Chapter

9 Sales Force
Compensation

How Little you know about the

age you live in if you fancy that
honey is sweeter than cash in
hand.
Ovid

Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

 Fig 9-1 What a Good Sales
Compensation Plan Should Do
Efforts + Control Treat Attract and
Results = activities of customers keep good
Reward sales reps properly people

Motivate the Good sales Economical yet

salesperson compensation plan competitive

Security and Flexible and

Fair Simple
incentive stable

Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

 Potential conflicts in Compensation Plan Design

Characteristics of Plan 1 2 3 4 5 6 7 8 9 10 11 12
1. Reward results __
2. Reward efforts C __
3. Provide steady income C __ __
4. Provide incentive __ C C __
5. Fair C C C C __
6. Flexible __ C C __ __ __
7. Simple C __ __ C C C __
8. Economical __ C C __ C __ C __
9. Competitive __ C C __ __ __ C C __
10. Controls and directs C __ __ C C C __ __ __ __
11. Consistent w/ company objectives C C C C __ __ C __ __ __ __
12. Stable C C __ C C C __ C __ C C __

C = Potential for conflict

Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

 Fig 9-2 Steps in designing a sales
compensation plan

Review job Identify plan’s Establish level of

description objectives
compensation

Develop the method Decide on indirect Pretest and

of compensation monetary compensation install plan

Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

 Fig 9-4 Building Blocks for a Sales
Compensation Plan

Others

Profit sharing Others

Pension Entertainment

Profit Sharing Moving Expenses Lodging

Company Car

Bonus Insurance Lodging

Salary Commission Paid Vacation Travel

SECURITY INCENTIVES BENEFITS EXPENSES

Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

Method Advantage Disadvantage Best Used

Straight Provides security and Direct incentive is easily For products that require a lot of
salary stability for reps lost if not administered presale and/or post-sale service
properly
Better for directing and For building long-term customer
controlling sales Represents a fixed cost relationships
activities
Requires supervision to When supervision is available for
Ensures proper direct, control, and new recruits
treatment of customers evaluate
For new territories
For missionary sales
Straight Provides a strong Difficult to direct and When a strong incentive is needed to
commission incentive supervise sales people attain sales
Sales people have Customers’ best interests For products that require little
more freedom may be ignored presale and/or post-sale service
Acts as a screening Sales people’s earnings The sale is a one-time sale
method may fluctuate widely
Adequate field supervision is not
available
Company is in a weak financial
position
Company uses part-time or
independent sales people
Bonus Added incentive Added cost To encourage above-normal
performance of specific activities
Can be used for specific May be seen as
activities - flexible inequitable if not
administered properly
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
 Possible Combination
Compensation Plans

COMMISSION

BONUS
SALARY

Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

 Drawing Account Examples
Non-Guaranteed Plan
Month Draw Sales Commission
Volume Earned End-of-Month Payment to Rep
January $1,800 $40,000 $4,000 $2,200 ($4,000 - $1,800 = $2
February $1,800 $15,000 $1,500 $0 (rep owes $300)
March $1,800 $30,000 $3,000 $900 (computed as follows
Commission = $3,000
Less draw - 1,800
Less February debt - 300
Net $ 900

Guaranteed Plan
Month Draw Sales Commission
Volume Earned End-of-Month Payment to Rep
January $1,800 $40,000 $4,000 $2,200 ($4,000 - $1,800 = $2,200)
February $1,800 $15,000 $1,500 $0 (rep owes $0)
March $1,800 $30,000 $3,000 $1,200 ($3,000 - $1,800 = $1,200)
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
 Compensating Cross-Functional Teams

Shared Reward
Role-reward congruence
Team-member input
Peer evaluations

Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.