Part V SALES FORCE LEADERSHIP Chapter 12 Compensating

Part V SALES FORCE LEADERSHIP Chapter 12: Compensating Salespeople

Goals of a Sales Force Reward System n n Acceptable ratio of costs to sales force output in volume, profit, or other objectives Encourage activities consistent with firm’s overall, marketing, and sales force objectives and strategies Attract and retain competent salespeople, thereby enhancing long-term customer relationships Be clear and be flexible enough to allow adjustments that facilitate administration

The Customer-Product Matrix New Convergence Selling New Business Development Account Management Leverage Selling CUSTOMERS Current PRODUCTS Figure 14 -1: The Customer-Product Matrix New

Compensating Salespeople Components Needs SALARY n n n COMMISSIONS n n INCENTIVE PAYMENTS n n n SALES CONTESTS PERSONAL BENEFITS n n n Motivate effort on non-selling activities Adjust for differences in territory 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 (Bonus) performers Encourage sales success Stimulate additional effort targeted at specific shortterm objectives Satisfy salespeople’s security needs Match competitive offers

Aligning Pay With Strategy n n n Government Computer Sales, Inc. ’s compensation plan ties a portion of reps' pay to the information they obtain from their clients. Mandates reps to dig deeper and put GCS in the minds of the government agencies and educational institutions that use its products. If a rep has $15, 000 of available commission for the first ½ of the year the plan would work as follows: - 40% ($6, 000) is tied to account management (i. e. , customer 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.

Use of Compensation Plans Percentage of Companies 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 TOTAL 1 100%

Compensating Salespeople Compensation Plan Salary Advantage Disadvantage n n n No motivation Favors unproductive sales people High costs when sales are low

Compensating Salespeople Compensation Plan Salary Advantage n n n n Reduced turnover Simple Easy to administer Good when difficult to determine who made the sale Good when service is required Promotes long-term goals Good during drastic business swings Easier to transfer salespeople Disadvantage n n n No motivation Favors unproductive sales people High costs when sales are low

Compensating Salespeople Compensation Plan Commissions Advantage n n n Motivational Relates directly to performance Unlimited income (assuming no cap) Good for saving money on unproductive salespeople Perceived fair Disadvantage

Compensating Salespeople Compensation Plan Commissions Advantage n n n Motivational Relates directly to performance Unlimited income (assuming no cap) Good for saving money on unproductive salespeople Perceived fair Disadvantage n n n No loyalty Little security Short range view High turnover Management has less control

Total cost person (thousands $) Comparing Salary and Commission Plans Use of Compensation Plans 50, 000 Straight Salary 40, 000 30, 000 is m % 0 1 20, 000 m o C n o i s 10, 000 0 100 200 300 400 Sales Person in Thousands 500

Advantages of Frequent vs. Infrequent Incentive Payments Frequent Payment Advantages (Monthly/Quarterly) n n n 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 increased. Infrequent Payment Advantages (Semiannually/Annually) n n n 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.

Customer Satisfaction and Compensation n n IBM places significant resources toward monitoring customer satisfaction. All customers are surveyed annually on: – – – – n n 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 competition Results are used for compensating sales reps and managers.

Gross Margin Commission Problem Marketing Plan Discounted Price % Decline $100 $92 8% Selling Price Assume the following: § The salesperson makes 20% commission on the gross margin § It costs $80 to make the product. § Overhead is $10.

Gross Margin Commission Problem Marketing Plan Selling Price Cost of Goods Sold Gross Margin $100 (80) $ 20 GM% Commission x 20% $ Commission $ 4. 00 Contribution 16. 00 Overhead Costs (10. 00) Net Profit (Loss) $ 6. 00 Discounted Price % Decline 8%

Gross Margin Commission Problem Marketing Plan Discounted Price % Decline $100. 00 $ 92. 00 8% 80. 00 $ 20. 00 $ 12. 00 x 20% 4. 00 $ 2. 40 Contribution 16. 00 9. 60 Overhead Costs 10. 00 6. 00 $ (0. 40) Selling Price Cost of Goods Sold Gross Margin GM% Commission $ Commission Net Profit (Loss) $ $ 40% 106%

Research on Pricing and Profits

Compensation Levels for Firms Using Salary Plus Incentives $161, 500 $147, 800 $119, 600 $94, 800 $71, 000 Average Sales Rep Poorly Performing Rep Midlevel Performing Rep Base Salary Bonus + Commission Top Performing Rep Sales Executive

Selecting Benefits n Salespeople expect cars n Insurance and travel are very common n Some plans offer a choice of alternatives