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    Motivation and Reward System Management

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    MOTIVATION AND R ha MeN NTI) MOTIVATING AND REWARDING: Objectives BIG BUCKS AND A PORSCHE 911 " Poe EORSCHE SIN Afier completing this module, Optio Sluion,& technology company in Noreross, Georgia, has developed | YO" should be able to + smpensation formula that attracts and retains salespeople by sppropsea in the k : aotnating and rewarding them, At Optimus, the more prot ee er eee y Sect he eee as the more they earn. They receive a 10 to 25 percent commisios (higher intensity, persistence, commission rates than competitors) on every dollar of profit generated. For in ‘end direction. sance, ifa produet cost Optimus $10,000, a rep may try to sell it for $12,000, taming a commission on the $2,000 profit Since the company does not cap its compensation, reps are motivated to continue to generate profits. Moreover, if there are products that the company wants to push, it will add 5 percent to the sandard commission rate to encourage reps to move that product. Optimus also provides an additional incentive, Any rep that reaches an ag- 2 Exploin the difference between compensation rewards ond noncom= Pensation rewards. Exsive, yet obtainable, annual sales objective of $1 million during a 12-month 3 Describe the primar Petiod receives a one-year lease on a Porsche 911. The company’s CEO and financial and nonfinoncial President, Mark Metz, believes that having the Porsche 911. parked in the park- ‘compensation rewards ing lot every day serves to constantly motivate his salespeople. The award also avcilable to salespeople. teats f0 motivate winners the following year, who realize they need to keep up ; their outstanding performance if they want to continue to drive the Porsche. 4 Doseribe salary, commis: The program, started in 1998, continues to motivate salespeople, Five salgspeo- sion, and combination te qualifed for the Porsche in 2000 and eight qualified in 2001, The company’s oy plans in terms of winner is so confident that he will continue to perform well enough each thar advantoges and Yaaro receive the Porsche that he sold his Honda Gite ae sadvantages, ¢ company’s system for motivating and rewarding its salespeople : 5. Beplan fhe fone ; ™ wre than $100 million in revenues in the Fundamental thee ‘The company has grown to mo! ; ein cee one reimbursement, See ae faite: Be ~The Perfect Plan,” Sales & Marketing Menagement 6 Discuss issues associated Cummi ut, “The Perfect Plan,’ o i ool hd eer) Soon runt tee and Erin Strout, “Driving Peformance" Sales & Marketing with sales contests equal "agement 154 (May 2002); 64. pay for equal work, team compensation, of global compensation, Bs pics regarding the management of i ind changin sale eeTINE Vignette introduces several to} ‘ond changing @ reward SES jb rewards, A saletorce reward system, because of ts impact on o- oud shore" job satisfaction, is one of the most important determinants of both | sey a i performancz. The vignette iustrates that there are 1 guidelines for SY elective wanes ae era reward the salesfoce, Optima Solutions mand ing : combat tunity 1o drive a Po i and ewe 9h, through a combination of pay and the opportunity Thig P fOsters recognition for a job well done. motivating the salesforce through tle examines the sles manager’ fle fn ee siden sane ion of this the cine®Ps in reward system management. In tn eth the reward prefer” aracteriny 5 m al , e teri ve ward syste! concentrates iene pn ec nn "" finan ple in general a ‘ons, and bonuses. ; Wie 193! rwards, such as salaries, commissions, ant ren beet te ‘espe (2 ©Penditures for financial rewards or¢ Mjget! Expense Feimbursem "alg cg, tPonent of the sales organization 209 b Sovered, 210 Part 4 Directing the Salesforce EXHIBIT 8.1 Total Total ; Percent Compensation 2001 Compensation 2000 Change 1519 Top-level rep $139,459 ae on 93% Mid-level rep $77,179 cece 13.4%, Low-level rep $51,992 te “93% Average rep $80,023 z 55% Base Salary Base Salary Percent 2001 2000 Change $70,832 108% Top-level rep $78,483 Mid-level rep $49,144 $46,563 55% Low-level rep $37,698 $36,906 21% Average rep $54,452 $53,293, 22% Bonuses Plus Bonuses Plus Percent Commissions 2001 Commissions 2000 Change Top-level rep $60,976 $56,687 7.6% Mid-level rep $28,035 $42,515, 41% Low-level rep $14,294 $20,569 305% Average rep $25,571 $31,441 “87% . Nonfinancial rewards, such as opportunities for growth, recognition, and ee ' tion, are reviewed. Current issues in reward system management, such as the use of 9 i contests, equal pay for equal work, team compensation, global compensation, 32 changing reward systems, are presented. This module concludes with summary guice lines for managing salesforce reward systems, MOTIVATION AND REWARD SYSTEMS Defining, motivation has been a tedio searchers, and sales managers. After de tions of motivation include three di Intensity refers to the amount of met Son, Persistence describes the salesperson’s choice vo expend effort over tim, PC when faced with adverse conditions, it Direction implies that salespeople choo their efforts will be spent among various job activities.? joo Because salespeople are often faced with a diverse set ofselling and nonsellng eh, spousbiltics, their choice of which activities warrant actiON is just as import oy, hard they work or how wel they persist in their efforts, The motivation tsk 8% Plete unless salespeople’s efforts are channeled in directions consistent with 128 ON jes strategic role of the salesforce within the firm, ‘These ideas are supported in © yc of salespeople: one in the direct selling industry and the other of a national 2 pct turer's salesforee-* Both studies indicate that higher levels of effort, of intensi0h ; necessarily associated with higher levels of performance, ines ‘Motivation is an unobservable Phenomenon, and the terms intensity, PO direction are concepts that help managers explain what they expect from, op? be ple. It is important to note that although sales managers can observe salesPem ait * havior, they can only infer their motivation. Indeed. it is the personal ‘mature of motivation that makes it such a dificult area to study, 4 : ‘ nd us job for psychologists, sales manogemet -cades of study, the most commonly use con? imensions— intensity, persistence, and dire t ntal and physical effort put forth by the SIP eat extrinsic motivation, some wil have strong gas am’ and formal recognition awards, whereas ail intrinsic rewards, tes Beal crn ers will seek intrinsic rewards, swt i ystem management involves the selec izational rewards can be classified as compensation and noncompensation qvards, Compensation rewards arc those that are given in return for acceptable per- fpaance or effort. Compensation rewards can include-nonfinancial compensation, sxchas recognition and opportunities for growth and promotion. Noncompensation rewards include factors related to the work situation and well- eng of cach salesperson. Sales jobs that are interesting and challenging can in- ease silespcople’s motivation, as can allowing salespeople some control over thei om activities, Sales managers can also improve salesforce motivation by provi ymance-enbancing feedback to salespeople. Other examples of noncompensa- don rewards are (1) providing adequate resources so that salespeople can accomplish thir jobs and (2) practicing a supportive sales management leadership style. In this nodule, the focus is on compensation rewards, including financial and nonfinancial compensation. : OPTIMAL SALESFORCE REWARD SYSTEM The optimal reward system balances the needs of the organization, its salespeople, and ‘scastomers against one another. From the organization’s perspective, the reward sys- ‘emshould help accomplish the following results: Provide an acceptable ratio of costs and salesforce output in volume, profit, or other objectives. : 1.Encourage specific activities consistent with the firm's overall, marketing, and sales- force objectives and strategies. For example, the firm may use the reward system to Sacourage the selling of particular products or to promote teamwork in the sales- Ke, Aime and retain competent salespeople, thereby enhancing long-term customer telaionships, ‘Allow the kind of adjubtments that facilitate administration of the reward system, A ‘rly stated, reasonably flexible plan assists in the administration of the plan, From the perspective of the salesperson, reward systems are expected to meet a cnr different set of criteria then from the sales manager's Perepecties ae oat. Compan Previous module, salespeople expect to be treated equitably, with rewards warpible to those of others in the organization doing a similar job—and to the ©f competitors’ salespeople. Most salespeople prefer some stability in the rewar bat they simultaneously want incentive rewards for superior performance. Be- ue an OS Productive salespeople have the best opportunitis to leave ehe firm for Samus work situations, the preferences of the salesforce regarding comp Biven due consideration. . sre the ee com ecomer have become more important than the ion che silesforce in determining the structure oF oa compensation to cs ‘ne Panies such as IBM, Eastman Kodak, hat 93 percent of technology com: T Satish ies ie cstion. In fact, recent research shows ti logy com- hae try OPensation to customer satisfaction and loyalty.® Serve automobile d eles Stucrby (© feduce customer dissatisfaction stemming from high-pressite Paying their salespeople a salary instead of a com sales 211 212 oN Part 4 Directing the Salesforce volume. Others adjust the seein ‘commission based on customer satisfaction on salesperson’s handling of the sale. Siege Sete ofenstomers, salespeople, and the sales organization Sioa, ously is indeed 4 challenging task. As you might suspect, compromise between yon times divergent interests becomes essential for managing most salesforce rewind y tems, As noted by Greenberg and Greenberg, “A salesforce is comprised of indy, human beings with broadly varying needs, points of view, and psychological chara, isties who cannot be infallibly categorized, measured, and punched out to formula "7 TYPES OF SALESFORCE REWARDS For discussion purposes, the countless number of specific rewards available to saespe. ple are classified into six categories, as shown in Exhibit 8.2: pay, promotion, sense of accomplishment, personal growth opportunities, recognition, and job security* Each of these reward categories is discussed in the next two sections of this module. The fina. cial compensation section focuses on pay, and the nonfinancial compensation section on the other rewards shown in Exhibit 8.2. Keep in mind that reward preferences may differ internationally. For example, one study found that Japanese salespeople prefer being a member of a successful team with shared goals and values over receiving finz- cial rewards? FINANCIAL COMPENSATION In many sales organizations, financial compensation is composed of current spendable income, deferred income or retirement pay, and various insurance plans that may Pro vide income when needed. The discussion here is limited to the current spendable i- come because it is the most controllable, and arguably most important, dimension of salesforce reward system, The other components of financial compensation tend tobe dictated more by overall company policy rather than by sales managers. 1 Current spendable income includes moncy provided in the short rerm (wee monthly, and annually) that allows salespeople to pay for desired goods and service. includes salaries, commissions, and bonuses. Bonus compensation may include onc income equivalents, such as merchandise and free-travel awards. A comprehensive s™. of salesforce financial compensation practices found salaries, commissions, and bows to be used widely to pay salespeople. The study concluded that financial compenstit plans including a salary and one or more incentives (commission and/or bonus) most popular.!° as The three basic types of salesforce financial compensation plans are straight 97% straight commission, and a salary plus incentive, with the incentive being 2€om"=" and/or a bonus. A discussion of each type follows (summarized in Exhibit 8:3)- Motivation and Reward System Management 213 EXHIBIT Common Uses Sales trainees; sales planned earnings facili- soe tates budgeting and re- pay often based on sen- cruiting; customer loyalty _fority, not merit; salaries enhanced; more control may be a burden to new of nonselling activities firms or to those in de- lining industries | i jon Income linked to results; Difficult to build loyalty _Real estate; insurance; gamision strong financial incentive of salesforce to company; — wholesaling; securities; to improve results; costs less control of nonselling automobiles reduced during stow sales activities | periods; less operating capital required tembination Flexibility allows fre- Complex to administer; __ Widely used—most quent reward of desired may encourage crisis- Popular type of finan- behavior; may attract oriented objectives «ial pay plan high-potential but un- proven recruits Staight Salary Ping slespeople a straight salary (exclusively by a salary) is uncommon. Such plans ‘nd suited for paying sales support personnel and sales trainces. Sales support personnel, including missionaries and detailers, are involved in situa- sia which itis difficult to determine who really makes the sale. Because missionar- i deuilers are concerned primarily with dissemination of information rather than ‘ed by an earnings cap, in that salespeople may 216 GL hae 8 ort oS Part 4 Directing the Salesforce managers 01 the salespe resent this outcome, but people may managers. Nor only do managers resent Fl" C8 J — spond to direction from those they exceed in earning: ‘OPle may ng Performance Bonuses The third dimension of curent spendable income is the peeformance bonus, ei ‘up or individual. Both types are prevalent, anid some ems plans Bonuses are wpically used to direct cffore toward relatively jort-term o| as introducing new products, adding new accounts, or reducing accou ‘They may be offered in the form of cash or income equivalents, such as fice travel. Although commissions or salary may be the financial-comy bonuses are used strictly in a supplementary fashion. Ombine the bjectves, ay tS receive Merchandise ¢ PEMSAtiOn bu, Advantages of Performance Bonuses One advantage of the performance bonus is that the organization can direct to what it considers important in the sales arca, In addition, sales em changed from period to period, Bonuses are particularly complishment of objectives." emphasg phasis cin by ly useful for tying rewards toa. Disadvantages of Performance Bonuses One problem with the performance bonus is that it may be difficult to determine aie Cea, x calculating bonus achievement ifthe objective is expressed in subjeine ake (€-8. account servicing). Further, ifsalespeople do no t Fully support the established b> Heetve, they may not exert additional effort to aceomplish the goal.!3 Combination Plans (Salary plus Incentive) ‘The limitations of straight-salary and stra use of plans that feature some combinstio words, salary plus incentive. Combinay Source of salesperson income, Salary.plug plans are popular When properly conceived. and enough flexibly to tant salesforce activities. The most dificult pt of structuring combination plans is de mining the financial compensation mi the relative amounts to be puid in ca commission, and bonus, Exhibit 8.4 enim" ight-commission plans have led to increasing, n of salary, commission, and bonus—in other ion pay plans usually feature sal: the mipe bonus and salary-plus-commission-plus-bons lary, Shite acre se E Sees ; eee ; : . = Ssiary ieee Proportion of Salary a Total Pay Should = tio “tower Higher Reportance of salesperson’s personal kills i i B Reputation of salespersons Company" Mking sales Niner! theta’ NANCE on advertising and other “ales promotion te known (owe : activities : h ig Competive Branta9# Of product in terms of price, ee Ph cece a les volume as a ect ight |Z incidence oi technical orteam seling "7 eling obj ca tn i “i See rs beyond the ‘Control of sales, a ‘Person that, we el Slight consider yr oe? Motivation and Reward System Management amber of factors related t0 determining the appropriate ratio of salary to otal 3281 apensation." salary fond corres in Exhibit 8.4, the compensation mix sho pe salary component when individual sales, yack the Stance, When well-established compant 2 Products in highly competitive markets, the salesforce has less direct convol over a atcomes- i erervce is crucial as contrasted with matimizing short-term sis volume crit selling is used, a compensation mix favoring the salary dimension is appropriate ‘uggested in Exhibit 8.4, conditions contrary to those favorable to a high salary-to- fealcompensation ratio would dictate an emphasis on commissions in the compensa. tion mix. advantages of Combination Plans ‘The paimary advantage of combination pay plans is their flexibility. Sales. behavior can be rewarded frequently, and specific behaviors can be reinforced or stimulated quick. For example, bonuses or additional commissions could be easily added to a Baybase 0 encourage such activites as selling excess inventory, maximizing the sales ef highy seasonal, products, introducing new products, or obtaining new customers, For example, when Management Recruiters International wanted to boost its business one December after having a record-breaking November, it offered the office’s nine salespeople a $5,000 bonus to split amongst themselves if they did two thirds of the business that they had done in November. Each salesperson’s share of the bonus, how- ser, was based on their contribution to sales,!5 ‘Combination plans can also be used to advantage when the skill levels of the sales- fore vary, assuming that the sales manager can accurately place salespeople into various shilltevel categories and then formulate the Proper combination for each category."* In this is done with sales trainees, regular salespeople, and senior salespeople in = companies, with cach category of salespeople having 2 different combination of and incentive compensation. Combination ‘or sales jobs. Col security of a ‘omponents, Pay plans are attractive to high-potential but unproven candidates lege students nearing graduation, for example, might be attracted by salary and the opportunity for additional earnings from incentive-pay Ristvantages of Combinaticin Plans re uated With straight-salary and straight-commission plans, combination plans are ‘hinges incon and difficult to administer. Their flexibility sometimes leads to frequent IY is des se Pensation Practices to achieve short-term objectives. Although flexibil- Pcie conte €2ch change requires careful communication with the salesforce and nN cideigm nwtO8 With long-term sales, marketing, and corporate objectives. A com- 65, many ot combination plans is that they tend to produce too many salesforce ob- cur, more 2, Of Which are of the crisis resolution “fire-fighting” variety. Should this © important long-term Progress can be impeded. Non, AngtNANCIAL COMPENSATION ica ey “atv in this module, compensation for effort and performance may incude forsSent yyevetds. Examples of nonfinancial compensation include e aggetOnal groveh Promotion, a sense of accomplishment on the job, opportunities Teva o'th, recognition of achievement, and job security. Sometimes, ont Yara Ment yyars Coupled with financial rewards—for example, a promotion laws it PBimagily ff sults in a pay increase—s0 one salesperson might view these re~ Nog The yah insncia, whereas another might view them from 3 nonfinancal per- Ney Of sleytlU® OF nonfinaneial compensation is illustrated by the considerable ‘en geen, Nghe Who knowingly take cuts in financial compensation a Mies prevalence of ecker nonfinancial rewards in salesforce reward sys- © their important role. 217 218 Part 4 Directing the Salesforce i Opportunity for Promotion tion is a highly valued reward among S90, dry Teofen eclipses pay as the most valued reward.!” Given gro” Gane sale peop oto middle-aged people in the vorkfore, the opperna for promotion may be limited severely in nongrowth industries. (Growth indus such as financial services and direct sales, offer reasonably good opportunities fora vancement through promotion.) Because opportunities for promotion are not ex varied in the short run, the importance of matching recruits to the job and its revar, ove should be nod that a promotion need not involve a move from sales into man. agement. Some career paths may extend from sales into management, whereas othen progress along a carcer salesperson path. Opportunity for prom Sense of Accomplishment Unlike some rewards, a sense of accomplishment cannot be delivered to the salesger son from the organization. Because a sense of accomplishment emanates from the sles person's psyche, all the organization can do is facilitate the process by which it develops Although organizations cannot administer sense-of-accomplishment rewards as they ‘would pay increases, promotions, or formal recognition rewards, the converse is not true—they do have the ability to withhold this reward, to deprive individuals of feeling a sense of accomplishment. Of course, no organization chooses this result; it stems om poor management practice. Several steps can be taken to facilitate a sense of accomplishment in the silesfore, First, ensure that the salesforce members understand the critical role they fulfill in rev enue production and other key activities within the company. Second, personalize the causes and effects of salesperson performance, This means that each salesperson should understand the link between effort and performance and between performance and ie wards. Third, strongly consider the practice of management by objectives or gol setting as a standard management practice, Finally, reinforce feelings of worthwhile complishment in communication with the salesforce. Opportunity for Personal Growth Opportunities for personal are routi xan caaege tuition tetnbaren eTowth ate routinely offered to salespeople. For © : nt programs are c : wad on sch topes as physi fines, tes reduction od pacar naa pln terestingly, many sales job candidates think the major reward available from well KO" companies is the opportunity for personal growth. ‘This is particularly true of 2 preneurially oriented college students who hope to “leam'then earn” in theit 0% dng ecrtenandsccton ay Compare showed in quisition of universally valuable selling ae for personal growth drove Recognition Recognition, both informal and forrn; systems. Informal recognit delivered in private conver ad i al, is an integral part of most salestore® iy raaten © “nice job” Solace and saat ess 35 "0n OF correspond: mana salesperon, Informal Fecognition-is easy ° of ee teen: a mies 2 ee practic ronal rescence desirable behavior immediately after it occu. in surance indus has the Nios Pang .OnE Deen popula in sls organi To

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