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 ComponentsNeeds * Motivate effort on non-selling activities Salary * Adjust for differencesin territory potential * Reward experience and competence Commissions * Motivate a high level of selling effort * Encourage sales success

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

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

Figure 14-2: Comparing Salary and Commission Plans for Field Sales Representatives ,000 20,000 30,000 40,000 Straight salary 10% Commission Total cost per person (thousands $) Sales Per Person in Thousands

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 (14-4b) –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 Straight Salary 7 Straight Commission10 Salary Plus Bonus34 Salary Plus Commission21 Salary Plus Bonus Plus Commission24 Commission Plus bonus 4 Total 100% Percentage of Companies Using

Compensating Salespeople Gross Margin Commission Problems Marketing Plan Discounted Price Percentage Decline Selling Price$100$92 Cost of Goods Sold Gross Margin GM% Commission 20% 20% $ Commission$ 4$ % Contribution Overhead Costs Net Profit$ 6$ 266%

Table 14-3 Compensation Levels for Firms using Salary Plus Incentives, 1996 Total SalaryIncentive Compensation Position($000) ($000) ($000) Top Sales Executive$91.2 $31.5 $122.7 Regional Sales Manager National Account Manager District Sales Manager Key Account Rep Senior Sales Rep Intermediate Rep Entry Level Rep Source: Sales Force Compensation Survey (Chicago: Dartnell Corporation, 1996), p. 28.

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