S14 comp

HARIHAR 2006 1

Sales Force Compensation

HARIHAR 2006 2

What a Good Sales Compensation Plan Should Do

Efforts +Results =Reward

Control activities of sales reps

Treat customers properly

Attract and keep good

people

Motivate the salesperson

Good sales compensation plan

Economical yet competitive

Fair SimpleFlexible and

stableSecurity and

incentive

HARIHAR 2006 3

Review job description

Identify plan’s objectives

Establish level of compensation

Develop the method of

compensation

Pretest and install plan

Steps in designing a sales compensation plan

Decide on indirect

monetary compensation

HARIHAR 2006 4

Key Compensation Questions Which compensation method is most appropriate

for motivating specific activities in specific situations?

How much of the total compensation should be earned through incentives?

What is the best mix of financial and nonfinancial compensation and incentives?

HARIHAR 2006 5McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights

reserved.7-5

HARIHAR 2006 6

EXPENSESEXPENSESBENEFITSINCENTIVESSECURITYSECURITY

Others

Profit sharing

Pension

Moving Expenses

InsuranceBonus

Commission Paid Vacation

Lodging

TravelSalary

Building Blocks for a Sales Compensation Plan

Profit Sharing

Lodging

Company Car

Entertainment

Others

HARIHAR 2006 7

Method Advantage Disadvantage Best Used

Straight salary

Provides security and stability for reps

Better for directing and controlling sales activities

Ensures proper treatment of customers

Direct incentive is easily lost if not administered properly

Represents a fixed cost

Requires supervision to direct, control, and evaluate

Difficult to direct and supervise sales people

Customers’ best interests may be ignored

Sales people’s earnings may fluctuate widely

Added cost

May be seen as inequitable if not administered properly

For products that require a lot of presale and/or post-sale service

For building long-term customer relationships

When supervision is available for new recruits

For new territories

For missionary salesStraight commission

Bonus

When a strong incentive is needed to attain sales

For products that require little presale and/or post-sale service

The sale is a one-time sale

Adequate field supervision is not available

Company is in a weak financial position

Company uses part-time or independent sales people

Provides a strong incentive

Sales people have more freedom

Acts as a screening method

Added incentive

Can be used for specific activities - flexible

To encourage above-normal performance of specific activities

HARIHAR 2006 8

Possible Combination Compensation Plans

COMMISSION

SALARY

BONUSSALARY

HARIHAR 2006 9

Key Definitions

Salary – a fixed sum of money paid at regular intervals

Commission – a payment based on short-term results, usually a dollar or unit sales volume

Bonus – a payment made at management’s discretion for achieving or surpassing some set level of performance

HARIHAR 2006 10

Compensation Methods for Salespeople

Compensation Method

Especially Useful For

Advantages Disadvantages

Straight Salary New sales repsNew sales territoriesMany required nonselling activities

Maximum securityControl over repsEasy to administerPredictable expenses

No incentiveRequires close supervisionSelling expenses remain same during sales declines

HARIHAR 2006 11

Compensation Methods for Salespeople

Compensation Method

Especially Useful For

Advantages Disadvantages

Straight Commission

Rates of commission – Rate differentials w.r.t products/ territories & various factors.Progressive rates, Regressive rates – B2B initial orders tough but repeat orders are easy.

Split Commissions : Distribution of credits

Highly aggressive sellingMinimal required nonselling tasksWhen company can’t closely control sales force

Maximum incentiveManagers can encourage sales of certain itemsSelling expenses relate directly to selling resources

Little securityLittle control over repsReps may provide inadequate service to smaller accountsSelling costs less predictable

HARIHAR 2006 12

Compensation Methods for Salespeople

Compensation Method

Especially Useful For

Advantages Disadvantages

Combination Similar sales potential across territoriesWhen company wants to offer incentive but maintain some control

Some securitySome incentiveSelling expenses vary with revenueManager has some control over nonselling activities

Selling expenses are less predictableMay be difficult to administer

HARIHAR 2006 13

What can be incentivised?

Sell numbers, revenue or profits? Push new products Push specific products Secure new customers/ Territory Reduce selling costs Number of calls Timely and quality reporting Customer Satisfaction Missionary work

HARIHAR 2006 14

HARIHAR 2006 15

Combination Plans

Offer a base salary plus some proportion of incentive pay

Most popular form of compensation Well-suited for relationship selling by

compensating for nonselling activities while providing incentives to motivate sales

HARIHAR 2006 16

Three Categories fo Combination Plan

* Salary plus Commission

* Salary plus bonus

* Salary plus commission and bonus

* Sales Quota – Quantitative objectives assigned

HARIHAR 2006 17

Sales Contests

Short-term incentive programs designed to motivate to accomplish specific sales objectives

Contest winners receive prizes, recognition, and a sense of accomplishment

Successful contests require:o Clearly defined, specific objectiveso An exciting themeo Reasonable probability of rewards for allo Attractive rewardso Promotion and follow-through

HARIHAR 2006 18

Fringe Benefits/ Nonfinancial Rewards

Recognition is an attractive reward because it makes a salesperson’s peers and superiors aware of outstanding performance

Effective recognition programs: Offer everyone a reasonable chance of winning Recognize the best performers across several

dimensions

HARIHAR 2006 19

Expense Account Types

Direct reimbursement – direct and unlimited reimbursement of all “allowable and reasonable” expenses

Limited reimbursement – either sets expense limits by-item or provides predetermined lump sum

No reimbursement – requires salespeople to cover all expenses; usually combined with higher total financial compensation plan

HARIHAR 2006 20McGraw-Hill/Irwin

Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved.

7-20

HARIHAR 2006 21

Mix and Level of Compensation

An appropriate mix and level of compensation shouldo Maximize compensation plan’s motivational

valueo Be fairo Remain consistent with firm’s resource

capabilities

HARIHAR 2006 22

Compensating Cross-Functional Teams

Shared Reward

Role-reward congruence

Team-member input

Peer evaluations

HARIHAR 2006 23

Sales Force Expenses and Transportation

HARIHAR 2006 24

Factors Influencing Sales Force Expenses

Transportation

Communication

Expenses Gifts

Lodging

Meals

Office supplies

Entertainment

HARIHAR 2006 25

Legal Impact

2004 budget putting onus of taxation on perks on organizations

Dis-allowances of certain expenses

HARIHAR 2006 26

Expenses

At the frontline level travel expenses normally equal to or more than basic salaries

Highest is lodging followed by travel/boarding Travel rules example

HARIHAR 2006 27

Salesperson Expense Options

Method Reimbursement Advantages Disadvantages

Salespeople pay None Simple, no costs Reps may not spend

Unlimited All legitimate Flexible and fair, Encourages excessive

their own expenses enough on customers

payment plan business expenses allows for territory spending differences

Limited Specific amounts Limited and predictable Inflexible payment plan allowed expenses

Possibility forRs.500/day - lodging switching expenses

Rs.300/day - food between categoriesRs. 5.50/Km - transportation

Sales may resent

Flat allowance Rs.3500 per week Limited and predictable Inflexible expenses

Sales may resent

e.g.

HARIHAR 2006 28

Automobile Allowance Plans

Method Example

Flat amount Rs.5000 /month

Fixed mileage rate Rs. 5.50 per Km

Graduate mileage rate Rs. 5.50/Km, first 15,000 KmsRs. 4.50/Km, balance Kms.

Combination, flat and Rs.2000/month + Rs. 4 /Km mileage rate

HARIHAR 2006 29

Other Methods of Expense Control

Training and enforcement

Credit cards

Expense bank account

Change in nature of entertainment

Telemarketing

Careful travel planning

HARIHAR 2006 30

Some dilemmas

Frequent Flier programme

Speeding ticketIs padding a fraud?