different times;
 Operate transparently – people understand how reward processes operate and how they are
affected by them.

A reward system consists of:

 Policies that provide guidelines on approaches to managing rewards.

 Practices that provide financial and non-financial rewards.
 Processes concerned with evaluating the relative size of jobs (job evaluation) and assessing
individual performance (performance management).
 Procedures operated in order to maintain the system and to ensure that it operates efficiently and
flexibly and provides value for money
7.3 Importance of Compensation

Compensation and reward system plays vital role in a business organization. Since, among
four Ms, i.e. Men, Material, Machine and Money, Men has been most important factor, it is
impossible to imagine a business process without Men. Every factor contributes to the process of
production/business. It expects return from the business process such as rent is the return expected

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by the landlord, capitalist expects interest and organizer i.e. entrepreneur expects profits. Similarly
the labor expects wages from the process. Labor plays vital role in bringing about the
process of production/business in motion. The other factors being human, has expectations,
emotions, ambitions and egos. Labor therefore expects to have fair share in the business/production
process. Therefore a fair compensation system is a must for every business organization.

The fair compensation system will help in the following:

 It has positive impact on the efficiency and results produced by employees and encourage the
employees to perform better and achieve the standards.
 It enhances the process of job evaluation. It will also help in setting up an ideal job evaluation
and the set standards would be more realistic and achievable.
 It brings peace and good relationship o between employer and employees.
 It creates healthy competition among employees and encourages them to work hard and
efficiently.
 It provides platform for happy and satisfied workforce and minimizes the labor turnover that
guarantees the organization stability and sustainability.
 It provides growth and advancement opportunities to the deserving employees.
 It helps the organization to retain instead of switching of best and talented workers to
competitors.
 It gives the organization hope to think of expansion and growth due to support of skillful,
talented and happy workforce.
 It is hallmark of organization’s success and prosperity. The success and stability of organization
is measured with pay-package it provides to its employees.
 It raises the morale, efficiency and cooperation among the workers and provides satisfaction to the
workers.
7.4 Factors Affecting Remuneration Plan
Mainly there are two environments that affect the remuneration plan. These are the internal factors
(exist within the organization and influence the pay structure of the company) and the external
factors (exist out of the organization but do affect the employee compensation in one/ the other way).

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A. Internal Factors
1. Ability to Pay: The prosperous or big companies can pay higher compensation as
compared to the competing firms whereas the smaller companies can afford to maintain
their pay scale up to the level of competing firm or sometimes even below the industry standards.
2. Business Strategy: The organization’s strategy also influences the employee
compensation. In case the company wants the skilled workers, so as to outshine the competitor,
will offer more pay as compared to the others. Whereas, if the company wants to go smooth
and is managing with the available workers, will give relatively less pay or equivalent
to what others are paying.
3. Job Evaluation and Performance Appraisal: The job evaluation helps to have a
satisfactory differential pays for the different jobs. The performance appraisal helps an
employee to earn extra on the basis of his performance.
4. Employee: The employee or a worker himself influences the compensation in one of the
following ways.
 Performance: The better performance fetches more pay to the employee, and thus with
the increased compensation, they get motivated and perform their job more
efficiently.
 Experience: As the employee devotes his years in the organization, expects to get an
increased pay for his experience.
 Potential: The potential is worthless if it gets unnoticed. Therefore, companies do pay
extra to the employees having better potential as compared to others.
B. External Factors
1. Labor Market: The demand for and supply of labor also influences the employee
compensation. The low wage is given, in case; the demand is less than the supply of labor. On
the other hand, high pay is fixed, in case; the demand is more than the supply of labor.
2. Going Rate: The compensation is decided on the basis of the rate that is prevailing in
the industry, i.e. the amount the other firms are paying for the same kind of work.
3. Productivity: The compensation increases with the increase in the production. Thus, to
earn more, the workers need to work on their efficiencies that can be improved by way
of factors which are beyond their control. The introduction of new technology, new

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 methods, better management techniques are some of the factors that may result in the
better employee performance, thereby resulting in the enhanced productivity.
4. Cost of Living: The cost of living index also influences the employee compensation, in a
way, that with the increase or fall in the general price level and the consumer price
index, the wage or salary is to be varied accordingly.
5. Labor Unions: The powerful labor unions influence the compensation plan of the
company. The labor unions are generally formed in the case, where the demand is more,
and the labor supplies is less or are involved in the dangerous work and, therefore,
demands more money for endangering their lives. The non-unionized companies or
factories enjoy more freedom with respect to the fixation of the compensation plan.
6. Labor laws: There are several laws passed by the government to safeguard the workers from the
exploitation of employers. Thus, there are several internal and external factors that decide the
amount of compensation to be given to the workers for the amount of work done by them.
7.5 Pay Dimensions

As organizations continue to face mounting competitive pressures, they seek to do more with less and
do it with better quality. As goals for sales volume, profits, innovation, and quality are raised,
employment growth is often tightly controlled and in many cases, substantial cuts in employment
have been made. To accomplish more with fewer employees, calls for effective management
of human resources. Employee compensation plays such a key role because it is at the heart
of the employment relationship, being of critical importance to both employees and
employers. Employees typically depend on wages, salaries, and so forth to provide a large
share of their income and on benefits to provide income and health security. For employers,
compensation decisions influence their cost of doing business and thus, their ability to sell at a
competitive price in the product market. Compensation decision influences the employer's
ability to compete for employees in the labor market (attract and retain), as well as their
attitudes and behaviors while with the employer.

Pay practices vary significantly across employing units and to some degree, across jobs.

 First, pay can be in the form of cash or benefits (e.g., health care, retirement, paid
vacation). Health care has been the fastest growing benefit, and most employers

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 describe the challenge of controlling this cost while providing quality coverage as one of
their top human resource management challenges.
 Second, both benefits and cash compensation can be described in terms of their level
(how much). Most organizations use one or more market pay surveys to help determine
what other organizations pay specific jobs in making their own pay level decisions.
More broadly, total labor costs are a function of both compensation cost per employee
and total employee headcount. Therefore, to assess competitiveness in the product
market, organizations should not focus only on pay levels. They should compare total
labor costs, and better yet, they should compare with other organizations the sort of
return (or productivity) they receive in terms of profits, sales, and so forth for each
dollar spent on labor costs.
 Third, the structure refers to the nature of pay differentials within an employing unit.
Some organizations may bring entry level people in at a relatively high rate of pay, but
then provide relatively slow pay growth, while another. Organization may bring
employees in relatively low but offer greater opportunities for promotion and pay
growth over time.
 Fourth, payment systems differ in their mix (how and when cash compensation is
disbursed). Some organizations pay virtually all employees a base salary that is adjusted
approximately once per year through a traditional merit increase program. Merit
increases become part of base salary and are supposed to depend on merit
(performance), although there is a widespread belief that most employees get about the
same percentage increase, regardless of their performance.
 Fifth, pay is administered differently in different organizations. The design of pay
policies differs, for example, in terms of who is involved in the process. The roles of
human resource departments, line managers, and rank and file employees differ across
situations. In some organizations, line managers may design plans, often with assistance
from the human resources department. Alternatively, human resources take the lead in
other cases. Employees to be covered by a payment system are sometimes involved, and
in some cases, may actually design plans for themselves
 Communication is another aspect of administration. The most technically sophisticated
payment plan can generate desired employee reactions or exactly the opposite. The

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 actual effect depends on whether the rationale for the payment plan is understood and
accepted and whether employees' perceptions of the facts upon which the rationale is
built (e.g., the company's financial health, the pay of employees in other jobs or
organizations) are the same as the perceptions of those charged with seeing that the
payment plan has the intended effects.
7.5 Methods of Compensation

There are no hard-and-fast rules governing how sales representatives should be paid. It
depends on the type of company, the products or services it offers its customers and the
nature of the sales process – how sales are organized and made. When designing
compensation plans, sales management need to recognize that not all of the sales team may
be motivated by the thought of higher earnings.

Darmon identified five types of salespeople:

1) Creatures of habit. These salespeople try to maintain their standard of living by earning
a predetermined amount of money.
2) Satisfiers. These people perform at a level just sufficient to keep their jobs.
3) Trade-offers. These people allocate their time based upon a personally determined ratio
between work and leisure that is not influenced by the prospect of higher earnings.
4) Goal orientated. These salespeople prefer recognition as achievers by their peers and
superiors and tend to be sales quota orientated with money mainly serving as
recognition of achievement.
5) Money orientated. These people aim to maximize their earnings. Family relationships,
leisure and even health may be sacrificed in the pursuit of money. The implication is
that sales management needs to understand and categorize their salespeople in terms of
their motives. Compensation plans can only be effectively designed with this
understanding. For example, developing a new plan based upon greater opportunities
to earn commission is unlikely to work if the sales team consists only of the first three
categories of salesperson. Conversely, when a sales team is judged to be composed
mainly of goal and money orientated salespeople, a move from a fixed salary to a salary
and commission system is likely to prove effective.

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There are, basically, three types of compensation plan:
A. Fixed salary: This method of payment encourages salespeople to consider all aspects of
the selling function rather than just those which lead to a quick sales return. Salespeople
who are paid on fixed salary are likely to be more willing to provide technical service, complete
information feedback reports and carry out prospecting than if they were paid solely by
commission. The system provides security to the salesperson who knows how much income they
will receive each month and is relatively cheap to administer since calculation of commissions
and bonuses is not required.
However, the method does have a number of drawbacks. First, no direct financial
incentive is provided for increasing sales (or profits). Second, high-performing
salespeople may not be attracted, and holding on to them may be difficult using fixed
salary since they may perceive the system as being unfair and be tempted to apply for
jobs where financial rewards are high for outstanding performers. Third, selling costs
remain static in the short term when sales decrease; thus the system does not provide
the inbuilt flexibility of the other compensation systems.
Because of its inherent characteristics it is used primarily in industrial selling where
technical service is an important element in the selling task and the time necessary to
conclude a sale may be long. It is particularly appropriate when the salesperson sells
very high value products at very low volumes. Under these conditions a commission
based compensation scheme would lead to widely varying monthly income levels
depending on when orders were placed.
2. Commission only: The commission-only system of payment provides an obvious
incentive to sell. However, since income is dependent on sales results, salespeople will
be reluctant to spend time on tasks, which they do not perceive as being directly related
to sales. The result is that sales personnel may pursue short-term goals, to the detriment
of activities, which may have an effect in the longer term. They may be reluctant to write
reports providing market information to management and to spend time out of the field
to attend sales training courses, for example. The system provides little security for
those whose earnings may suffer through no fault of their own and the pressure to sell
may damage customer–salesperson relationships. This is particularly relevant in

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 industrial selling, where the decision-making process may be long and pressure applied
by the salesperson to close the sale prematurely may be detrimental.
From management’s perspective the system not only has the advantage of directly
financing costs automatically, but also allows some control over sales activities through
the use of higher commission rates on products and accounts in which management is
particularly interested. It is most often used in situations where there are a large number of
potential customers, the buying process is relatively short and technical assistance and service is
not required. Insurance selling is an example where commission-only payments are often used.
3. Salary plus commission: This system attempts to combine the benefits of both the
previous methods in order to provide financial incentives with a level of security. Since
income is not solely dependent upon commission, management gains a greater degree
of control over the salesperson’s time than under the commission-only system, and sales
costs are to some extent related to revenue generated. The method is attractive to
ambitious salespeople who wish to combine security with the capability of earning
more by greater effort and ability. For these reasons it is the most commonly used
method of compensating salespeople, although the method of calculating commission
may vary. Extra payment may be linked to profits or sales generated, at a constant rate
for all sales or only after a certain level of sales have been generated. Payment may be
based upon a fixed percentage for all products and customers or at a variable rate.
Alternatively, a bonus (a given monetary sum) may be paid on the accomplishment of a
particular task (e.g. achieving a sales target, opening a certain number of new accounts).

Summary of payment and incentive arrangements for sales staff

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