Part V SALES FORCE LEADERSHIP Chapter 12: Compensating Salespeople

Acceptable ratio of costs to sales force output in volume, profit, or other 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 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 Attract and retain competent salespeople, thereby enhancing long-term customer relationships Be clear and be flexible enough to allow adjustments that facilitate administration Be clear and be flexible enough to allow adjustments that facilitate administration Goals of a Sales Force Reward System

ConvergenceSelling AccountManagementLeverageSelling New Business Development New Current CUSTOMERS New PRODUCTS Figure 14-1: The Customer-Product Matrix The Customer-Product Matrix

Compensating Salespeople ComponentsNeeds SALARY Motivate effort on non-selling activities Adjust for differences in territory potential Reward experience and competence COMMISSIONS Motivate a high level of selling effort Encourage sales success INCENTIVE PAYMENTS Direct effort toward strategic objectives Provide additional rewards for top (Bonus) performers Encourage sales success SALES CONTESTS Stimulate additional effort targeted at specific short- term objectives PERSONAL BENEFITS Satisfy salespeople’s security needs Match competitive offers

Aligning Pay With Strategy Government Computer Sales, Inc.’s compensation plan ties a portion of reps' pay to the information they obtain from their clients. 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. 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: 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 1 TOTAL 100%

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

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

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

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

Advantages of Frequent vs. Infrequent Incentive Payments Frequent Payment Advantages (Monthly/Quarterly) Infrequent Payment Advantages (Semiannually/Annually) 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. 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 IBM places significant resources toward monitoring customer satisfaction. IBM places significant resources toward monitoring customer satisfaction. All customers are surveyed annually on: All customers are surveyed annually on: – – 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 benchmarked against prior IBM performance, as well as the competition Results are used for compensating sales reps and managers. Results are used for compensating sales reps and managers.

Gross Margin Commission Problem Assume the following:   The salesperson makes 20% commission on the gross margin   It costs $80 to make the product.   Overhead is $10. Marketing Plan Discounted Price % Decline Selling Price$100$928%

Gross Margin Commission Problem Marketing Plan Discounted Price % Decline Selling Price$1008% Cost of Goods Sold (80) Gross Margin$ 20 GM% Commission x 20% $ Commission$ 4.00 Contribution16.00 Overhead Costs (10.00) Net Profit (Loss)$ 6.00

Gross Margin Commission Problem Marketing Plan Discounted Price % Decline Selling Price$100.00$ % Cost of Goods Sold Gross Margin$ 20.00$ GM% Commission x 20% $ Commission$ 4.00$ % Contribution Overhead Costs Net Profit (Loss)$ 6.00$ (0.40)106%

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

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

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

Additional Slides below – not discussed in the Instructor’s Note, but can be used to further enhance your discussion.NOTE:

Other Considerations Trend toward TEAM selling Trend toward TEAM selling – difficult to reward team members for group effort – usually emphasize shared commissions / bonuses Profit-Based Commissions Profit-Based Commissions – Gross margin commissions Salesperson & firm attempt to maximize same $$ raise wages for salespeople often at expense of company profits tends to increase industry price competition tends to raise price elasticities in the long run

Comparing Gross Margin Commissions on Two Orders Order Number Percentage Gross Margin on Each Order Size of Order Gross Margin to Company Percentage Commission on Gross Margin Commission Paid to Salesperson 110$1,000,000$100,00015$15, $ 500,000$100,00015$15,000

Expense Accounts & Benefits Objective - enough, but not too much. Objective - enough, but not too much. Types of Plans 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

Benefits Offered by Companies Benefit Percentage of Firms Offering Hospital Costs90% Lift Insurance77 Dental Plan69 Long-Term Disability56 Pension Plan55 Short-Term Disability49 Profit Sharing44 Thrift Savings22 Employees Stock Purchase Plan21