Chapter 13

•COMPENSATION FOR
HIGH PERFORMANCE
 Compensation is more than
Money
Any type of sales organization can reward sales
performance in three fundamental and
interrelated ways:
1. Direct financial rewards.
2. Career advancement and personal development
opportunities.
3. Non-financial compensation.
 Remember…
A sales reward system is not the only means
of motivating salespeople, but it is the most
important.

Measuring sales performance but not

properly rewarding it severely limits the
achievement level for salespeople.
 Purposes of Compensation
• Connect individual with organization.
• Influence work behavior.
• Organizational choice.
• Influence satisfaction.
• Feedback.
• Reinforcement.
 FIGURE 13.1 EFFECTS OF PAY ON DISSATISFACTION

Performance

Pay D esir e fo r
D is sa t is fa ctio n M ore P ay Absenteeism

P s y ch o lo g ica l
Grievances W ith d ra w a l

Jo b
Job S tr ess,
Dissatisfacti A n x iety
on
P oor M en ta l
Turnover
H ea lth
 Satisfaction with rewards
depends on:
• How much reward is actually received in
relation to how much was expected to be
received.
• How the rewards received compare with
what others received.
• Whether the rewards lead to other rewards.
• The level of extrinsic and intrinsic
satisfaction from the rewards.
• The value of different rewards.
 FIGURE 13.2 FORMAL COMPENSATION PROCESS

D e te rm in e C o m p e n s a tio n D e t e r m i n e M a jo r
E s t a b lis h S a le s F o rc e
O b je c t iv e s , S t r a t e g i e s , C o m p e n s a tio n
O b je c t iv e s a n d P la n s
a n d T a c tic s F a c to rs

A p p ra is a l I m p le m e n t
and L o n g - a n d S h o rt-
R e c y c lin g R a n g e P ro g ra m s

M e a s u re I n d iv id u a l, C o m m u n ic a te
R e la te R e w a rd s
G ro u p , a n d O rg a n iz a tio n a l C o m p e n s a tio n
to P e rfo r m a n c e
P e rfo r m a n c e P o lic y
 Designing a compensation
program:
• Compensation plans should have general and specific
objectives:
• Attaining yearly sales volume and gross margins (general).
• Attaining monthly sales volume and sales on specific products
(specific).
• Market penetration and exploiting the territory’s potential (general).
• Call management and development of potential in key accounts as
well as development of new accounts (specific).
• Introduction of new products (specific).
 Determine Basic compensation
Components
• Wage level.
• Wage structure.
• Individual wage.
• Administration procedures.
 IMPLEMENT LONG AND SHORT-RANGE
COMPENSATION PROGRAMS
Communicate compensation policy. Needs to
include:
1. The salesperson needs to know what part the sales force
is expected to take in attaining the organization’s goals.
2. The salesperson’s role in achieving sales objectives
should be thoroughly discussed.
3. The limitations and weaknesses of the compensation
program should not be hidden from the salesperson.
RELATE REWARDS TO PERFORMANCE
Rewards and promotions should be tied directly
to the salesperson’s individual contributions to
sales force objectives.
Companies need to regularly measure individual,
sales group, and organizational performance to
determine whether the compensation program’s
objectives are being met.
 Appraisal & Recyling
Key questions in terms of the success of a plan:

• Are the compensation objectives being met?

• Is the firm able to attract new salespeople
with this plan?
• What is the relationship of compensation to
turnover?
 PERFORMANCE-BASED PAY:
PREREQUISITES AND OBSTACLES
If pay is going to influence salespeople’s
performance, the following factors are important:
• The salesperson must perceive a close relationship
between performance and pay.
• Pay must be important to the salesperson.
• The salesperson must be able to perform what is
necessary to achieve the pay.
• The salesperson must know what is expected.
• Performance must be measurable, and its evaluation must
be fair.
 For these conditions to exist, the
organization must do its part, which means:
• Sales territories must have equal potential.
• The salesperson must know and understand how the pay program
works.
• The performance appraisal system must be free from potential
bias.
• Managers must be trained in giving feedback.
• The amount of money set aside for merit or incentive pay must be
sufficiently large to make extra effort worthwhile.
• The job evaluation must be valid so the overall salary
relationships are equitable.
• The sales culture must be such that the high performers are
encouraged rather than discouraged by their peers.
 Types of compensation plans
STRAIGHT SALARY
Of all the compensation plans, the straight salary
plan is the simplest: The salesperson is paid a
specific dollar amount at regular intervals.
 Who uses straight salary plan:
• Dominant market share in mature, stable industry
• Highly defined and stable customer base
• Strongly centralized and closely managed selling
effort
• Significant number of house accounts
• Highly team-oriented sales effort
• Service versus selling emphasis
 Straight Commission
The straight commission plan is a total
incentive plan. If salespeople do not sell
anything, they do not earn anything.

Two basic types of commission plans exist:

1. Straight commission.
2. Draw against commission.
When Commission works best…
• Little non-selling, missionary work
involved.
• The company cannot afford to pay a salary and
wants selling costs to be directly related to sales.
• The company uses independent contractors and
part-timers.
 Profile of straight commission
company:
• Low barriers to entry into the job
• Limited corporate cash resources
• Small entrant into an emerging market or market segment
• High risk reward sales force culture
• Undefined market opportunity or customer base
• Inability to set quotas or other performance criteria
• Volume-oriented business strategy
 How to calculate
• The past year’s sales.
• The sales force’s forecast of the coming
year’s sales.
• Corporate marketing targets.
• A specific net profit target.
• Geographic market potentials.
 Consider Profitable Products

• The profitable products can carry a higher

commission or incentive reward.
• The more profitable products can be weighted
so one of them counts as much as two or three
of the routine products.
• Separate quotas can be set for each product
line.
• Salespeople can be paid on the basis of their
individual contributions to profit.
 Combination plans:
• Salary and commission
• Salary and bonus: individual or group bonus
• Salary, commission, and bonus: individual or
group bonus
 Characteristics of Combination
plan companies
• Established company with growth
potential, many products, and active
competition
• Need to direct a complex set of behaviors
• Need for a variable pay component that
will ensure top performers are rewarded
commensurately
 When to use combination plans
1. To motivate the sales force.
2. To attract and hold good people.
3. To direct the sales force efforts in a
profitable direction.
 Bonuses
1. Non-productivity bonus
2. Productivity bonus
 Special incentives
• Sales contests are special sales programs
offering salespeople incentives to achieve
short-term work goals.
 Sales Expenses
• Expense plans have the same basic objectives as a
compensation system, that is, to motivate the salesperson’s
behavior in terms of membership, performance, and
attendance.
• Good plans should be:
1. Fair for the salesperson.
2. Fair for the company.
3. Cost effective.
4. Understandable.
5. Convenient.
 Types of Expense plans:
• The company pays all expenses.
• The salesperson pays all expenses.
• The company partially pays expenses.
 Fringe Benefits
• Five basic classifications of salespeople’s
benefits and services are:
1. Benefits that are required legally.
2. Pension and retirement programs.
3. Nonworking time.
4. Insurance.
5. Miscellaneous services.
 Factors to Consider in
developing a compensation plan:
1. Companies with a sales force on a
straight salary may find it highly
advantageous to move to a salary-plus-
incentive plan.
2. Companies with a sales force on straight
commission may sometimes adopt a
salary-plus-incentive plan to gain more
control over the sales force.
 When Compensation program
needs modification:
1. Declining revenues
2. Declining market share
3. Declining profitability
4. Insufficient premier accounts
5. High sales force turnover
6. Uneven sales force performance
7. Inadequate servicing of customers
8. Concentrating on easy-to-sell and unprofitable products