copyright © 2001 by harcourt, inc. all rights reserved. c ompensation for h igh p erformance

COMPENSATION FOR HIGH PERFORMANCE

Why compensation is so important for establishing an effective sales force.

How to design, implement, and evaluate a compensation program. The advantages and disadvantages involved in the three types of

compensation plans: straight salary, straight commission, and combination salary.

The different types of sales force expenses and transportation. The total compensation package and how to develop a proper

compensation mix. What is involved in designing a new compensation plan.

LEARNING OBJECTIVES

Suitable compensation is a must for companies striving for a satisfied and high-quality sales force. This chapter should help you understand:

Sales is one of the few jobs where you earn your money – every day.

Compensating the Salesforce

• A good compensation plan should consider objectives from the

company’s and salespeople’s viewpoint

• Objectives of compensation plan from the company’s viewpoint

• To attract, retain, and motivate competent salespeople

• To control salespeople’s activities

• To be competitive, yet economical: It is difficult to balance

these two objectives

• To be flexible to adapt to new products, changing markets,

and differing territory sales potentials

Objectives of Compensation Plan from Salesperson’s Viewpoint

• To have both regular and incentive income

• Regular income by fixed salary to take care of living

expenses

• Incentive income for above average performance

• To have a simple plan, for easy understanding

• This is in conflict with the objective of flexibility

• To have a fair payment plan

• Fair or just payment to all salespeople is ensured by

selecting measurable and controllable factors

Designing an Effective Sales Compensation Plan

• Designing a new compensation plan or revising an existing

plan consists of the following steps:

• Examine job descriptions

• Set up specific objectives for salespeople

• Decide levels of pay / compensation

• Develop the compensation mix

• Decide indirect payment plan or fringe benefits

• Pretest, administer, and evaluate the plan

• We shall examine these steps briefly

Examine Job Descriptions

• Separate job descriptions are required for different sales positions or jobs – E.G. missionary salesperson, senior salesperson, key account executive

• Each job description should include responsibilities and key performance standards, to decide how much to pay

Set up Specific Objectives for Salespeople

• These are derived from company’s sales and marketing objectives

• Salespeople should have some control on the objectives – E.G. number of sales calls made

• Objectives should be measurable. E.G. sales volume, selling expenses

Decide Levels of Pay / Compensation

• It means the average pay or money earned per year (or month)

• It is important to decide levels of pay for all sales positions

• It is decided based on the following factors:

• Levels of pay for similar positions in the industry

• Levels of pay for comparable jobs in the company

• Education, experience, and skills required to do sales job

• Cost of living in different metros and cities

• Annual average pay levels vary between industries, within the same industry, and sometimes within the company

• Firms decide a range of average pay, instead of a specific pay

• Salespeople earn pay depending on their and company performance

Develop the Compensation Mix

• Widely used elements of compensation mix are: (1) salaries, (2) commissions, (3) bonuses, (4) fringe benefits (or perquisites)

• Expense allowances or reimbursements like travel, lodging, etc are not included

• Basic types of compensation plans are:

• Straight salary

• Straight commission

• Combination of salary, commission, and / or bonus

• 68 percent companies use combination plan and balance 32 percent firms use straight salary or straight commission

• We shall briefly examine above compensation plans

Straight – Salary Plan• Characteristics:

• 100 percent compensation is salary, which is a fixed component

• No concern for sales performance or salesperson’s efforts

• This plan is suitable for sales trainees, missionary salespeople, and when a company wants to introduce a new product or enter a new territory

• Advantages:

• Salespeople get secured income to cover living expenses

• Salespeople willing to perform non-selling activities like payment collection, report writing

• Simple to administer

• Disadvantages:

• No financial incentive to salespeople for more efforts and better performance. Hence, superior performance may not be achieved

• May be a burden for new and loss-making firms

Straight – Commission (or Commission Only) Plan

• Characteristics:

• It is opposite of straight-salary plan

• Most popular commission base is sales volume or profitability

• Commission rate is a percentage of sales or gross profit

• This plan is generally used by real estate, insurance, and direct-sales (or network marketing) industries

• Advantages:

• Strong financial incentive attracts high performance, removes ineffective salespeople and improves results

• Controls selling costs and requires less supervision

• Disadvantages:

• Focus is on sales and not on customer relationship

• Salespeople may pay less attention to non-selling activities

Combination Plan

• Characteristics:

• Combines straight salary & straight commission plan

• Four types of combination plans used by companies:

1) Salary plus commission: suitable for getting improved sales and customer service

2) Salary plus bonus: a bonus is a lumpsum, single payment, for achieving short-term objectives. This plan is used for rewarding team performance

3) Salary plus commission plus bonus: suitable for increasing sales, controlling salesforce activities, and achieving short-term goals. Also suitable for selling seasonal products like fans

4) Commission plus bonus: Not popular. Used for team selling activities for selling to major customers

Combination Plan (Continued)

• Advantages:

• Flexible to reward and control salesforce activities

• Security for living costs and incentives for superior performance for salespeople

• Rewards specific sales performance

• Different plans for different sales positions / jobs

• Disadvantages:

• Complex and difficult to administer

• May not achieve objectives if not properly planned, implemented and understood

• Indirect payment plan, also called fringe benefits or perquisites, help in attracting and retaining people, but have now come under government tax in India

Pretest, Administer, and Evaluate Compensation Plan

• Pretesting the new / proposed Compensation Plan:

• Companies pretest a new (or proposed) plan, before adoption

• Either it is simulated on a computer, or pretested at one / more branches for 6-12 months

• It should involve all concerned people

• Administering the new compensation plan

• Announce the plan in advance

• Explain the new plan and reasons for changing the previous plan

• Outsource administration if plans are changed frequently

• Evaluating the new compensation plan

• Find if objectives of the plan are achieved

• Some companies audit compensation plans

Any type of sales organization can reward sales performance in three fundamental and interrelated ways:

1. Direct financial rewards.

2. Career advancement and personal development opportunities.

3. Nonfinancial compensation.

COMPENSATION IS MORE

THAN MONEY

A sales reward system is not the only means of motivating salespeople, but it is the most important.

Measuring sales performance but not properly rewarding it severely limits the achievement level for salespeople.

PURPOSES OF COMPENSATION

• Connect individual with organization.

• Influence work behavior.

• Organizational choice.

• Influence satisfaction.

• Feedback.

• Reinforcement.

FIGURE 13.1 EFFECTS OF PAY DISSATISFACTION

P a y D issa tisfa ction

D esire for M ore P a y

Absenteeism

Grievances

Job Dissatisfaction

Turnover

Performance

S tress, A n x iety

P oor M en ta l H ea lth

P sych ologica l W ith dra wa l

Individuals are satisfied with the rewards they receive in the following terms:

• How much reward is actually received in relation to how much was expected to be

received.

• How the rewards received compare with what others received.

• Whether the rewards lead to other rewards.

• The level of extrinsic and intrinsic satisfaction from the rewards.

• The value of different rewards.

FIGURE 13.2 FORMAL COMPENSATION PROCESS

E stablish Sales F orce O b jectives and P lans

D eterm ine C om pensation O b jectives, Strateg ies, and T actics

D eterm ine M ajor C om pensation F actors

Im plem ent L ong- and Short- R ange P rog ram s

C om m unicate C om pensation P olicy

R elate R ew ards to P erform ance

M easure Ind ivid ual, G roup, and O rganizational P erform ance

A ppraisal and R ecycling

DESIGNING A COMPENSATION PROGRAM

Compensation plans should have general and specific objectives:

• Attaining yearly sales volume and gross margins (general).

• Attaining monthly sales volume and sales on specific products (specific).

• Market penetration and exploiting the territory’s potential (general).

Compensation plans should have general and specific objectives: continued

•Call management and development of potential in key accounts as well as

development of new accounts (specific).• Introduction of new products (specific).

DETERMINE MAJOR COMPENSATION

FACTORS

• Wage level.• Wage structure.• Individual wage.• Administration procedures.

IMPLEMENT LONG AND SHORT-RANGE

COMPENSATION PROGRAMS

Communicate compensation policy.

1. The salesperson needs to know what part the sales force is expected to take in

attaining the organization’s goals.

2. The salesperson’s role in achieving sales objectives should be thoroughly

discussed.

3. The limitations and weaknesses of the compensation program should not be

hidden from the salesperson.

The compensation message should contain several elements:

RELATE REWARDS TO PERFORMANCE

Rewards and promotions should be tied directly to the salesperson’s individual contributions to sales force objectives.

MEASUREMENT OF PERFORMANCE

Companies need to regularly measure individual, sales group, and organizational performance to determine whether the compensation program’s objectives are being met.

APPRAISAL AND RECYCLING

Key questions in terms of the success of a plan:

• Are the compensation objectives being met?• Is the firm able to attract new salespeople

with this plan?• What is the relationship of compensation to

turnover?

PERFORMANCE-BASED PAY:

PREREQUISITES AND

OBSTACLES

If pay is going to influence salespeople’s performance, the following factors are important:

• The salesperson must perceive a close relationship between performance and

pay.• Pay must be important to the salesperson.

If pay is going to influence salespeople’s performance, the following factors are important: continued

• The salesperson must be able to perform what is necessary to achieve the pay.

• The salesperson must know what is expected.• Performance must be measurable, and its

evaluation must be fair.

For these conditions to exist, the organization must do its part, which means:

• Sales territories must have equal potential.• The salesperson must know and understand

how the pay program works.• The performance appraisal system must be

free from potential bias.• Managers must be trained in giving feedback.

For these conditions to exist, the organization must do its part, which means:

continued

• The amount of money set aside for merit or incentive pay must be sufficiently large to

make extra effort worthwhile.• The job evaluation must be valid so the

overall salary relationships are equitable.• The sales culture must be such that the high

performers are encouraged rather than discouraged by their peers.

FIGURE 13.3 TYPICAL COMPENSATION PLANS

STRAIGHT SALARY

TYPES OF COMPENSATION

Of all the compensation plans, the straight salary plan is the simplest: The salesperson is paid a specific dollar amount at regular intervals.

TABLE 13.1 PROFILE OF A STRAIGHT SALARY COMPANY

• Dominant market share in mature, stable industry

• Highly defined and stable customer base

• Strongly centralized and closely managed selling effort

• Significant number of house accounts

• Highly team-oriented sales effort

• Service versus selling emphasis

STRAIGHT COMMISSION PLANS

Two basic types of commission plans exist:

1. Straight commission.

2. Draw against commission.

The straight commission plan is a complete incentive plan. If salespeople do not sell anything, they do not earn anything.

Drawing Accounts

Drawing accounts combine the incentive of a commission plan with the security of a fixed income.

Situations where commission plans can be used:

• Little nonselling, missionary work involved.

• The company cannot afford to pay a salary and wants selling costs to be

directly related to sales.

• The company uses independent contractors and part-timers.

TABLE 13.2 PROFILE OF A COMMISSION PLAN COMPANY

• Low barriers to entry into the job

• Limited corporate cash resources

• Small entrant into an emerging market or market segment

• High risk reward sales force culture

• Undefined market opportunity or customer base

• Inability to set quotas or other performance criteria

• Volume-oriented business strategy

HOW TO CALCULATE INCENTIVES

Factors on which to base quotas:

• The past year’s sales.

• The sales force’s forecast of the coming year’s sales.

• Corporate marketing targets.

• A specific net profit target.

• Geographic market potentials.

Consider Profitable Products

• The profitable products can carry a higher commission or incentive reward.

• The more profitable products can be weighted so one of them counts as much as two or

three of the routine products.

• Separate quotas can be set for each product line.

• Salespeople can be paid on the basis of their individual contributions to profit.

Who Should Participate?

• Split credit

• Support people

The question of who gets incentive payments has two aspects:

• Salary and commission

• Salary and bonus: individual or group bonus

• Salary, commission, and bonus: individual or group bonus

Numerous types of combination salary plans exist. The more popular plans are:

1. Nonproductivity bonus

2. Productivity bonus

Bonus: Individual or Group

Sales contests are special sales programs offering salespeople incentives to achieve short-term work goals.

TABLE 13.3 PROFILE OF A COMBINATION-PAY PLAN COMPANY

• Established company with growth potential, many products, and active competition

• Need to direct a complex set of behaviors

• Need for a variable pay component that will ensure top performers are rewarded commensurately

1. To motivate the sales force.

2. To attract and hold good people.

3. To direct the sales force efforts in a profitable direction.

When to Use a Combination Salary Plan

SALES FORCE EXPENSES

Expense plans have the same basic objectives as a compensation system, that is, to motivate the salesperson’s behavior in terms of membership, performance, and attendance.

1. Fair for the salesperson.

2. Fair for the company.

3. Cost effective.

4. Understandable.

5. Convenient.

Several criteria for an effective expense plan:

• The company pays all expenses.

• The salesperson pays all expenses.

• The company partially pays expenses.

Types of Expense Plans:

1. Benefits that are required legally

2. Pension and retirement programs

3. Nonworking time

4. Insurance

5. Miscellaneous services

FRINGE BENEFITS

Five basic classifications of salespeople’s benefits and services are:

FACTORS TO CONSIDER WHEN

DEVELOPING A NEW PLAN

1. Companies with a sales force on a straight salary may find it highly advantageous to move to a salary-plus-incentive plan.

2. Companies with a sales force on straight commission may sometimes adopt a salary-plus-incentive plan to gain more control over the sales force.

Information to Collect

• Competitor’s plans

• Product profitability

• Sales force activities

TABLE 13.5 KEY INDICATORS FOR POSSIBLE SALES COMPENSATION PROBLEMS

1. Declining revenues

2. Declining market share

3. Declining profitability

4. Insufficient premier accounts

5. High sales force turnover

6. Uneven sales force performance

7. Inadequate servicing of customers

8. Concentrating on easy-to-sell and unprofitable products

Pretest the Plan

• In boom times.

• During a recession.

• If a runaway market occurs for one product.

• If old products are dropped or new ones added.

THE BOTTOM LINE

Compensation given for certain behaviors have major influences on a sales force’s culture.

Compensation is one part of the salesperson’s behavioral model.

Money can be an extremely powerful performance motivator if used with the right compensation program.

Under a combination salary plan, a proportion of the salesperson’s total pay is guaranteed, and the rest is incentive pay.

Daily expenses of field salespeople are a major part of the sales force budget.

When developing a new pay plan, managers must consider the nature of the job, the market, channels of distribution, the caliber of the salespeople, a company’s financial condition, and suggestions made by sales personnel.

The sales manager can better “sell” the job to prospective salespeople by determining the dollar value of fringe benefits and presenting pay and benefits as a total compensation package.

THE BOTTOM LINE

Leading the Salesforce

• Leadership is the ability to influence people to achievement of objectives

• Leadership is necessary for a sales manager’s effectiveness

Leadership Styles

• Transactional leadership equates to supervision – relating to day-to-day operations & control, and task-orientation

• Transformational leadership changes values and attitudes of followers, who perform beyond expectations

• Situational leadership uses a style that fits the situation

Leadership skills

• Leadership skills required by an effective sales manager are: communication, problem-solving, and interpersonal

Supervising Salespeople

• Supervising is directing and controlling day-to-day activities of salespeople

• It is a part of leadership

• Sales managers use a combination of methods to supervise salespeople

• Methods of supervision are classified into two categories – direct and indirect

Direct Supervisory Methods Indirect Supervisory Methods

• Telecommunications

• Sales meetings

• Personal contacts

• Coaching / Mentoring

• Sales reports

• Compensation plan

• Sales analysis

• Expense accounts

copyright © 2001 by harcourt, inc. all rights reserved. c ompensation for h igh p erformance

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