Chapter 9

Sales Force Compensation and

motivation

Main references :
Sales Force Management 2017 by Gregory A. Rich &
Selling & Sales Management 2019 David Jobber, Geoffrey Lancaster and
Kenneth Le Meunier-FitzHugh
Compensations
Compensation is defined as all monetary payments as well as benefits
used to remunerate employees for their performance.
• Constituting a central part of extrinsic rewards, compensation plans
and financial packages are widely recognized as the single greatest
motivator of salespeople.

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Seminal study –types of sales person
• Creatures of habit—They try to maintain their
standard of living by earning a predetermined amount
of money.
• Goal-oriented individuals—They prefer recognition as
achievers by peers and by superiors and tend to be
sales-quota-oriented, with money serving mainly as a
by-product of
achievement.
• Satisfiers—They perform just well enough to keep
their jobs

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Seminal study –types of sales person
• Trade-offers—They allocate their time according to a personally
determined ratio of work and leisure that is not influenced by
opportunities for increased earnings.

• Money-oriented individuals—They seek to maximize their earnings.

These people may sacrifice family relationships, personal pleasures,
and even health to increase their income.

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Varied in compensation systems
• The importance of sales people assign to rewards differs according to
their changing needs, career stage, and organizational level.
• Management should allowed sales people to choice reward systems,
compensation structures, and benefits packages.

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 Motivate
salespeople
Correlate

Objectives Provide
choice
efforts and
results with
rewards

What a Good Sales Be fair

Control
salespeople's
Compensation Plan activities

Should Do
A Good Sales
Compensation Ensure
Be simple Plan Should... proper
treatment of
customers

Provide Attract and

secure and keep
incentive competent
income salespeople

Be
Be flexible economical
yet stable yet
competitive
Building Blocks for a Sales Compensation Plan

Others
Profit sharing Others
Pension Entertainment
Profit sharing Moving expenses Company car
Bonus Insurance Lodging
Salary Commission Paid vacation Travel
Security Incentives Benefits Expenses
Finance Compensation
1.
Straight Salary
The salesperson receives a fixed
amount of money at regular
intervals,
such as weekly or monthly
2. 3.
Straight Commission Combination ( 1&2)
The sales person receive both
salary & commission
The salesperson receives an amount
that varies with results, usually
sales or profits.
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 Reward packages
Nature of reward
Non-incentive based Incentive based Benefits based

hourly wage straight commission health insurance

straight salary performance bonus dental insurance
Compensation Plans

merit pay pension plans

profit sharing social security

pay-for-knowledge

stock options

flexible pay compensation

combination

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 Example of Progressive and
Regressive Commission Rates
Progressive Rate Sales volume generated Regressive Rate

5% First $20,000 10%

Next $80,000
7% 7%
($20,000-$80,000)

10% Amount over $100,000 5%

Developing the Compensation Plan

1. 2. 3. 4.
Prepare Establish Determine Develop
job specific general the
descriptions. objectives. levels of compensation
compensation. mix.

7. 6. 5.
Evaluate Administer Pretest
the plan. the plan. the plan.

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Developing Compensation Plan
1.
Prepare JD
Need detailed, Compensation plans are designed to
meaningful JD with
clear responsibilities
and performance criteria
and importance to
company
2.
Establishing specific
Objectives
achieve organizational
objectives, such as :
larger market share
higher profit margins
introducing new products or
services
winning new accounts
reducing selling costs
3.
Determine General
level
of compensation
Should be attractive &
competitive to retain
competent sales people
Basic pay should be
• Skills, experience, and
education required to do the
work successfully
• Level of income for comparable
jobs in the company
• Level of income for comparable
jobs in the industry
• Should be enough to cover
living costs
• Earning ceilings is 12
considered
Developing Compensation Plan
1. Costs for alternative compensation mixes

4. Develop the mix • Straight-commission plans are most efficient at

lower sales volume levels.
• A shift from commissions to salaried positions is
in order once a salesperson’s volume has
reached a critical level.

Generally, a
2. Proportion of the salary
compensation mix
Salaries should enable salespeople to meet everyday
of salary, living expenses while encouraging them to perform
commission, and/or tasks that are not directly measurable by sales, such as
bonus is more servicing customer accounts
effective in
achieving objectives 3. Proportion mix for incentives
and goals than Commission and bonus are based on
salary or achieving a sales quota
commission alone.
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Developing Compensation Plan
4. Fixed, progressive, or regressive incentives
Fixed commissions do not offer salespeople much
4. Develop the mix incentive for seeking higher sales.
Progressive incentive rates step up the percentage
of commission or bonus awarded as
sales volume grows past designated levels.
Regressive incentives decline as sales increase,
which are used if there is a high
Generally, a compensation probability of windfall sales and a propensity to
mix of salary, commission, overload customer inventories.
and/or bonus is more
effective in achieving
objectives and goals than
salary or commission alone.
5. Splitting commissions
If two or more salespeople worked on closing a sale,
the commissions can be split.

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Developing Compensation Plan
4. Develop the mix
Generally, a compensation
mix of salary, commission,
and/or bonus is more
effective in achieving
objectives and goals than
salary or commission alone.
6. Types of incentives
Companies may consider a host of fringe benefits
• Supplemental life insurance
• Tax return preparation
• Supplemental medical insurance
• Personal tax and financial planning
• Country club membership
• Low- or no-interest loans
• Deferred compensation
• Supplemental retirement benefits
• First-class air travel
• Relocation allowance
• Stock options

7. Stock Options
An awarded opportunity (an option) to purchase
stock in the company at some future date at a preset price—
usually lower than the prevailing market value.
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Developing Compensation Plan

6.
5.Pre-test the plan Administering the Plan

• Managers must pretest and

evaluate any compensation
• A compensation plan should be fair, easy to
plan before adopting it in one understand, simple to calculate, and
or more sales divisions. flexible.

• Managers need to assess its • As market conditions and organizational

probable impact on profits and objectives change, the plan may need to be
organizational objectives. altered.
sts
• A committee of key employees
should help develop, approve,
and implement any proposed
new plan.
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Developing Compensation Plan

7. Evaluating the plan

• Continually evaluate the plan for the following:

attracting desirable people
retaining salespeople
motivating salespeople
achieving organizational goals

• Evaluate the compensation plan for ongoing effectiveness on a

quarterly, semiannual, or annual basis.
• .

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When Is Straight Salary Best ?
• Team selling situations

• Long negotiating periods

• Mixed promotional situations

• During learning periods

• Missionary selling

• Special conditions (for example, introducing a new line of

products, opening up new territories, calling on new
customer accounts)
 Straight Salary
Advantages
• Provides security to salespeople, since they
know their basic living expenses will be
covered.
• Helps develop a sense of loyalty to the
company.
• Increases flexibility in territorial
assignments because salespeople are less
likely to become attached to certain sales
territories and customers.
• Gives a higher degree of company control
over salespeople’s activities.
• Permits rapid adaptation of sales force
efforts to changing market demands and
company objectives.
• Is simple to administer.
Dis-Advantages
• Provides no financial incentive to put forth
extra effort.
• May increase selling costs because salaries
continue even when sales are not being
made.
• Often leads to income inequities because
the least productive salespeople tend to be
overpaid, and the most productive tend to
be underpaid
• Leads to adequate, but not superior,
performance.
When Is Straight Commission Best ?

• strong incentives needed

• selling costs need close control

• service is less important

• long-term relationships are less

Source: PhotoLink
important

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 Dis-advantages -Straight Commission
• Excessive emphasis may be placed on sales volume rather than
profitable sales.

• Salespeople have little loyalty to the company.

• Because of extreme fluctuations in earnings, many salespeople may

face uncertainty about meeting daily living expenses for their families.

• There may be high sales force turnover rates when business conditions
are slow.

• Non-selling activities like service, missionary sales, and displays are

often neglected.
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Dis-advantages -Straight Commission
• Salespeople may overload customers with inventory, thereby
straining long-term customer relationships.

• Windfall earnings may occur under good business conditions,

which may be disturbing to sales management.

• Flexibility in splitting territories or transferring salespeople is

diminished because of limited means of control over the sales
force.

• Sales managers may become lax about recruiting, selecting, and

supervising because they may consider marginal salespeople
acceptable under this compensation plan.

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Advantages -Straight Commission
• Income is directly related to productivity.
• Commission is easy to calculate, so salespeople may
keep track of their earnings.
• There is no ceiling on potential earnings.
• Money is not tied up in salaries because commissions
are paid only when revenues are generated.
• Costs are proportional to sales.
• Salespeople have maximum work freedom.
• Poorly performing salespeople eliminate themselves by
quitting.
• Income is based strictly on accomplishments, not on
subjective evaluations by sales managers. 23
When to Use Different Combination Plans
• Salary plus commissions
– when management wants to get high
sales without sacrificing customer
service
– for new salespeople, since it provides
more security than straight
commission

• Salary plus bonus

– for achieving long-run objectives,
such as selling large installations or
product systems or achieving a
desired customer mix

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When to Use Different Combination Plans

• Salary plus commission plus

bonus
– for seasonal sales and
frequent inventory
imbalances
– when management wants to
focus on certain products or
customers

• Commission plus bonus

– for team-based efforts, in
which some salespeople call
on central buyers or buying
committees

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 Combination Plan Advantages/Disadvantages

Advantages Dis-Advantages
• greatest flexibility and
control can be complex and difficult to
understand
• provides security plus
incentive can be expensive to administer

• allows frequent, likely to fail if not carefully

immediate developed
reinforcement of
desired behaviors

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 Trends in Sales Compensation
• Tying sales compensation plan to
productivity and retention

• including customer satisfaction in

the sales compensation plan

• adjusting international sales

compensation plans to meet local
conditions

• commission for sales managers

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 EXPENSE ACCOUNTS AND FRINGE BENEFITS

Expense accounts enable sales representatives to carry out necessary

selling activities, while fringe benefits help provide them with personal
security and job satisfaction.

Salespeople often see them as important parts of the total compensation

package.

Major types of sales expense: meals, entertainment, travels ( air, train, car),
auto rental, lodging

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 Designing expense account

Flexibility
• Expenses only for sales may
discourage prospecting for new
customers or customer service
Equitability
• Expensing sales task costs should be
treated equally to every sales
person
Legitimacy
• Genuine expenses should be
reimbursed, with neither profits
nor losses for salespeople.
Simplicity
• Clear guideline what can/can’t
be claimed
Affordability
• Paperwork for reimbursement
of expenses should be
minimized.

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Controlling Expenses Through Reimbursement

1. 2. 3.
Unlimited Limited reimbursement Combination
reimbursement plans plans reimbursement
plans

Unlimited • Limited reimbursement

reimbursement plans
cover all selling and
travel expenses with no
limit being put on total
expenses, but sales reps
must regularly submit
itemized records of their
expenditures.
plans offer flat dollar • Combination
reimbursement plans
amounts for food, hotel,
travel for a given time set limits on certain
items such as food and
period (usually a day or lodging but not on
week), or an allowable transportation
cost per item.

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Compensating Cross-Functional Teams
•Shared Reward
•Role-reward congruence
•Team-member input
•Peer evaluations
Indirect Monetary Compensation
• These are benefits often worth 10-20% of total
compensation:
• Health insurance
• Life insurance
• Disability insurance
• Retirement plan
• Profit-sharing
• Paid holidays and vacation
 Compensation Sally is in a combination plan with a
monthly base salary of $4,000, a

Equation commission rate of 6% of dollar

sales, and no bonus. How much
should she be compensated if she
sold $25,000 last month?

Compensation = Base salary + Commission + Bonus

Where…
Commission = Amount of Commission Base Generated x Rate of Commission