Part V SALES FORCE LEADERSHIP Chapter 12: Compensating Salespeople

Compensation:

Learning Objectives: Balance the need for wages against company resources. Select appropriate compensation methods. Set pay levels. Assemble a compensation plan.

Chapter Outline: Compensation objectives. Compensation methods. Expense accounts and benefits. Assembling the plan. Evaluating the plan.

Compensation Objectives: 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

Compensation Methods: Straight Salary. Straight Commission. Salary Plus Bonus. Salary Plus Commission. Salary Plus Commission Plus Bonus. Commission Plus Bonus.

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 Commission Plus Bonus 1 TOTAL 100%

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

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

Sales Per Person in Thousands Comparing Salary and Commission Plans Use of Compensation Plans 50,000 Straight Salary 40,000 Total cost per person (thousands $) 30,000 10% Commission 20,000 10,000 0 100 200 300 400 500 Sales Per Person in Thousands

Compensating Salespeople Compensation Plan Advantage Disadvantage Salary Plus Bonus Motivational Provide rewards for added results. Lower turnover among sales people. Size of the bonus is arbitrary. Annually payments may lead to less motivation.

Compensating Salespeople Compensation Plan Advantage Disadvantage Salary Plus Commission. Motivational Relates directly to performance Unlimited income (assuming no cap) Promote the sales of a product or specific market segment. Very expensive. Costly to administer.

Compensating Salespeople Compensation Plan Advantage Disadvantage Salary Plus Commission Plus Bonus. Motivational Relates directly to performance Unlimited income (assuming no cap) It is a comprehensive compensation plan. It is going to be very widely used in the future. Complex. Expensive to administer.

Compensating Salespeople Compensation Plan Advantage Disadvantage Commission Plus Bonus. Easy to understand. Easy to administer. Added control over the salesperson activities. Little security High turnover

Midlevel Performing Rep Compensation Levels for Firms Using Salary Plus Incentives Base Salary Bonus + Commission $139,826 $136,403 $97,097 $82,566 $55,842 Average Sales Rep Poorly Performing Rep Midlevel Performing Rep Top Performing Rep Sales Executive

Compensation Levels by Account Relationships ENTERPRISE RELATIONSHIPS $121,800 Customer solution more important than price; team selling approach $64,400 $43,300 CONSULTATIVE RELATIONSHIPS $97,100 Creates new value; tailors product to customer needs $62,700 $42,300 TRANSACTIONAL RELATIONSHIPS $83,300 Sells on price; product is a commodity Top-Level $52,500 Mid-Level $36,700 Entry-Level

Expense Accounts and Benefits: Expense Reimbursement Programs. Selecting Benefits.

Expense Reimbursement Programs: Unlimited Plans. Per Diem Plans. Limited Repayment Plans.

Expense Accounts & Benefits 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

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

Benefits Offered by Companies Percentage of Firms Offering Hospital Costs 90% Lift Insurance 77 Dental Plan 69 Long-Term Disability 56 Pension Plan 55 Short-Term Disability 49 Profit Sharing 44 Thrift Savings 22 Employees Stock Purchase Plan 21

Assembling the Plan: Combining the various wage elements. Calculating the total payments.

Evaluating the Plan: How it will affect salespeople’s wages and total costs? How the compensation plan has affected the salespeople’s performance.