Selling and Negotiation Skills-1st Sem-mms Modified

Compensating sales personnel

Purpose of the plan- 1)provide a living wage

Compensating sales personnel

2)adjust pay levels to performance (expectancy motivation theory)

3)provide a mechanism for demonstrating the congruency between attaining company goals and individual goals (expectancy theory)

When total overhauling of plan?

1)when the morale is low because of low compensation

2)when a company is anticipating the cultivation of new and different markets

7 requirements of a good compensation plan-

1)it provides a living wage preferably in the form of a secure income

2)fits with rest of the motivational program

3)is fair-equal pay for equal performance

7 requirements of a good compensation plan-

4)easy for sales personnel to understand

5)adjusts pay to changes in performance

6)economical to administer 7)helps in attaining the objectives

of the sales organization

Devising a sales compensation plan

1)define the sales job 2)consider the company’s general

compensation structure

Devising a sales compensation plan-

3)consider compensation patterns in community and industry

4)determine compensation level 5)provide for the various

compensation elements

Devising a sales compensation plan-

6)special company needs and problems

7)consult the present sales force 8)reduce tentative plan to writing

and pre-test it 9)revise the plan 10)implement the plan and provide

for follow-up

General compensation structure

As per job evaluation Job evaluation methods-4 1)simple ranking 2)classification or grading 3)point system 4)factor-comparison method

Simple ranking

Inexpensive Widely used by small businesses Executive committee sorts out job

descriptions in the order of worth

Simple ranking

Without considering current individuals in the job or their compensation levels

No effort is made to determine critical factors inherent in the job

Only relative appraisal of the relative worth of different jobs are made

Classification or grading

The grades sometimes called classes, are described in terms of job responsibilitys,skills required, supervision given and received,exposure to hazardous and unfavorable working conditions

Classification or grading

Job descriptions are then classified into appropriate grades by an executive committee or by personal specialists

All jobs within a grade are treated alike with respect to base compensation

Point system

Most widely used method Factors considered are- Mental and physical

skills,responsibility,supervision given and received, personality requirements and minimum education required

Point system

Each factor is assigned a minimum and maximum number of points (in line with importance)

Appraised factor scores are combined into a total point value

Point system

Finally, bands of points are decided upon and become the different compensation classes

Point values make it possible to determine the gap, or distance, between job classes

Factor-comparison method

Resembles the point system but more complex

Utilizes a scheme of ranking and cross-comparisons to minimize error from faulty judgment


Employs selected factors and evaluation scales


Scale values are in dollars and cents, and no upper limit exists to the valuation that can be assigned to any one factor

A selected number of key jobs, typical of similar jobs throughout the company are then evaluated factor by factor


This is done by arranging them in rank order from highest to lowest for each factor


As a check against judgmental evaluation, the compensation dollars actually paid for each job are allocated to the factor; the allocation automatically establishes the relationship among jobs for each other


The judgment ranking and the ranking by allocation of compensation are compared and differences are reconciled, or else the jobs are removed from the key list


On the basis of dollar amounts assigned to the several factors making up key jobs, additional jobs are evaluated and their monetary values for each factor interpolated into the scale

This process is repeated until all jobs are evaluated

4-determine compensation level

Decide on the average Ascertain the caliber of the present

sales force measures up to what the company would like to have


Weigh the worth of individual persons through estimating the sales and profit dollars that would be lost, if particular sales person resigns


Another consideration is the compensation company can pay

Plot each cost estimate on a break-even style chart

Similar companies but different pay? Possibilities-

The first group of sales people may be overcompensated

Sometimes, management does not know the true worth of individual sales personnel


In other cases, management regards some sales personnel as indispensable or managerial inertia prevents adjustment of the compensation level to a changed selling conditions


Sales managers are biased in favor of high compensation for selling jobs

5-provide for the various compensation elements

4 basic elements- 1)a fixed element, either a salary

or drawing account, to provide some stability of income

2)a variable element (a commission, bonus or profit sharing arrangement) to serve as an incentive


3)an element covering the fringe or ‘plus’ factor-such as paid vacation, sickness and accident benefits, life insurance, pensions and the like


4)an element providing for reimbursement of expenses or payment of expense allowances

Generally fixed and variable component will be 80/20 or 60/40

Types of compensation plans

1)straight salary 2)straight commission 3)combination of salary and

commission

Straight salary

Once popular now less importance @20%organizations use this

Straight salary

Most common among industrial goods companies

Suitable when the selling job requires extensive missionary or educational work, when sales people service the product or give technical or engineering advice, or when sales people do considerable sales promotion work

Straight salary

If non-selling tasks bulk large in the salesperson’s total time expenditure

Commonly used for people involved in trade-selling

Sometimes for driver-sales people selling liquor,beverages,milk,bread etc

Straight salary-advantages

Provides strong control over sales personnel

Management can direct their activities along the most productive lines

Economical to administer Accounting costs are lower

Straight salary-advantages fro salesman

Stability of income Less burden of planning routing

and scheduling

Straight salary-disadvantages

Many sales people do only an average rather than an outstanding job

There is tendency to under compensate productive people and overcompensate poor performer giving rise to turnover and increased cost of recruiting

Maintaining morale


Difficult to adjust to changing conditions during downswings

During upswing, sales people will not be ready to exceed previous sales records by any large amount


Through good administration, these weaknesses can be overcome

Measuring average, good and poor performance is difficult

Straight commission

Individual sales personnel should be paid according to productivity

Sales volume is the best productive measure

More complex than straight salary plan

Straight commission

2 classifications- 1)straight commission with sales

personnel paying their own expenses

2)straight commission with the company paying expenses, with or without advances against earned commissions

Straight commission

Suitable where non-selling duties are relatively unimportant and management emphasizes order getting

Straight commission

Common in the clothing,textile,and shoe industries and in drug and hardware wholesaling

Insurance, investment securities, furniture manufacturer, office equipment

Less than 10%companies use this plan

Advantages-straight commission

Provides maximum direct monetary incentive for the salesperson to strive for high level volume

Advantages-straight commission

A means for cost control-all direct selling expenses except for traveling and miscellaneous expenses fluctuate directly with sales volume changes and sales compensation becomes virtually an all variable expense

Great flexibility-by revising commission rates applying to different products

Disadvantages-straight commission

Provides little financial control over salespeople’s activities

Negligence towards daily reports etc,consider sales accounts as individual property, high pressure tactics and loss of goodwill


May push the easiest-to-sell-low margin items and neglect harder-to-sell high-margin items


Costs of checking and auditing salespeople’s reports and of calculating payrolls are higher than under the straight salary method

Some salespeople’s efficiency may decline because of income certainties (management needs to invest in time and money to buoy up their spirits)

Determining commission base

Company selling policies and problems influence selection of the base

If obtaining volume is the main concern, the total sales is the base

If sales personnel make collections on sales, commissions are based on collections

Determining commission base

In case of excessive order cancellation history, commission can be based upon shipments, billings or payments

Some companies base commissions on gross margins

Other companies use net profits as the base

Drawing accounts Company establishes separate accounts

for each salesperson, to which commissions are credited and against which withdrawals are made

Drawing accounts resemble salaries, since customarily individual sales personnel are allowed to overdraw against future earnings

If sales personnel become greatly overdrawn, they may lose incentive to produce, because earned commissions are used to reduce the indebtedness

Drawing accounts

Some sales personnel become discouraged with the prospect of paying back overdrawn accounts and quit the company

Drawing accounts

To forestall quitting by overdrawn salespeople, some firms use “guaranteed" drawing account plans (these do not require the paying back of overdrawls)

Commonly, drawing account plans include a provision that covers the possibility of overdrafts

Salary and incentive combination plan-advantages

Sales personnel have both the security of stable income and the stimulus of direct financial incentive

Management has both financial control over sales activities and the apparatus to motivate sales efforts

Salary and incentive combination plan-advantages

Greater flexibility for adjustment to changing conditions

Cooperative spirit develops between the sales personnel and the company

Disagreement on pay increases and territorial changes are less violent

Disadvantages of combination plan

Clerical costs are higher More records are maintained and

in great detail Generally 80-20 or 60-40 fixed and

variable element

bonus

Is an amount paid for accomplishing a specific sales task

Are paid for reaching a sales quota, a performing promotional activities, obtaining new accounts, following up leads, setting up displays or carrying out other assigned tasks

bonus

Is an additional financial reward to the sales person for achieving results beyond a pre-determined minimum

Bonuses are never used alone-they always appear with one of the three main sales compensation methods

bonus

The bonus conditions require thorough explanation, as all sales personnel must understand them

The necessary records must be set up and maintained

bonus

Procedure for keeping sales personnel abreast of their current standings relative to the goals are needed

Any bonus misunderstandings or grievances arising should be dealt with fairly and tactfully

Fringe benefits

Range from 25 to 40% of the total sales compensation package

Fringe benefits

Do not bear direct relationship to job performance

Some fringe benefits like payments for social security premiums, unemployment compensation and worker’s compensation are required by federal and state law

Why fringe benefits?

1)to be competitive with other companies in the industry or community

2)to furnish reasons for employees to remain in the company’s service

3)to comply with what employees expect as fringe benefits

Fringe benefits-possible for sales personnel

1)time-holidays,vacations,sick-leave,personal-leave,sabbaticals,pregnancy leave

2)organization dues-trade association, civic clubs, country clubs, professional association

Fringe benefits-possible for sales personnel

3)retirement programs-social security (mandatory) ,pension plan, profit sharing, salary reduction plans

Fringe benefits-possible for sales personnel 4)miscellaneous-automobile,use of vacation

spot,parking,dry cleaning and laundry,lunches(all or part), secretarial services, employee stock purchase plan, company-provided housing, legal services, financial counseling,tution for continuing education programs, financial support for dependent’s education, discount for purchase of company products, child care payments, matching funds to charities and schools, company social events, company sporting tournaments, retirement counseling, career counseling, payment of moving expenses

Fringe benefits-possible for sales personnel 5)insurance and medical-physical

examination, medical payments and reimbursements, hospitalization insurance, dental insurance, disability insurance, life insurance, travel insurance, accident insurance, worker's compensation (mandatory), unemployment insurance (mandatory), cancer insurance, psychotherapy expense

Managing expenses of sales personnel

Generally @9% in the electrical equipment industry

@34%in the automotive parts and accessories industry

Most industries, amount from one-fourth to one-half of sales compensation


Missionary selling incurs the lowest expenses since involves calling on professionals who are extremely busy

New business selling results in the highest selling expenses (calls are promising investment)


Technical selling requires longer calls, more spending

Trade selling-routine calls with short times spent with each customer-most expenses for travel and lodging and little for entertainment


It is wiser to be overly liberal than to restrict salespeople’s activities through insufficient expense reimbursement


Some firms try to hold expenses within a planned total amount or to some percentage of sales volume of gross margin


Others control sales expenses only in a general way by scrutinizing expense reports or through policy statements outlining the conditions under which the expenses are reimbursable

Reimbursement of sales expenses-policies and practices

1)have sales personnel pay their own expenses

2)reimburse sales personnel for all or part of their expenses

2 common sense principles for expense reimbursement policies

1)reimbursable expenses should be large enough to permit the performance of assigned duties in the expected manner

2)all expenses incurred because sales personnel are away from home on company business should be reimbursable

Sales personnel paying their own expenses

Is the simpler by far Treat sales personnel as

independent businesspeople using straight commission plan

No records are necessary

Sales personnel paying their own expenses

It is essential that their regular commission be sufficient to permit them to further the company’s best interest

Little management control can be exercised

Avoid missionary duties and ‘high spot’ (call on large account)

Full or partial reimbursement

Factors affecting- Territorial size and characteristics Caliber of sales personnel Nature and breadth of product line Managerial efficiency Intensity of competition Mode of travel

How a expense reimbursement policy should be?

Take into account the customary living standards of the salesperson and the customers (more emphasis)


The salesperson should eat and stay at hotels of the class patronized by the customers


In some instances, different salespeople in the same company should be allowed different amounts for expense, reflecting deviations in customer’s living standards (actual expenses vary a great deal from one territory to another)

Keep expenses reasonable


No bad feeling among the sales staff

Easy to administer-minimum supervision and record keeping

Avoid tendency to over economize

Methods of controlling and reimbursing expenses of sales personnel

1)flat expense account 2)flexible expense account 3)honor system 4)expense quota

Flat expense account

No need to keep reports and no need to check expense accounts

Makes possible the advance determination of total sales expenses

Forces sales personnel to control their own expenses

Works best when-


1)the exact amounts of expense accounts do not need changing often (selling staple products in small territories)

2)when expense allowances come up for frequent review and possibly revision


Should have flexibility built into them

The weakness is the tendency of some sales personnel to over economize thinking it as a regular addition to salary and do not spend all of it, preferring to save a portion for personal use

Flexible expense account

Known as ‘exact' plan and most common

Sales personnel are reimbursed for all allowable expenses incurred and reported

for this method to work management must-


1)know the total amount of sales personnel’s probable expenses

2)classify expenses into ‘allowable' and ‘non-allowable" categories with clear descriptions of items under each heading


3)set up a system and forms for the sales staff to use in periodic expense reporting

4)establish procedures for checking itemized expense reports and for expeditious handling of reimbursements


Because of the flexibility sales opportunities are fully capitalized on as they arise


Administrative costs are sizable because of the large amount of clerical and accounting work in checking expense reports and making reimbursements (good sales persons are generally poor record keepers)


Without close control, some people spend the company’s money too generously, further aggravated by the opportunity for expense account padding giving rise to disputes

Honor system Sales expenses are fully reimbursed Only total expenses are reported Indicates complete honesty of all

sales personnel Easy to administer thus paving way

to savings in both accounting expenses and time

Management control is weak

Honor system

Sales personnel may become free spenders spending on unwanted heads

Regard expense accounts as sources of income causing inequities in expense allowances adversely affecting morale

Honor system

To control,establish maximum ratios of selling expense to sales

Watch the trend of expenses; sudden and sizable increase in reported expenses unless accompanied by parallel increase in sales

Remedial action in case of dishonesty

Expense quota Permits week-by-week variations but

controls total expenses over long period of time

Management first studies individual sales territories and estimates the sales volume and upper limit for each sales person

Prompt and full reimbursements are made

Expense quota

Drawback-the burden for controlling expenses is upon the sales personnel rather than upon management

Expense quota

Skillful administration is necessary In case of wrong forecasts, the

sales personnel may curtail their activities towards the end of budgetary periods because of low balances left in accounts

Reimbursement of automobile expenses

1)flat mileage rate 2)graduated mileage rate 3)fixed periodic allowance 4)combination fixed periodic

allowance and mileage rate 5)runzheimer plan

Flat mileage rate Must set the mileage rate high enough to

cover all expenses of automobile ownership and operation, yet low enough to permit the company to buy transportation economically

Works satisfactorily when a company’s sales force covers small territories all in the same geographical area

Most local and regional wholesalers among other small companies favor flat mileage rates

Flat mileage rate

Short-comings- Ignores cost differentials arising

from the use of various makes and models

Flat mileage rate

Ignores territorial differences in expenses (price of gasoline,oil,tires,insurance coverage, license and inspection fee etc)

Hesitation in adjusting the rate upward as well as downward in line with changing actual expenses

Graduated mileage rate

Different rates apply to mileages in different ranges

Setting the rate per mile is difficult Suitable when sales personnel

travel long distances annually and serve concentrated geographic areas without significant regional expense differences

Fixed periodic allowance

To those who use their personal vehicle on company business-on day,week,month basis

Assumes that total automobile expenses vary with duration of use rather than mileage

Fixed periodic allowance

Difficult for sales personnel with large territories requiring extensive traveling

If allowances are uniform for all sales personnel, morale suffers because of the inequities

Fixed periodic and mileage rate combination

Fixed periodic allowance to cover fixed and semi variable expenses such as insurance premiums, license fees and depreciation

Fixed periodic and mileage rate combination

Mileage payment for operating expenses including cost of gasoline, oil and tires

Some companies using combinations systems accumulate reserves to cover depreciation on automobiles and reimburse sales personnel when they buy new cars

Runzheimer plan

Originated by consulting firm Runzheimer USA in 1933

Divides USA into 29 auto-use basic cost areas

Runzheimer plan

Allowances are for 20,000 miles of average annual travel within each of the cost areas

Runzheimer plan

Recommends that certain expense items not provided for in the standard allowance be reimbursed as incurred and reported by sales personnel such as local city license fees, property taxes, daytime parking, overnight parking away from home and toll charges etc

Runzheimer plan

More than 1,50,000 drivers of business automobiles are reimbursed over $500 million each year

travel

travel awards are popular and a strong incentive

Generally provide trips for winners and their spouses

Special honors or privileges A letter from a top executive

recognizing the winner’s superior performance

A loving cup A special trip to a home office

meeting Membership in a special group or

club (million dollar club for life insurance salesman)

Special honors or privileges

Publicity through house organs and in hometown newspapers

Are used by firms employing sales personnel who are almost ‘independent entrepreneurs”

Special honors or privileges

These are suitable when management desires to strengthen group identity and build team spirit

These appeal to the sales person’s belongingness and social relations needs

How many prizes and how should they be awarded?

Make it possible for everyone to win

Present performance levels be considered

Basis for award be improvement rather than total performance( not the total sales volume but %of quota achieved)

Impact upon sales force morale

Successful sales contests result in permanently higher levels of sales force morale

Impact upon sales force morale

If the format causes personal rivalry, it may have the counter productive effect of creating jealousy and antagonism among the sales force

It is advisable to organize teams and place the emphasis on competition among teams for recognition than individuals

Objections to sales contests Only 1 in 4 sales departments use contests,

why? Sales persons are paid for their service under

provision of the basic compensation plan hence no need to reward them further

High caliber and more experienced sales personnel consider sales contests juvenile and silly

Contests lead to unanticipated and undesirable results such as increased returns and adjsutments,higher credit loss and overstocking of dealers

Objections to sales contests

Sales slump occur before and after the contest

The disappointment suffered by contest losers causes a general decline in sales force morale

Documents

Selling and Negotiation Skills-1st Sem-mms Modified