Salesperson Compensation and Incentives 11 Salesperson Compensation and Incentives McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Great Compensation Plans Calibrate with firm’s overall profit objectives Motivate to meet tactical sales and strategic objectives Tie to measurable criteria representing tactical/ strategic objectives Include fixed and variable elements Keep the plan simple yet thorough Reward securing, building, maintaining long-term relationships with profitable customers Consider salespeople a mission-critical asset Reward salesperson efforts according to worth (contribution) Clearly differentiate payouts for top, average, and inadequate performers Distinguish between performing tasks and achieving results Avoid direct competition between salespeople Reduce role conflict, ambiguity, and stress Generally don’t change plan too quickly When the time is right to change plan quickly, do so Permit salespeople with above-adequate performance to seek desired compensation potential w/out penalty Acid test is how the plan impacts the customer marketplace Source: HR Chally Group (2005), Principles of Sales Compensation. Dayton, OH: HR Chally Group.

Discuss advantages/limitations of straight salary, straight commission, combination plans Explain how/why a bonus might be used as an incentive Understand effective use of sales contests and their potential pitfalls Identify key nonfinancial rewards, why they might be important Recognize key issues surrounding expense accounts Discuss making decisions on mix and level of compensation

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?

Key Definitions Salary – a fixed sum of money paid at regular intervals Incentive Payments 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 Quota - often the minimum requirement for a salesperson to earn a bonus Sales contests – encourage extra effort aimed at specific short-term objectives Benefits - medical and disability insurance, life insurance, retirement plan Non-financial incentives - opportunities for promotion or various types of recognition for performance

11.1 Components and objectives of financial compensation plans

11.2a Compensation Methods for Salespeople

11.2b Compensation Methods for Salespeople

11.2c Compensation Methods for Salespeople

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

Design Questions for Combination Plans Appropriate size of incentive relative to base salary? Should ceiling be imposed on incentive earnings? When should the sale be credited? Should team incentives be used? How? How often should incentive payments be made?

Sales Contests Short-term incentive programs to accomplish specific objectives Winners receive prizes, recognition, sense of accomplishment Successful contests require: Clearly defined, specific objectives An exciting theme Reasonable probability of rewards for all Attractive rewards Promotion and follow-through

Criticisms of Sales Contests May not produce lasting improvements Salespeople may borrow sales from another period to increase sales during contest period Poorly administered contests can hurt cohesiveness and morale

Nonfinancial Rewards Recognition makes peers and superiors aware of outstanding performance Effective recognition programs: Offer everyone a reasonable chance of winning Recognize best performers across several dimensions

11.3 Guidelines for effective formal recognition programs

Expense Accounts Often, field selling expenses may be $25K or more per salesperson Types Direct reimbursement – of all “allowable and reasonable” expenses Limited reimbursement – sets expense limits by-item or provides predetermined lump sum No reimbursement – salespeople covers all expenses; usually combined with higher total compensation

11.3 Dumb-Down Pay Programs Eliminate nonselling activities No more than three performance measures Exclude inappropriate measures Hold supervisors accountable Tighten sales credit rules Source: David Cichelli, “Dumb Down Your Pay Programs,” Sales & Marketing Management, September 2003, p. 88. joh29877_ch11_343-376.indd 360 1/4/08 10:49:25 AM

11.4 Rewarding A While Hoping for B? Straight commission may work for transactional selling, but… Relationship selling is more complex; requires Operating within a team Securing, building, long-term relationship with profitable customers Organizations must reward these additional behaviors Source: Kerr’s original article was updated and republished as follows—Steven Kerr, “On the Folly of Rewarding A, while Hoping for B,” Academy of Management Executive, 9:1 (1995), pp. 7–14.

Assessing Relationship Selling Objectives How are salespeople spending time? Do most time-intensive tasks match organization’s goals? If not, may be time to adjust quotas to change motivations

11.5 Your Quota System Isn’t Working If… Nobody makes a goal There are no over-achievers Only superstars make goal Source: Julia Chang, “Numbers Crunching,” Sales & Marketing Management, February 2003, p. 49.

Sales activities and performance outcomes that might be encouraged by compensation and incentive programs 11.4