Chapter 11

Sales Force
Compensation
Method Advantage Disadvantage Best Used
Provides security and Direct incentive is easily For products that require a lot of
Straight stability for reps lost if not administered presale and/or post-sale service
salary Better for directing and
properly
For building long-term customer
controlling sales Represents a fixed cost relationships
activities
Requires supervision to When supervision is available for
Ensures proper direct, control, and new recruits
treatment of customers evaluate
For new territories
For missionary sales
Provides a strong Difficult to direct and When a strong incentive is needed to
Straight incentive supervise sales people attain sales
commission
Sales people have Customers’ best interests For products that require little
more freedom may be ignored presale and/or post-sale service
Acts as a screening Sales people’s earnings Adequate field supervision is not
method may fluctuate widely available
Company is in a weak financial
position
Company uses part-time or
independent sales people

Added incentive Added cost To encourage above-normal

Bonus performance of specific activities
Can be used for specific May be seen as
activities - flexible inequitable if not
administered properly
Following are three problems often faced by sales managers:
 
a. Salespeople tend to overemphasize the easy-to-sell parts of
multiple product lines in an effort to build sales volume; other more
profitable lines are forced into the background.
 
a. the plan should be a commission based on gross margin. Usually the
easy-to-sell items are also the low-margin items. Paying commission
on gross margin will discourage emphasis on these items, and conversely will
encourage more attention to higher margin items.
 
b. Salespeople need to spend more time developing new accounts.

b. Salary plan will offers management the opportunity to require

salespeople to do some specific activity. Provides security and stability for reps.
Better for directing and controlling sales activities

 
c. To improve a company's long-term position, salespeople should be
doing more missionary work and developing long-term customers to
meet expected competition.
  
 
c. Might put more emphasis on the salary part of the pay plan
What plan would you recommend for each of the following companies in handling
split commissions?

a. Manufacturer of sheets, pillowcases, towels, and related items sells to a

department store chain. The order is placed through the chain's buying offices in New
York. Delivery is made to stores throughout the country on an order from the
department manager in each store. The manufacturer's salespeople call on the units of
the chain located in their territories.
b. Manufacturer of small airplanes used by executives.
c. Wholesales of office equipment and supplies.
d. Automobile dealer.

a. Manufacturer of sheets, pillowcases, etc.

 
Split the commissions between the rep calling on the home office and
the rep selling in the territory where the product is delivered.
Possibly a 50-50 split. It may vary from 50-50 if firm can show that
one of the two people typically has far more to do with making the
sale.
b. Manufacturer of small airplanes used by executives.
This type of product takes a lot of lead time to sell and a lot of post-
sale activity as well. This person would probably be on a
compensation plan which is a salary + commission plan, with
salary comprising at least 50 percent of the total.

C. Wholesales of office equipment and supplies.

This sales job also requires some pre-sale and post-sale service, but the lead times
would not be very long.
This salesperson would also be paid on a salary plus commission basis, but the salary
proportion would be less than 50 percent and the commission percentage would be
greater than 50 percent.

d. Automobile dealer.

There is no pre-sale or post-sale activity. This suggests that a large part of this
salesperson's compensation is commissioned based.
Also traditionally, the salespeople in this industry have been paid straight
commission