Chapter 15.
Compensating the Sales Force

Building Relationships Bonuses
One of the best ways to reward salespeople for special efforts
Can direct salespeople away from sales volume for other specific objectives	Product launch Account penetration Dealer participation Nibble selling Customer satisfaction Team selling Market share Account profitability

Introduction
Salespeople are different. Money is not always the motivator
Five types of salesperson behavior patterns
Some are "Creatures of habit." Money does not motivate either way Some are motivated toward goals regardless of money Some work just enough to keep their jobs Some work to balance time between income generation and income consumption Certain salespeople have an insatiable appetite for money. They will try to earn as much as they can.
Any incentive's value depends on
The personal characteristics of the person to whom it is offered The degree to which it is needed or wanted The absolute value of the incentive How this incentive interacts with other incentives that might be aimed at other needs The perceived organizational environment
Some type of Sales Compensation Plan
A plan assumes at least two prerequisites	The sales manager knows what the salespeople do The sales manager has some behavioral priorities or objectives

What salespeople do?
How much should your incentive program motivate the salespeople to be involved in?
Selling at a profit Servicing before and after the sale Planning - call schedules Forecasting Managing time, effort, expenses Communicating	Record Keeping Complaint handling Implementing promotions Determining credit and collecting Prospecting Self-development

Objectives of a Strong Compensation Plan
based on corporate objectives communicates business direction communicates priorities
Salespeople's Needs Based Objectives
Equitable	Internal equity - related to other employees Comparable to competitors Commensurate with effort and results
Stable	eliminate "feast" or "famine" periods
Provide incentive	Reward superior performance
Understandable	Easy to calculate in advance
Company Needs Based Objectives
Attract and retain desirable salespeople Encourage specific activities Reward outstanding performances Provide the optimum balance between costs and results Develop long-term relationships with customers Provide easy administration

Process for Developing the Compensation Plan
Major Decision Areas
Gross Level of Compensation	Experience, ability and education required Income level of comparable jobs in the company Competitive market for salespeople
The Compensation mix (Usually a mix of salary and incentive )	Unless
	Trust level is low Individual performance is difficult to measure Performance must be measured subjectively Inclusive measures of performance cannot be developed Large pay rewards cannot be given to top performers
Measurement Criteria	Salary compensated for nonselling tasks Quotas are the usual basis for for the incentive portion
The Process
Evaluate the job description Establish specific objectives
Determine levels of compensation	Assign values to each requirement Compare to other jobs in the firm Compare to what the competition pays Determine the maximum (if any) that you want any salesperson to make Consider cost of living
Develop the compensation mix
The proportions of salary and incentives Prime Factors Amount of management control desired Amount of motivation needed Total cost	Salary should
	Meet needs without luxury Pay for nonselling tasks
	Incentive Should
	Not be so large to encourage neglect of other areas Less than 10% may not be motivating 10% to 25% when Product market is mature Product is expensive Firm has a high market penetration Long selling cycle Established customers with automatic reorders Time spent on customer relationships 25% - 50% when Low market penetration Emphasis on high volume Little postsale service is required New markets are being developed Competition is intense
Regressive versus progressive incentive	Regressive - commission percentages decline as volume gets higher Used to limit income
Pretest the plan Administer and evaluate the plan

Basic compensation plans

Salary
Characteristics
fixed amount per period raises based on performance and manager's evaluation
Advantages
Security for salesperson Company loyalty developed Flexibility - you can shift territories, customers Greater control over salesperson's time Simple to administer Costs are known and budgeted in advance Easier to recruit some people Salespeople tend to operate in the best interests of the firm
Disadvantages
No financial incentives Selling costs can get out of line Income inequities - slackers still get paid Does not encourage superior performance
Strategic Implications (requires more management)
Situations where straight salary might work best	Team selling Long negotiation periods Unbalanced promotional mix Sales trainees Special conditions - new products, etc Missionary selling

Commission
Characteristics
Commission Base - units, dollars, profit Commission Rate - percent, amount When does commission start? Draws - paid against future commissions Recoverable - salesperson must pay back Nonrecoverable Draw or Guaranteed Minimum Expenses may or may not be included When disbursed At sale At delivery At payment Hold backs Charge backs
Advantages
Income is related to performance Easy to compute and understand Salespeople realize that they are in control of their income Low costs when there are low sales Commission expenses come at the same time as revenue Salespeople work as hard or as little as they want. More like independent businesses Those that don't sell don't get paid. Income of salesperson is not subject to the manager's subjective opinion
Disadvantages
Emphasis can easily be on sales and not profitable sales Very little company loyalty Sales people neglect nonselling activities During good times their pay is higher than sales management May tend to overload the customer with inventory, hurts relationships Turnover goes up in economic downturns Salespeople feel less secure Less flexible salespeople. Can't split territories easily Some are harder to recruit Legal Problems
Strategic implications
Straight Commissions make sense when	There is little team selling Short negotiation periods No missionary work Relationships not important Service not important Part time salespeople The firm cannot afford anything else
Administrative problems
How to encourage profitable sales Base commission on exact profit means divulging profit may be difficult to compute items beyond the salesperson's control Create profit groups with different commission levels Commission splits Commission rates - progressive, static, regressive

Bonus

Characteristics

Lump sum for outstanding performance
May be individual or group
Always in combination with a salary and/or commission

Advantages

Flexibility
Can motivate teams
Can tie to specific outcomes like profit

Disadvantages

May not motivate if they drag out over a long time
May not be realistic to attain
Some sales people will get a free ride on team bonuses

Strategic implications

good tool for a good manager
must be in combination with other compensation

Combination Plans
Characteristics
Salary plus commission Salary plus bonus Commission plus bonus
Advantages
Can offer the advantages of both types Greatest flexibility Tightest control over salespeople Security plus incentive Salespeople are paid for doing what management thinks is important Desirable sales behaviors can be quickly and easily reinforced
Disadvantages
Can be complex and misunderstood Poorly conceived plans can be expensive May disappoint management and salespeople Incentive portion is still not tied to profits Incentive portion may be too small to motivate
Strategic implications
Salary plus Commission	Use when incentives and non selling tasks are important Use when hiring people new to sales
Salary plus Bonus	Use for long range objectives Long term relationships Major installation sales Customer mix
Salary plus Commission plus Bonus	Seasonal sales frequent inventory imbalances need to emphasize certain products temporarily
Commission plus Bonus	Commissions are usually associated with group bonuses Some salespeople call on central buyers to get product approved Others call on the actual stores

Trends in Compensation
Salespeople
No best plan Plans are often modified Salary and incentive are most popular
From 1988 to 1998 compensation rose	22.5% for Sales Trainees 16.7% for Mid Level Salespeople 14.1% for Top Level Salespeople 18.7% for Sales Supervisors
Sales force compensation survey	2% have Degrees 37 years - typical age 6.9 years on present job Reimbursed $225 per call
Sales management
Trends in executive compensation	Wide variety between industries Pay does not get cut regardless of profit Bonuses for performance (paid next year) More perks and benefits
Selling Business Services
Make more money Are more influential Growth in this area Less constrained by tradition and inertia

Summary

Each salesperson is different
The needs of salespeople change over time
Compensation is a critical factor in keeping salespeople motivated
Financial and nonfinancial incentive plans must be kept current

Here are some useful salary related web sites
Cost of Living Salary Calculator	Enables you to do a city-by-city comparison of national cost-of-living differences.
Salary.com	Very comprehensive site with up-to-date compensation information.
JobStar.org	Job search site with an excellent salary/compensation section. Links to over 300 salary surveys.
Bureau of Labor Statistics
Job Search Compensation Center from About.com	Tips, tools and insights into salary and other compensation.
ERI Economic Research Institute: College Students Career Planning	A website with compensation and benefits research. Includes information about expected career earnings, cost of living analysis, expected starting salary survey, and salary assessor tools.
America's Career InfoNet	Site maintained by the US Dept of Labor, includes information on over 460 occupations. Also includes market outlook and job listings.