Copyright © 2001 by Harcourt, Inc. All rights reserved.

C HAPTER 13 C OMPENSATION FOR H IGH P ERFORMANCE

Copyright © 2001 by Harcourt, Inc. All rights reserved.  Why compensation is so important for establishing an effective sales force.  How to design, implement, and evaluate a compensation program.  The advantages and disadvantages involved in the three types of compensation plans: straight salary, straight commission, and combination salary.  The different types of sales force expenses and transportation.  The total compensation package and how to develop a proper compensation mix.  What is involved in designing a new compensation plan. L EARNING O BJECTIVES Suitable compensation is a must for companies striving for a satisfied and high-quality sales force. This chapter should help you understand:

Copyright © 2001 by Harcourt, Inc. All rights reserved. Sales is one of the few jobs where you earn your money – every day.

Copyright © 2001 by Harcourt, Inc. All rights reserved. Any type of sales organization can reward sales performance in three fundamental and interrelated ways: 1. Direct financial rewards. 2. Career advancement and personal development opportunities. 3. Nonfinancial compensation. C OMPENSATION I S M ORE T HAN M ONEY

Copyright © 2001 by Harcourt, Inc. All rights reserved. A sales reward system is not the only means of motivating salespeople, but it is the most important. Measuring sales performance but not properly rewarding it severely limits the achievement level for salespeople.

Copyright © 2001 by Harcourt, Inc. All rights reserved. P URPOSES OF C OMPENSATION Connect individual with organization. Influence work behavior. Organizational choice. Influence satisfaction. Feedback. Reinforcement.

Copyright © 2001 by Harcourt, Inc. All rights reserved. FIGURE 13.1 EFFECTS OF PAY DISSATISFACTION Absenteeism Grievances Job Dissatisfaction Turnover Performance

Copyright © 2001 by Harcourt, Inc. All rights reserved. Individuals are satisfied with the rewards they receive in the following terms: How much reward is actually received in relation to how much was expected to be received. How the rewards received compare with what others received. Whether the rewards lead to other rewards. The level of extrinsic and intrinsic satisfaction from the rewards. The value of different rewards.

Copyright © 2001 by Harcourt, Inc. All rights reserved. FIGURE 13.2 FORMAL COMPENSATION PROCESS

Copyright © 2001 by Harcourt, Inc. All rights reserved. D ESIGNING A C OMPENSATION P ROGRAM Compensation plans should have general and specific objectives: Attaining yearly sales volume and gross margins (general). Attaining monthly sales volume and sales on specific products (specific). Market penetration and exploiting the territory’s potential (general).

Copyright © 2001 by Harcourt, Inc. All rights reserved. Compensation plans should have general and specific objectives: continued Call management and development of potential in key accounts as well as development of new accounts (specific). Introduction of new products (specific).

Copyright © 2001 by Harcourt, Inc. All rights reserved. D ETERMINE M AJOR C OMPENSATION F ACTORS Wage level. Wage structure. Individual wage. Administration procedures.

Copyright © 2001 by Harcourt, Inc. All rights reserved. I MPLEMENT L ONG AND S HORT- R ANGE C OMPENSATION P ROGRAMS Communicate compensation policy.

Copyright © 2001 by Harcourt, Inc. All rights reserved. 1. The salesperson needs to know what part the sales force is expected to take in attaining the organization’s goals. 2. The salesperson’s role in achieving sales objectives should be thoroughly discussed. 3. The limitations and weaknesses of the compensation program should not be hidden from the salesperson. The compensation message should contain several elements:

Copyright © 2001 by Harcourt, Inc. All rights reserved. R ELATE R EWARDS TO P ERFORMANCE Rewards and promotions should be tied directly to the salesperson’s individual contributions to sales force objectives.

Copyright © 2001 by Harcourt, Inc. All rights reserved. M EASUREMENT OF P ERFORMANCE Companies need to regularly measure individual, sales group, and organizational performance to determine whether the compensation program’s objectives are being met.

Copyright © 2001 by Harcourt, Inc. All rights reserved. A PPRAISAL AND R ECYCLING Key questions in terms of the success of a plan: Are the compensation objectives being met? Is the firm able to attract new salespeople with this plan? What is the relationship of compensation to turnover?

Copyright © 2001 by Harcourt, Inc. All rights reserved. P ERFORMANCE- B ASED P AY: P REREQUISITES AND O BSTACLES If pay is going to influence salespeople’s performance, the following factors are important: The salesperson must perceive a close relationship between performance and pay. Pay must be important to the salesperson.

Copyright © 2001 by Harcourt, Inc. All rights reserved. If pay is going to influence salespeople’s performance, the following factors are important: continued The salesperson must be able to perform what is necessary to achieve the pay. The salesperson must know what is expected. Performance must be measurable, and its evaluation must be fair.

Copyright © 2001 by Harcourt, Inc. All rights reserved. For these conditions to exist, the organization must do its part, which means: Sales territories must have equal potential. The salesperson must know and understand how the pay program works. The performance appraisal system must be free from potential bias. Managers must be trained in giving feedback.

Copyright © 2001 by Harcourt, Inc. All rights reserved. For these conditions to exist, the organization must do its part, which means: continued The amount of money set aside for merit or incentive pay must be sufficiently large to make extra effort worthwhile. The job evaluation must be valid so the overall salary relationships are equitable. The sales culture must be such that the high performers are encouraged rather than discouraged by their peers.

Copyright © 2001 by Harcourt, Inc. All rights reserved. FIGURE 13.3 TYPICAL COMPENSATION PLANS

Copyright © 2001 by Harcourt, Inc. All rights reserved. S TRAIGHT S ALARY T YPES OF C OMPENSATION P LANS Of all the compensation plans, the straight salary plan is the simplest: The salesperson is paid a specific dollar amount at regular intervals.

Copyright © 2001 by Harcourt, Inc. All rights reserved. TABLE 13.1 PROFILE OF A STRAIGHT SALARY COMPANY Dominant market share in mature, stable industry Highly defined and stable customer base Strongly centralized and closely managed selling effort Significant number of house accounts Highly team-oriented sales effort Service versus selling emphasis

Copyright © 2001 by Harcourt, Inc. All rights reserved. STRAIGHT COMMISSION PLANS Two basic types of commission plans exist: 1.Straight commission. 2. Draw against commission. The straight commission plan is a complete incentive plan. If salespeople do not sell anything, they do not earn anything.

Copyright © 2001 by Harcourt, Inc. All rights reserved. Drawing Accounts Drawing accounts combine the incentive of a commission plan with the security of a fixed income.

Copyright © 2001 by Harcourt, Inc. All rights reserved. Situations where commission plans can be used: Little nonselling, missionary work involved. The company cannot afford to pay a salary and wants selling costs to be directly related to sales. The company uses independent contractors and part-timers.

Copyright © 2001 by Harcourt, Inc. All rights reserved. TABLE 13.2 PROFILE OF A COMMISSION PLAN COMPANY Low barriers to entry into the job Limited corporate cash resources Small entrant into an emerging market or market segment High risk reward sales force culture Undefined market opportunity or customer base Inability to set quotas or other performance criteria Volume-oriented business strategy

Copyright © 2001 by Harcourt, Inc. All rights reserved. H OW TO C ALCULATE I NCENTIVES Factors on which to base quotas: The past year’s sales. The sales force’s forecast of the coming year’s sales. Corporate marketing targets. A specific net profit target. Geographic market potentials.

Copyright © 2001 by Harcourt, Inc. All rights reserved. Consider Profitable Products The profitable products can carry a higher commission or incentive reward. The more profitable products can be weighted so one of them counts as much as two or three of the routine products. Separate quotas can be set for each product line. Salespeople can be paid on the basis of their individual contributions to profit.

Copyright © 2001 by Harcourt, Inc. All rights reserved. Who Should Participate? Split credit Support people The question of who gets incentive payments has two aspects:

Copyright © 2001 by Harcourt, Inc. All rights reserved. Salary and commission Salary and bonus: individual or group bonus Salary, commission, and bonus: individual or group bonus Numerous types of combination salary plans exist. The more popular plans are:

Copyright © 2001 by Harcourt, Inc. All rights reserved. 1.Nonproductivity bonus 2.Productivity bonus Bonus: Individual or Group

Copyright © 2001 by Harcourt, Inc. All rights reserved. Sales contests are special sales programs offering salespeople incentives to achieve short-term work goals.

Copyright © 2001 by Harcourt, Inc. All rights reserved. TABLE 13.3 PROFILE OF A COMBINATION-PAY PLAN COMPANY Established company with growth potential, many products, and active competition Need to direct a complex set of behaviors Need for a variable pay component that will ensure top performers are rewarded commensurately

Copyright © 2001 by Harcourt, Inc. All rights reserved. 1.To motivate the sales force. 2.To attract and hold good people. 3.To direct the sales force efforts in a profitable direction. When to Use a Combination Salary Plan

Copyright © 2001 by Harcourt, Inc. All rights reserved. S ALES F ORCE E XPENSES Expense plans have the same basic objectives as a compensation system, that is, to motivate the salesperson’s behavior in terms of membership, performance, and attendance.

Copyright © 2001 by Harcourt, Inc. All rights reserved. 1.Fair for the salesperson. 2.Fair for the company. 3.Cost effective. 4.Understandable. 5.Convenient. Several criteria for an effective expense plan:

Copyright © 2001 by Harcourt, Inc. All rights reserved. The company pays all expenses. The salesperson pays all expenses. The company partially pays expenses. Types of Expense Plans:

Copyright © 2001 by Harcourt, Inc. All rights reserved. 1.Benefits that are required legally 2.Pension and retirement programs 3.Nonworking time 4.Insurance 5.Miscellaneous services F RINGE B ENEFITS Five basic classifications of salespeople’s benefits and services are:

Copyright © 2001 by Harcourt, Inc. All rights reserved. F ACTORS TO C ONSIDER W HEN D EVELOPING A N EW P LAN 1.Companies with a sales force on a straight salary may find it highly advantageous to move to a salary-plus-incentive plan. 2.Companies with a sales force on straight commission may sometimes adopt a salary- plus-incentive plan to gain more control over the sales force.

Copyright © 2001 by Harcourt, Inc. All rights reserved. Information to Collect Competitor’s plans Product profitability Sales force activities

Copyright © 2001 by Harcourt, Inc. All rights reserved. TABLE 13.5 KEY INDICATORS FOR POSSIBLE SALES COMPENSATION PROBLEMS 1.Declining revenues 2.Declining market share 3.Declining profitability 4.Insufficient premier accounts 5.High sales force turnover 6.Uneven sales force performance 7.Inadequate servicing of customers 8.Concentrating on easy-to-sell and unprofitable products

Copyright © 2001 by Harcourt, Inc. All rights reserved. Pretest the Plan In boom times. During a recession. If a runaway market occurs for one product. If old products are dropped or new ones added.

Copyright © 2001 by Harcourt, Inc. All rights reserved. T HE B OTTOM L INE Compensation given for certain behaviors have major influences on a sales force’s culture. Compensation is one part of the salesperson’s behavioral model. Money can be an extremely powerful performance motivator if used with the right compensation program. Under a combination salary plan, a proportion of the salesperson’s total pay is guaranteed, and the rest is incentive pay. Daily expenses of field salespeople are a major part of the sales force budget.

Copyright © 2001 by Harcourt, Inc. All rights reserved. When developing a new pay plan, managers must consider the nature of the job, the market, channels of distribution, the caliber of the salespeople, a company’s financial condition, and suggestions made by sales personnel. The sales manager can better “sell” the job to prospective salespeople by determining the dollar value of fringe benefits and presenting pay and benefits as a total compensation package. T HE B OTTOM L INE