Compensating Salespeople Compensation Methods C Combination Plans Most

Compensating Salespeople Compensation Methods C. Combination Plans – Most common today 1. Salary + Commission • base for non-selling activities • commission for incentive to push complex industrial accounts 2. Salary + Bonus • base for non-selling activities • bonus to reward completion of special tasks in consumer products selling 3. Salary + Commission + Bonus • rewards every activity, BUT costly to administer

Compensating Salespeople Compensation Methods B. Straight Commission – Maximum incentive – All variable cost – low costs when sales/salesperson is low – hard to control reps – low loyalty – pay low when business is weak – used in small firms, door-to-door, retail sales, insurance, stock brokerage, printing

Compensating Salespeople Components Needs * Motivate effort on non-selling activities Salary * Adjust for differences in territory potential * Reward experience and competence Commissions * Motivate a high level of selling effort * Encourage sales success

Compensating Salespeople Components Needs Incentive Payments (Bonus) * Direct effort toward strategic objectives * Provide additional rewards for top performers * Encourage sales success Sales Contests * Stimulate additional effort targeted at specific short-term objectives Personal Benefits * Satisfy salespeople’s security needs * Match competitive offers

Compensating Salespeople Expense Accounts & Benefits • Objective -- enough, but not too much. • Types of plans – Unlimited • Low supervision • easy to abuse – Per diem • controls costs but may restrict coverage of distant accounts • needs constant adjusting – Limited • can lead to wasted time on “cheat sheets” • limits for each category

COMPONENTS Salary Commissions Incentive payments (bonus) Sales contests Personal benefits NEEDS • Motivate effort on non-selling activities • Adjust for differences in territorial potential • Reward experience and competence • Motivate a high level of selling effort • Encourage sales success • Direct effort toward strategic objectives • Provide additional rewards for top performers • Encourage sales success • Stimulate additional effort targeted at specific short-term objectives • Satisfy salespeople’s security needs • Match competitive offers Source: Adapted from Sales Compensation Concepts and Trends (New York: Alexander Group, 1988).

Total cost person (thousands $) on i s is 40, 000 % 10 mm o C Straight salary 30, 000 20, 000 10, 000 0 100 200 300 400 500 Sales Person in Thousands Figure 14 -2: Comparing Salary and Commission Plans for Field Sales Representatives

Compensating Salespeople In-Class Exercises 14 -1 DEC Joins the Rest of the World 1. What is the purpose of adding an incentive portion to sales compensation? 2. Having decided to incorporate incentive pay, what other compensation decisions must be made to complete the sales compensation program?

Compensating Salespeople In-Class Exercises 14 -1 DEC Joins the Rest of the World 3. How can the compensation plan be adjusted for different types of selling situations 4. How will other management functions change as a result of the compensation change?

Compensating Salespeople In-Class Exercises 14 -1 DEC Joins the Rest of the World 5. What are the trade-offs between alternative compensation plans? 6. How will the compensation changes affect: * Recruiting * Setting Quotas * Sales Territories * Organization * Performance appraisal

Compensating Salespeople In-Class Exercises 14 -1 Results: DEC Joins the Rest of the World • 40% incentive for salespeople selling to resellers and VARS because of the large volume involved and the emphasis on volume rather than consultative selling. • 20% incentive for the regular sales force • 10% incentive for those salespeople assigned to one or a few large accounts with longer selling cycles and performing much more of a servicing and upgrading function.

Compensating Salespeople Other Considerations • Trend toward TEAM selling – difficult to reward team members for group effort – usually emphasize shared commissions / bonuses • Optimum Pay Plans – Gross margin commissions • Salesperson & firm attempt to maximize same $$ • rasies wages for salespeople often at expense of company profits • tends to increase industry price competition • tends to raise price elasticities in the long run

Compensating Salespeople Selecting Benefits • Salespeople expect cars • Insurance and Travel are very common • Some plans offer a choice of alternatives

Compensating Salespeople Setting Pay Levels • At parity, above, or below competition • Some salespeople paid too much to keep peace • Example Public Service of New Mexico (14 -4 b) – paid better than average before deregulation – With deregulation more competition • • • need to reduce & control salary costs employees made contributions to health plans fewer pay classifications, flexible benefits, pay based on individual performance & responsiveness Sales managers use signing bonuses -- BUT not adjust pay

Compensating Salespeople Compensation Methods A. Straight Salary – Control wage levels – easier to control rep’s activities – increases loyalty to firm – fails to provide incentives – high costs when sales are low – most common in complex business selling

Table 14 -1 Use of Compensation Plans Percentage of Companies Using Straight Salary Straight Commission Salary Plus Bonus Salary Plus Commission Salary Plus Bonus Plus Commission Plus bonus Total 7 10 34 21 24 4 100%

Compensating Salespeople Gross Margin Commission Problems Marketing Discounted Percentage Plan Price Decline Selling Price Cost of Goods Sold Gross Margin GM% Commission $ Commission Contribution Overhead Costs Net Profit $100 80 20 20% $ 4 16 10 $ 6 $92 80 12 20% $ 2. 40 12 10 $ 2 40% 66%

Table 14 -3 Compensation Levels for Firms using Salary Plus Incentives, 1996 Position Salary ($000) Top Sales Executive Regional Sales Manager National Account Manager District Sales Manager Key Account Rep Senior Sales Rep Intermediate Rep Entry Level Rep $91. 2 69. 0 66. 9 61. 8 54. 6 45. 1 34. 6 28. 8 Incentive ($000) $31. 5 23. 3 18. 7 22. 0 16. 6 23. 2 16. 1 10. 9 Source: Sales Force Compensation Survey (Chicago: Dartnell Corporation, 1996), p. 28. Total Compensation ($000) $122. 7 92. 3 85. 6 83. 7 71. 2 68. 3 50. 7 39. 8

Table 14 -2 Order Number 1 2 Comparing Gross Margin Commissions on Two Orders Percentage Gross Margin on Each Order Size of Order Gross Margin to Company Percentage Commission on Gross Margin Commission Paid to Salesperson 10 20 $1, 000 $500, 000 $100, 000 15 15 $15, 000