13-1 Salesperson Compensation and Incentives 13. SALESPERSON COMPENSATION AND INCENTIVES 13-2 Learning Objectives Understand the effective use of sales

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Salesperson Salesperson Compensation and Compensation and

IncentivesIncentives

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SALESPERSON COMPENSATION AND INCENTIVES

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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• 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?

Three Key Compensation Questions

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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 management’s discretion for achieving or surpassing some set level of performance

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EXHIBIT Compensation Methods for Salespeople13.3

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 Method



Straight Commission

Highly aggressive selling

Minimal required nonselling tasks

When company can’t 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 Method



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 salesperson’s 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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leadership 13.2

• Successful compensation plans must clearly link performance to rewards

• To fix a poor compensation plan:• Clean up the jobs• Three’s the magic number• Exclude inappropriate measures• Hold supervisors accountable• Tighten sales credit rules

Simplify Your Pay Programs

Source: David Cichelli, “Dumb Down Your Pay Programs,” Sales & Marketing Management, September 2003, p.88.

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leadership 13.4

• Three clues your quota system ISN’T working:

• 1. Nobody makes goal

• 2. There are no overachievers• 3. Only superstars make goal

Is Your Quota System Working?

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

Documents

13-1 Salesperson Compensation and Incentives 13. SALESPERSON COMPENSATION AND INCENTIVES 13-2 Learning Objectives Understand the effective use of sales