Salesperson Compensation and Incentives

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Salesperson Compensation and Incentives

• 13

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Learning Objectives

• Understand the effective use of sales contests,
  as well as the potential pitfalls of their use
• Identify key nonfinancial rewards and how and why
  they might be important
• Recognize key issues surrounding expense accounts
  in relationship selling

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Learning Objectives

• Describe how to make compensation and incentive
  programs work
• Discuss making decisions on the mix and level of
  compensation

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Three Key Compensation Questions

• Which compensation method is most appropriate for
  motivating specific activities in specific
  situations?
• How much of the total compensation should be
  earned through incentives?
• What is the best mix of financial and
  nonfinancial compensation and incentives?

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Key Definitions

• Salary a fixed sum of money paid at regular
  intervals
• Commission a payment based on short-term
  results, usually a dollar or unit sales volume
• Bonus a payment made at managements discretion
  for achieving or surpassing some set level of
  performance

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Compensation Methods for Salespeople
13.3
Compensation Method Especially Useful For Advantages Disadvantages
Straight Salary New sales reps New sales territories Many required nonselling activities Maximum security Control over reps Easy to administer Predictable expenses No incentive Requires close supervision Selling expenses remain same during sales declines
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Compensation Methods for Salespeople
13.3
Compensation Method Especially Useful For Advantages Disadvantages
Straight Commission Highly aggressive selling Minimal required nonselling tasks When company cant closely control sales force Maximum incentive Managers can encourage sales of certain items Selling expenses relate directly to selling resources Little security Little control over reps Reps may provide inadequate service to smaller accounts Selling costs less predictable
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Compensation Methods for Salespeople
13.3
Compensation Method Especially Useful For Advantages Disadvantages
Combination Similar sales potential across territories When company wants to offer incentive but maintain some control Some security Some incentive Selling expenses vary with revenue Manager has some control over nonselling activities Selling expenses are less predictable May be difficult to administer
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Combination Plans

• Offer a base salary plus some proportion of
  incentive pay
• Most popular form of compensation
• Well-suited for relationship selling by
  compensating for nonselling activities while
  providing incentives to motivate sales

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Design Questions for Combination Plans

• What is the appropriate size of the incentive
  relative to the base salary?
• Should a ceiling be imposed on incentive
  earnings?
• When should the salesperson be credited with a
  sale?

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Design Questions for Combination Plans

• Should team incentives be used? If so, how should
  they be allocated among team members?
• How often should the salesperson receive
  incentive payments?

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Sales Contests

• Short-term incentive programs designed to
  motivate to accomplish specific sales objectives
• Contest winners receive prizes, recognition, and
  a sense of accomplishment
• Successful contests require
• Clearly defined, specific objectives
• An exciting theme
• Reasonable probability of rewards for all
• Attractive rewards
• Promotion and follow-through

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Criticisms of Sales Contests

• May not produce lasting improvements
• Salespeople may borrow sales from another period
  to increase sales during the contest period
• Poorly administered contests can hurt
  cohesiveness and morale

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Nonfinancial Rewards

• Recognition is an attractive reward because it
  makes a salespersons peers and superiors aware
  of outstanding performance
• Effective recognition programs
• Offer everyone a reasonable chance of winning
• Recognize the best performers across several
  dimensions

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Expense Account Types

• Direct reimbursement direct and unlimited
  reimbursement of all allowable and reasonable
  expenses
• Limited reimbursement either sets expense
  limits by-item or provides predetermined lump sum
• No reimbursement requires salespeople to cover
  all expenses usually combined with higher total
  financial compensation plan

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13.2
Simplify Your Pay Programs

• Successful compensation plans must clearly link
  performance to rewards
• To fix a poor compensation plan
• Clean up the jobs
• Threes the magic number
• Exclude inappropriate measures
• Hold supervisors accountable
• Tighten sales credit rules

Source David Cichelli, Dumb Down Your Pay
Programs, Sales Marketing Management,
September 2003, p.88.
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13.4
Is Your Quota System Working?

• Three clues your quota system ISNT working
• 1. Nobody makes goal
• 2. There are no overachievers
• 3. Only superstars make goal

Source Julia Chang, Numbers Crunching, Sales
and Marketing Management, February 2003, p. 49.