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
Components Needs
* Motivate effort on non-selling activities
Salary * Adjust for differences in territory
potential
* Reward experience and competence

Commissions * Motivate a high level of selling effort

* Encourage sales success
 Compensating Salespeople
Components Needs
* 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
COMPONENTS NEEDS
•Motivate effort on non-selling activities
Salary •Adjust for differences in
territorial potential
•Reward experience and competence

Commissions •Motivate a high level of selling effort

•Encourage sales success

•Direct effort toward strategic

Incentive objectives
payments •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
Source: Adapted from Sales Compensation Concepts and Trends (New York: Alexander Group,
1988).
 40,000
Total cost per person
(thousands $)

30,000 Straight salary

20,000

10,000

0 100 200 300 400 500

Sales Per Person in Thousands

Figure 14-2: Comparing Salary and Commission Plans for Field Sales Representatives
 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

Percentage of
Companies Using

Straight Salary 7
Straight Commission 10
Salary Plus Bonus 34
Salary Plus Commission 21
Salary Plus Bonus Plus Commission 24
Commission Plus bonus 4
Total 100%
 Compensating Salespeople
Gross Margin Commission Problems
Marketing Discounted Percentage
Plan Price Decline
Selling Price $100 $92
Cost of Goods Sold 80 80
Gross Margin 20 12
GM% Commission 20% 20%
$ Commission $ 4 $ 2.40 40%
Contribution 16 12
Overhead Costs 10 10
Net Profit $ 6 $ 2 66%
 Table 14-3 Compensation Levels for Firms using Salary Plus
Incentives, 1996
Total
Salary Incentive Compensation
Position ($000) ($000) ($000)

Top Sales Executive $91.2 $31.5 $122.7

Regional Sales Manager 69.0 23.3 92.3
National Account Manager 66.9 18.7 85.6
District Sales Manager 61.8 22.0 83.7
Key Account Rep 54.6 16.6 71.2
Senior Sales Rep 45.1 23.2 68.3
Intermediate Rep 34.6 16.1 50.7
Entry Level Rep 28.8 10.9 39.8

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 of Margin to Commission on Paid to
Number on Each Order Order Company Gross Margin Salesperson

1 10 $1,000,000 $100,000 15 $15,000

2 20 $500,000 $100,000 15 $15,000