compensating compensating the the sl fsales · pdf fileacceptable ratio of costs to sales...

Chapter 12:Chapter 12:

Compensating Compensating The The S l FS l FSales ForceSales Force

After studying this chapter, you should be able to:After studying this chapter, you should be able to:

Explain the need to balance wages against Explain the need to balance wages against

Learning ObjectivesLearning Objectives

p g gp g gcompany resources.company resources.

Describe the various compensation methods.Describe the various compensation methods.

Set pay levels.Set pay levels.

Assemble a compensation planAssemble a compensation plan Assemble a compensation plan. Assemble a compensation plan.

Acceptable ratio of costs to sales force output Acceptable ratio of costs to sales force output in volume, profit, or other objectivesin volume, profit, or other objectives

Goals of a Sales ForceGoals of a Sales ForceReward SystemReward System

Encourage activities consistent with firm’s Encourage activities consistent with firm’s overall, marketing, and sales force objectives overall, marketing, and sales force objectives and strategiesand strategies

Attract and retain competent salespeople, Attract and retain competent salespeople, thereby enhancing longthereby enhancing long--term customer term customer

l ti hil ti hirelationshipsrelationships

Be clear and be flexible enough to allow Be clear and be flexible enough to allow adjustments that facilitate administrationadjustments that facilitate administration

New BusinessNew Business

The CustomerThe Customer--Product MatrixProduct MatrixCS & NBD require a greater proportion of incentive like commissions & bonus than AM.

ConvergenceConvergenceSelling (CS)Selling (CS)

AccountAccountManagementManagement

( )( )

LeverageLeverageSellingSelling

( )( )

New BusinessNew BusinessDevelopmentDevelopment

(NBD)(NBD)New

Current

CUSTOMERSCUSTOMERS

(AM)(AM) (LS)(LS)

Current NewPRODUCTSPRODUCTS

Figure 12-1: The Customer-Product Matrix – p. 302

AM involve greater account servicing; better suited to a salary.

LS should have a combination of salary & incentive

Use of Compensation Use of Compensation Plans […]Plans […]

Percentage of Percentage of Companies UsingCompanies Using

Straight Salary 18

Straight Commission 19

Combinations Plans (63%)

Salary Plus Bonus 24

Salary Plus Commission 20

Salary Plus Bonus Plus Commission 18

Commission Plus Bonus 1

TOTAL 100%

Compensating Compensating Salespeople […]Salespeople […]

ComponentsComponents NeedsNeeds

SALARY Motivate effort on non-selling activities Adjust for differences in territory potential Reward experience and competence

COMMISSIONS Motivate a high level of selling effort Encourage sales success

INCENTIVE PAYMENTS

Direct effort toward strategic objectives Provide additional rewards for top (Bonus) performers Encourage sales success

SALES CONTESTS Stimulate additional effort targeted at specific short-SALES CONTESTS Stimulate additional effort targeted at specific short-term objectives

PERSONAL BENEFITS

Satisfy salespeople’s security needs Match competitive offers

Compensating SalespeopleCompensating SalespeopleCompensation PlanCompensation Plan AdvantagesAdvantages DisadvantagesDisadvantages

Straight Salary –involves paying a fixed amount each pay period.

l l Average salary plan is about 30% less than salary + incentives involves lower paying sales activities

Compensating SalespeopleCompensating SalespeopleCompensation PlanCompensation Plan AdvantagesAdvantages DisadvantagesDisadvantages

Straight Salary –involves paying a fixed amount each pay period. Average salary plan is b t 30% l th

Reduced turnover Simple Easy to administer Good when difficult to

about 30% less than salary + incentives involves lower paying sales activities

determine who made the sale

Good when teamwork required in the sales process

Good when service is required

Promotes long-term goals Promotes long-term goals Good during drastic

business swings Easier to transfer

salespeople Provides salesperson with

security and a steady predictable income

Compensation PlanCompensation Plan AdvantagesAdvantages DisadvantagesDisadvantages

Straight Salary –involves paying a fixed amount each pay period. Average salary plan is

Reduced turnover Simple Easy to administer Good when difficult to

No motivation for extra effort

Favors unproductive sales people

Compensating SalespeopleCompensating Salespeople

g y pabout 30% less than salary + incentives involves lower paying sales activities

Good when difficult to determine who made the sale

Good when teamwork required in the sales process

Good when service is requiredP t l t l

p p Lowers morale when new

salespeople earn as much as the experienced ones

High costs when sales are low

Usually requires much closer supervision by

Promotes long-term goals Good during drastic

business swings Easier to transfer

salespeople Provides salesperson with

security and a steady predictable income

closer supervision by sales managers than salespeople who work under commission plans.


Straight Commission – salespeople are paid a percentage of the sales or gross profits that they


generate. Rewards people for their accomplishments rather than their time or efforts. Ideal for those who are confident of adding valueand want to be fairly rewarded for their efforts with commissions works best when max incentive is needed and when min of after-sale service is required commission rates range from 5 to 14% of sales



Motivational Relates directly to

performance Unlimited income


generate. Rewards people for their accomplishments rather than their time or efforts. Ideal for those who are confident of adding valueand want to be fairly rewarded for their efforts

Unlimited income (assuming no cap)

Good for saving money on unproductive salespeople

Perceived fair Tends to attract better

qualified applicants and provides a strongwith commissions

works best when max incentive is needed and when min of after-sale service is required commission rates range from 5 to 14% of sales

provides a strong incentive to work efficiently.

See (next slide)

40 000rson

)

50,000

Comparing Salary and Commission PlansComparing Salary and Commission PlansUse of Compensation PlansUse of Compensation Plans

StraightSalary

10,000

20,000

30,000

40,000

Tota

l cos

t pe

r pe

(tho

usan

ds $

)

Sales Per Person in Thousands

0 100 200 300 400 500



Motivational Relates directly to

performance Unlimited income

No/little loyalty to company

Little security Short range view


generate. Rewards people for their accomplishments rather than their time or efforts. Ideal for those who are confident of adding valueand want to be fairly rewarded for their efforts

Unlimited income (assuming no cap)

Good for saving money on unproductive salespeople

Perceived fair Tends to attract better

qualified applicants and provides a strong

Short range view High turnover when

business conditions are bad

Management hasless control and nonselling activities are likely to be neglectedWide variations in paywith commissions

works best when max incentive is needed and when min of after-sale service is required commission rates range from 5 to 14% of sales

provides a strong incentive to work efficiently.

See (next slide)

Wide variations in pay may lead to poor morale among lower paid salespeople

Highly paid salespeople with management potential may not seek managerial positions.


The Salary Plus Bonus plan provides reps with income security while bonus gives added


incentives to meet company objectives Bonuses are annual discretionary payments for reaching specified goals



Ideal when products are largely presold by advertising. E.g. FMCG goods



Lower turnover among salespeople

Good to expand customer base in addition to servicing existing accounts

Good to foster teamwork



Ideal when products are largely presold by advertising. E.g. FMCG goods

Sales reps lose their motivation when the size of the bonus is arbitrary

Since bonus is paid



Lower turnover among salespeople

Good to expand customer base in addition to servicing existing accounts

Good to foster teamwork

pannually, motivation may be reduced as sales reps do not see the outcome of their hard work until the end the year


Salary Plus Commission gives a base salary plus a commission on sales.


20% of companies use this compensation plan; ideal for industrial firms selling, building materials, machinery, electrical supplies, &paper products. About 40% of these companies use

h h ldcommission thresholds before commission are paid. Commission rates may be progressive. E.g. 4% on the first $20k, 5% on the next $15k, and 6% on anything over $35k.



Commissions rate may be adjusted to promote the sale of individual products, or to intensify ff t i ifi k t



h h ld

efforts in specific market segments.

Some firms have wage caps on the incentive portion to prevent windfall (i.e. unexpected) earnings unrelated to salespeople’s efforts.

commission thresholds before commission are paid. Commission rates may be progressive. E.g. 4% on the first $20k, 5% on the next $15k, and 6% on anything over $35k.

Commissions are usu. paid monthly, which provides immediate reinforcement for salesperson’s efforts.



Commissions rate may be adjusted to promote the sale of individual products, or to intensify ff t i ifi k t

Costly to the firm Time-consuming to

administer Wages paid with a salary



h h ld

efforts in specific market segments.

Some firms have wage caps on the incentive portion to prevent windfall (i.e. unexpected) earnings unrelated to salespeople’s efforts.

g p yplus commissions are usu. higher than other plans

Commission caps save money to the company but may limit the motivation and enthusiasm of the

commission thresholds before commission are paid. Commission rates may be progressive. E.g. 4% on the first $20k, 5% on the next $15k, and 6% on anything over $35k.

Commissions are usu. paid monthly, which provides immediate reinforcement for salesperson’s efforts.

salespeople. Higher performers may

reach their commission caps early in the year and then take it easy for the rest of the year.


Salary Plus Commission plus Bonus plan is the most comprehensive Ab t 18% f


About 18% of companies surveyed used this plan Ideal for firms that sell office equipment, instruments, electronics, and business services.



Allows the sales manager to reward virtually every activity performed by salespeopleEffi i t f l d



Efficient for sales and behavior activities alike

Ideal to measure and reward activities like teamwork, customer satisfaction, and sales to distributors

Flexible - may be t i d t tcustomized to meet

different sales salespeople’s needs.



Allows the sales manager to reward virtually every activity performed by salespeopleEffi i t f l d

Complex and confusing to salespeople

Costly to administer Program tracking



Efficient for sales and behavior activities alike

Ideal to measure and reward activities like teamwork, customer satisfaction, and sales to distributors

Flexible - may be t i d t t

requires more administrative work involving salespeople, sales managers & HR personnel.

Given their personal strengths, salespeople may do some cherry-i ki d f thcustomized to meet

different sales salespeople’s needs.

picking and focus on the activities that are less difficult to achieve first & ignore some important ones.

Sales managers may find themselves micro-managing their reps.


Commission plus Bonus used by about 1% of firms surveyed


combines the incentives of a commission plus special rewards for meeting objectives ideal for firms that use brokers or independent sales reps such as stock brokers and bond traders.



Easy to understand Fairly simple to

administer Commissions are paid at



the time revenues are received

Bonus is typically paid at the end of the year

Ideal for the highest performing salespeople in the industry

top performers may get p p y gclub memberships with unique perks as long as they maintain their top selling status



Easy to understand Fairly simple to

administer Commissions are paid at

100% of salespeople’s pay is at risk

High-performing salespeople may get f t t d d it h



the time revenues are received

Bonus is typically paid at the end of the year

Ideal for the highest performing salespeople in the industry

top performers may get

frustrated and quit when they find out that other top performing sales reps receive much larger year-end bonuses

High-performing salespeople may get hired by the competition

p p y gclub memberships with unique perks as long as they maintain their top selling status

Advantages of Frequent vs. Advantages of Frequent vs. Infrequent Incentive Payments Infrequent Incentive Payments

Frequent Payment Advantages Frequent Payment Advantages (Monthl /Q a te l )(Monthl /Q a te l )

Infrequent Payment Advantages Infrequent Payment Advantages (Semiann all /Ann all )(Semiann all /Ann all )(Monthly/Quarterly)(Monthly/Quarterly) (Semiannually/Annually)(Semiannually/Annually)

Salespeople receive frequent feedback and rewards when selling cycle is short.

Rewards are close in time proximity to the successes that provided the reward.

Strong link between successful behavior and reward – motivation

Payments at bonus time are larger and have greater impact.

Performance is more stable because short-term sales variations are smoothed over the longer time horizon.

Incentives are not paid till end of year – smoother cash flow.

increased.y

Customer Satisfaction and Customer Satisfaction and Sales Sales Force Compensation Force Compensation Total Quality Management (TQM) focuses on delivering highTotal Quality Management (TQM) focuses on delivering high--quality quality

products to clients and making sure customers are satisfied.products to clients and making sure customers are satisfied. E.g. IBM E.g. IBM places significant resources toward monitoring customer places significant resources toward monitoring customer

satisfaction.satisfaction.satisfaction.satisfaction. All customers are surveyed annually on:All customers are surveyed annually on:

– Overall customer satisfaction– The rep’s knowledge of the customer– The transaction or solution itself– How satisfied the customer is with the solution– The installation process (smooth or disruptive), including how long it

took– The extent and clarity of the education provided– The time needed to get the application(s) up and running– The capability and speed of technical support

Results are benchmarked against prior IBM performance, as well as the Results are benchmarked against prior IBM performance, as well as the competitioncompetition

Results are used for compensating sales reps and managers.Results are used for compensating sales reps and managers.

TeamTeam--Selling PlansSelling Plans

TeamTeam--sellingselling involves two or more salespeople in involves two or more salespeople in separate territories who need to coordinate their separate territories who need to coordinate their activities to complete the sale.activities to complete the sale.

TeamTeam--selling is becoming more and more common selling is becoming more and more common because of increasing customer demands and a more because of increasing customer demands and a more complex business environmentcomplex business environment

The usual compensation approach is to share The usual compensation approach is to share incentive payments (such as small commissions or incentive payments (such as small commissions or group bonuses) with group bonuses) with allall members of the selling team members of the selling team g p )g p ) ggi.e. not only sales reps but also technical reps and i.e. not only sales reps but also technical reps and service people, who usually get a fixed salaryservice people, who usually get a fixed salary

TEAM EXERCISE TEAM EXERCISE –– “Incentives for Team Selling”, “Incentives for Team Selling”, p. 311 p. 311 –– 5 min.5 min.

ProfitProfit--Based CommissionsBased Commissions The The gross margin commission gross margin commission plan is designed to plan is designed to

make a sales force work towards achieving the highest make a sales force work towards achieving the highest profits possible by sharing a portion of the realized profits possible by sharing a portion of the realized gross margin.gross margin.

Commissions are a percentage of the gross margin Commissions are a percentage of the gross margin realized by the salesperson (i.e. sales price realized by the salesperson (i.e. sales price –– cost of cost of goods = gross margin)goods = gross margin)

It’s a winIt’s a win--win situation for both the sales reps win situation for both the sales reps andand the the companycompany

A potential problem with gross margin plans is theA potential problem with gross margin plans is the A potential problem with gross margin plans is the A potential problem with gross margin plans is the implicit incentive to work on larger, lower gross implicit incentive to work on larger, lower gross margins orders, instead of smaller, more profitable margins orders, instead of smaller, more profitable sales.sales.

See Table 12See Table 12--2 (next slide) Comparing Gross Margin 2 (next slide) Comparing Gross Margin Commissions on Two Orders on p. 312 […]Commissions on Two Orders on p. 312 […]

Table 12Table 12--2 Comparing Gross Margin 2 Comparing Gross Margin Commissions on Two Orders, p. 132Commissions on Two Orders, p. 132

Order Number

Percentageof Gross

Margin on Each Order

Size of Order

Gross Margin to Company

Percentage Commission

on Gross Margin

Commission Paid to

Salesperson

1 10% $1,000,000 $100,000 15% $15,000

2 20% $ 500,000 $100,000 15% $15,000

Comparing Gross Margin Commissions Comparing Gross Margin Commissions on Two Orderson Two Orders•• Salespeople view a 10% gross margin on a $1 million Salespeople view a 10% gross margin on a $1 million

order as equivalent to a 20% gross margin on a order as equivalent to a 20% gross margin on a $500,000 order$500,000 order

•• On both orders, the company makes $100,000 in On both orders, the company makes $100,000 in O bo o de s, e co pa y a es $ 00,000O bo o de s, e co pa y a es $ 00,000gross margin, and the salesperson collects $15,000 in gross margin, and the salesperson collects $15,000 in commissioncommission

•• If the selling time is the same, the salesperson is If the selling time is the same, the salesperson is likely to work for the prestige of the $1 million orderlikely to work for the prestige of the $1 million order

•• However, the company may be better off with the However, the company may be better off with the $500 000 sale because the smaller order means lower$500 000 sale because the smaller order means lower$500,000 sale because the smaller order means lower $500,000 sale because the smaller order means lower inventory carrying costs and a reduced drain on raw inventory carrying costs and a reduced drain on raw materials and plant capacity.materials and plant capacity.

•• To solve this problem, the plan could be reTo solve this problem, the plan could be re--designed designed to pay a lower commission rate when gross margin to pay a lower commission rate when gross margin and the order size are smaller.and the order size are smaller.

Expense Accounts & BenefitsExpense Accounts & Benefits

Almost all firms cover expenses for salespeopleAlmost all firms cover expenses for salespeople Typical expenses paid include vehicle expenses and Typical expenses paid include vehicle expenses and

other travel (airlines, trains, etc.), tips, lodging, other travel (airlines, trains, etc.), tips, lodging, ki f d l l h (l dli bil &ki f d l l h (l dli bil &parking, food, samples, telephone (landline, mobile & parking, food, samples, telephone (landline, mobile &

Internet access), postage, and tickets for sporting and Internet access), postage, and tickets for sporting and theater events (if going with the customers).theater events (if going with the customers).

Annual expense budgets can run in the tens of Annual expense budgets can run in the tens of thousands of dollars per salesperson per year.thousands of dollars per salesperson per year.

There are three types of There are three types of Expense Reimbursement Expense Reimbursement ProgramsPrograms: […]: […]

–– Unlimited PlansUnlimited Plans–– Per Diem PlansPer Diem Plans–– Limited Repayment PlansLimited Repayment Plans

Unlimited PlansUnlimited Plans Salespeople submit itemized forms showing their expenditures, Salespeople submit itemized forms showing their expenditures,

and the firm simply pays all reported expensesand the firm simply pays all reported expenses This approach allows salespeople wide discretion on where This approach allows salespeople wide discretion on where

they travel and how they entertain customersthey travel and how they entertain customersThe Unlimited Plan is relatively inexpensive to administerThe Unlimited Plan is relatively inexpensive to administer The Unlimited Plan is relatively inexpensive to administer The Unlimited Plan is relatively inexpensive to administer because no one regularly spends time checking expense because no one regularly spends time checking expense accounts to see if they are overstatedaccounts to see if they are overstated

Unlimited expense plans are favored by small companies that Unlimited expense plans are favored by small companies that don’t want to bother auditing expense accountsdon’t want to bother auditing expense accounts

They are also used by companies that sell expensive products They are also used by companies that sell expensive products such as airplanes and defense systems, where extensive such as airplanes and defense systems, where extensive entertainment of clients is routineentertainment of clients is routine

The main problem with the unlimited plan is that salespeople The main problem with the unlimited plan is that salespeople may get too greedy and try to profit from their expense may get too greedy and try to profit from their expense accounts, which will force management to occasionally fire reps accounts, which will force management to occasionally fire reps who get out of line.who get out of line.

Per Diem PlansPer Diem Plans A per diem expense plan pays the salesperson a fixed A per diem expense plan pays the salesperson a fixed

dollar amount for each day or week spent in the field.dollar amount for each day or week spent in the field. This plan is typically used for routine reorder selling of This plan is typically used for routine reorder selling of

standard items.standard items. The amount is designed to cover food, gasoline, The amount is designed to cover food, gasoline,

lodging, telephone calls, and other expenses.lodging, telephone calls, and other expenses. It is simple and inexpensive to superviseIt is simple and inexpensive to supervise Salespeople may try to profit from the plan by spending Salespeople may try to profit from the plan by spending

less than the allowance, usually by cutting back on less than the allowance, usually by cutting back on travel.travel.

Instead of driving to distant customers, salespeople Instead of driving to distant customers, salespeople could save money by concentrating on nearby could save money by concentrating on nearby prospectsprospects

Per diem allocations are revised periodically to reflect Per diem allocations are revised periodically to reflect inflation.inflation.

Limited Repayment PlansLimited Repayment Plans With this approach the firm sets dollar limits on each With this approach the firm sets dollar limits on each

category of sales expenses.category of sales expenses. For example, a firm might allow $.48 a kilometer for travel, For example, a firm might allow $.48 a kilometer for travel,

$10 for breakfast, $15 for lunch, $25 for dinner, and $90 for $10 for breakfast, $15 for lunch, $25 for dinner, and $90 for a rooma rooma room.a room.

These limits must reflect actual field experience, and they These limits must reflect actual field experience, and they are adjusted frequently to reflect inflationare adjusted frequently to reflect inflation

The objective of this plan is to make salespeople aware of The objective of this plan is to make salespeople aware of what the company will pay and encourage them to control what the company will pay and encourage them to control their expensestheir expenses

It also makes it easier to budget for sales costs and shouldIt also makes it easier to budget for sales costs and should It also makes it easier to budget for sales costs and should It also makes it easier to budget for sales costs and should reduce expensereduce expense--account padding.account padding.

One problem with the limited reimbursement plans is that One problem with the limited reimbursement plans is that salespeople may spend their valuable time juggling salespeople may spend their valuable time juggling expenses from one category to another or from one time expenses from one category to another or from one time period to another to make sure they cover their costs. This period to another to make sure they cover their costs. This time could be better spent solving customers’ problems.time could be better spent solving customers’ problems.

Selecting BenefitsSelecting Benefits BenefitsBenefits are used to attract and reward salespeopleare used to attract and reward salespeople Studies show that salespeople prefer benefits to recognition Studies show that salespeople prefer benefits to recognition

and incentive awardsand incentive awards Benefit packages include a variety of hospitalization, Benefit packages include a variety of hospitalization,

i d i l [T bl 12i d i l [T bl 12 3 313]3 313]insurance, and pensions plans: [Table 12insurance, and pensions plans: [Table 12--3, p. 313]3, p. 313]Benefit Percentage

of firms offering

Hospital costs 90%

Life insurance 77%

Dental plan 69%

Long-term disability 56%

Pension plan 55%

Short-term disability 49%

Profit sharing 44%

Thrift savings 22%

Employees stock purchase plan 21%

Assembling the Plan […]Assembling the Plan […] Sales managers are responsible for combining the Sales managers are responsible for combining the

various wage elements into an appropriate various wage elements into an appropriate compensation plan and predicting its effectiveness.compensation plan and predicting its effectiveness.

There are three wage level options:There are three wage level options:g pg p–– the firm can pay a premium, orthe firm can pay a premium, or–– pay the average prevailing wage, orpay the average prevailing wage, or–– offer less than the going rateoffer less than the going rate

A A premium wage level premium wage level is appealing because it may is appealing because it may attract better salespeople and motivate them to sell attract better salespeople and motivate them to sell high volumes then promote them into managerial high volumes then promote them into managerial positions later on.positions later on.

However, overpaying salespeople could cause However, overpaying salespeople could cause resentment and low morale among the firm’s other resentment and low morale among the firm’s other employees and top executivesemployees and top executives

Assembling the Plan […]Assembling the Plan […] To determine a relevant To determine a relevant average wage levelaverage wage level, a , a

good starting point is to determine the average good starting point is to determine the average compensation paid by other firms of the same compensation paid by other firms of the same size in the same industrysize in the same industrysize in the same industry.size in the same industry.

The plan should also take into consideration the The plan should also take into consideration the labor market where people are entering and labor market where people are entering and leaving.leaving.

Read Commission Breakdown table on p. 315Read Commission Breakdown table on p. 315

Assembling the PlanAssembling the Plan Example of a salesperson compensation plan:Example of a salesperson compensation plan:

$38,000$38,000 salarysalary10,00010,000 commission (1 to 4 % of sales)commission (1 to 4 % of sales)4 0004 000 bonus (8 3% of salary & commissions forbonus (8 3% of salary & commissions for4,0004,000 bonus (8.3% of salary & commissions for bonus (8.3% of salary & commissions for

exceeding new account quota)exceeding new account quota)7,5007,500 BenefitsBenefits

12,00012,000 car expense (25,000 miles at $0.48 per mile)car expense (25,000 miles at $0.48 per mile)20,00020,000 Lodging, food, and entertainmentLodging, food, and entertainment

$ 87,200$ 87,200 Total costs per salespersonTotal costs per salesperson$ ,$ , p pp p

Evaluating the PlanEvaluating the Plan The compensation plan should be evaluated The compensation plan should be evaluated

periodically to see how it will affect salespeople’s periodically to see how it will affect salespeople’s wages and total costs.wages and total costs.

The objective is to see how aboveThe objective is to see how above-- and belowand below--jjaverage salespeople would fare under the new plan.average salespeople would fare under the new plan.

Sales managers want to avoid having salespeople Sales managers want to avoid having salespeople reap windfall gains or suffer from unfairly low reap windfall gains or suffer from unfairly low earnings.earnings.

New compensation plans that pay lower wages than New compensation plans that pay lower wages than the current plan must be avoided becausethe current plan must be avoided becausethe current plan must be avoided because the current plan must be avoided because dissatisfied sales reps may end up leaving the firm to dissatisfied sales reps may end up leaving the firm to work for the competition.work for the competition.

In some situations, however, turnover may be In some situations, however, turnover may be welcome to inject new blood into the organization.welcome to inject new blood into the organization.

End of Chapter 12

NOTE:NOTE:

Additional Slides below –not discussed in the Instructor’s Note, but can be used to further enhance your discussion.

Other ConsiderationsOther Considerations

Trend toward TEAM sellingTrend toward TEAM selling–– difficult to reward team members for group effortdifficult to reward team members for group effortdifficult to reward team members for group effortdifficult to reward team members for group effort

–– usually emphasize shared commissions / bonusesusually emphasize shared commissions / bonuses

ProfitProfit--Based CommissionsBased Commissions–– Gross margin commissionsGross margin commissions

Salesperson & firm attempt to maximize same $$

raise wages for salespeople often at expense of company profits

tends to increase industry price competition

tends to raise price elasticities in the long run

Comparing Gross Margin Comparing Gross Margin Commissions on Two OrdersCommissions on Two Orders

Percentage Percentage GrossGross GrossGross

Percentage Percentage CommissionCommission CommissionCommission

Order Order NumberNumber

Gross Gross Margin on Margin on Each OrderEach Order

Size of Size of OrderOrder

Gross Gross Margin to Margin to CompanyCompany

Commission Commission on Gross on Gross MarginMargin

Commission Commission Paid to Paid to

SalespersonSalesperson

1 10 $1,000,000 $100,000 15 $15,000

2 20 $ 500,000 $100,000 15 $15,000

Expense Accounts & BenefitsExpense Accounts & Benefits

Objective Objective -- enough, but not too much.enough, but not too much.

Types of PlansTypes of Plans Types of PlansTypes of Plans–– UnlimitedUnlimited

Low supervision

Easy to abuse

–– Per diemPer diem Controls costs but may restrict coverage of distant accounts

Needs constant adjusting

–– LimitedLimited Can lead to wasted time on “cheat sheets”

Limits for each category

Benefits Offered by CompaniesBenefits Offered by Companies

BenefitBenefitPercentage of Percentage of Firms OfferingFirms Offering

Hospital Costs 90%Hospital Costs 90%Lift Insurance 77

Dental Plan 69Long-Term Disability 56Pension Plan 55Short-Term Disability 49

Profit Sharing 44Profit Sharing 44Thrift Savings 22Employees Stock Purchase Plan 21

Aligning Pay With StrategyAligning Pay With Strategy

Government Computer Sales, Inc.’s Government Computer Sales, Inc.’s compensation plan ties compensation plan ties a portion of reps' pay to the information they obtain from a portion of reps' pay to the information they obtain from their clients.their clients.

Mandates reps to dig deeper and put Mandates reps to dig deeper and put GCS in the minds of GCS in the minds of the government agencies and educational institutions that the government agencies and educational institutions that use its products.use its products.

If a rep has $15,000 of available commission for the first If a rep has $15,000 of available commission for the first ½ of the year the plan would work as follows:½ of the year the plan would work as follows: 40% ($6,000) is tied to account management (i.e., customer

information)information)

60% ($9,000) is tied to a profit dollar quota

Reps who meet the documentation requirements receive all

$6,000; those who meet less than 85% do not receive the $6,000.

Gross MarginGross MarginCommission ProblemCommission Problem

Marketing Marketing PlanPlan

Discounted Discounted P iceP ice

% % DeclineDecline

Assume the following:Assume the following:

The salesperson makes 20% commission on the gross margin

It t $80 t k th d t

PlanPlan PricePrice DeclineDecline

Selling Price $100 $92 8%

It costs $80 to make the product.

Overhead is $10.



Discounted Discounted PricePrice

% % DeclineDecline

Selling Price $100 8%g

Cost of Goods Sold (80)

Gross Margin $ 20

GM% Commission x 20%

$ Commission $ 4.00

Contribution 16.00

Overhead Costs (10.00)

Net Profit (Loss) $ 6.00



Discounted Discounted PricePrice

% % DeclineDecline

Selling Price $100.00 $ 92.00 8%g $ $

Cost of Goods Sold 80.00 80.00

Gross Margin $ 20.00 $ 12.00

GM% Commission x 20% x 20%

$ Commission $ 4.00 $ 2.40 40%

Contribution 16.00 9.60

Overhead Costs 10.00 10.00

Net Profit (Loss) $ 6.00 $ (0.40) 106%

Compensation Levels for Firms Compensation Levels for Firms Using Salary Plus IncentivesUsing Salary Plus Incentives

$140,000

$160,000

$$139,826139,826 $136 403$136 403

Base SalaryBase SalaryBonus + CommissionBonus + Commission

$40,000

$60,000

$80,000

$100,000

$120,000

$$97,09797,097

$$55,84255,842

$$82,56682,566

$$139,826139,826 $136,403$136,403

$0

$20,000

AverageSales Rep

Poorly Performing

Rep

Midlevel Performing

Rep

Top Performing

Rep

SalesExecutive

ENTERPRISE RELATIONSHIPSENTERPRISE RELATIONSHIPS $121,800$121,800Customer solution more important than price; team selling approachCustomer solution more important than price; team selling approach

$64 400$64 400

Compensation Levels by Account RelationshipsCompensation Levels by Account Relationships

$64,400$64,400

$43,300$43,300

CONSULTATIVE RELATIONSHIPSCONSULTATIVE RELATIONSHIPS $97,100$97,100Creates new value; tailors product to customer needsCreates new value; tailors product to customer needs

$62,700$62,700

$42,300$42,300

TRANSACTIONAL RELATIONSHIPSTRANSACTIONAL RELATIONSHIPS $83,300$83,300Sells on price; product is a commoditySells on price; product is a commodity

$52,500$52,500

$36,700$36,700

TopTop--LevelLevelMidMid--LevelLevelEntryEntry--LevelLevel

Selecting BenefitsSelecting Benefits

Salespeople expect carsSalespeople expect cars

Insurance and travel are very commonInsurance and travel are very common

Some plans offer a choice of alternativesSome plans offer a choice of alternatives

compensating compensating the the sl fsales · pdf fileacceptable ratio of costs to sales...

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