24.01.07 R. Sunitha , INCCompensating salespersonnel• In this chapter we will discuss:– Objectives of compensation plans– Characteristics of compensation plans– Types of compensation plans– Designing compensation plans– Implementing compensation plans– Sales contests– Sales force expenses– Fringe benefits
24.01.07 R. Sunitha , INCIntroduction• What is compensation?• How it motivates salespersonnel?• How to formulate it?
24.01.07 R. Sunitha , INCObjectives ofcompensation plans1. Balancing the needs of salespersonnela) Secure income and securityb) Desire for personal recognitionand statusc) Reinforcement for doing goodwork2. Managing effects of time
24.01.07 R. Sunitha , INCCharacteristics ofcompensation plans1. Fairness to all2. Flexibility3. Provide incentive &motivation4. Lead to direction of effortstowards company objectives5. Ease of administration andcomprehension
24.01.07 R. Sunitha , INCTypes ofcompensation plansI. Straight salary planII. Straight commission planIII.Combination salary plan
24.01.07 R. Sunitha , INCStraight salaryplan• When it is suitable?–Prospecting is the mainactivity–Team selling–Continuing existing relations–Technical products are dealt
24.01.07 R. Sunitha , INCStraight salary plan -Advantages1. Regular, fixed, guaranteed income2. Reduces cost of organization3. Easy to administer4. Switching and reassigningterritories is easier as there won’tbe any resistance
24.01.07 R. Sunitha , INCStraight salary plan –Disadvantages1. Sales person need not put inextra effort2. Lack of uniformity in sellingproducts (sells only least effortproducts)3. No distinction betweenefficiency and inefficiency
24.01.07 R. Sunitha , INCStraightcommission plan• A fixed % of sales volume is fixedas compensation• Serves as primary mode of paymentin the initial stages• Calculated either on gross sales ornet profits• Sales person gets eligibility to getcommission only after attaining thequota.
24.01.07 R. Sunitha , INCStraight commissionplan – Advantages1. Easily acceptable by sales personsas it depends on theirperformance2. Measures performance3. As the sales volume increases, perunit sales expenses decreases4. Helps in setting targets5. Motivates sales personnel
24.01.07 R. Sunitha , INCStraight commissionplan – Disadvantages1. No focus on non selling activities2. Focus only on increase in salesvolume not in profit3. Customer service may be overlooked4. Regular transfers and redesigning theterritories is difficult5. Differences among compensationmay lead to conflicts between salespersonnel
24.01.07 R. Sunitha , INCStraight commissionplan – Disadvantages6. Income of sales person depends oneconomy7. Excessive turn over8. Sales people focus on selling themselves rather than the products9. No focus on building long termrelation ship with the customers.
24.01.07 R. Sunitha , INCCombination salaryplan• Salary + commission + incentives• Suitable for organization withvaried products and divisions• More flexible (80 – 20, 70 – 30, 60 –40)
24.01.07 R. Sunitha , INCCombination salaryplan – Advantages1. Regular incentives motivates salespeople2. Advantages of both fixed salaryand variable income3. Non selling activities are notoverlooked4. Opportunity to earn more5. Preferred by younger sales people
24.01.07 R. Sunitha , INCCombination salaryplan – Disadvantages1. Lot of calculation andadministration2. Administering costs are high3. External environment is to beregularly analyzed to modify thecompensation plan4. Greater monitoring and control isrequired
24.01.07 R. Sunitha , INCDesigning compensationplans• It should meet the needs oforganization• Should attract and retainemployees• Should be viewed as a tool toderive desired sales volume but notas a control element
24.01.07 R. Sunitha , INCDesigning compensationplans – main factors to beconsidered• Specific objectives• Levels of sales forcecompensation• Method of compensation
24.01.07 R. Sunitha , INC• Type of industry andorganization• Its position in the industry• Awareness of companyobjectivesDesigning compensationplans – other aspects
24.01.07 R. Sunitha , INC1. Determine specific objectives2. Establish desired levels ofearnings3. Methods of paymentDesigningcompensation plans
24.01.07 R. Sunitha , INCDetermine specificobjectives• Need of specific objectives• Balancing the different objectives isneeded to avoid conflicts• Following objectives must beachieved to make compensationplan a successful one1. Income and security2. Equity3. Flexibility4. Economy
24.01.07 R. Sunitha , INCEstablish desiredlevels of earnings• Pay structure offered by competitors• Industry average• Type of selling activities• Experience and ability of salespersonnel• Correlation with nature of job• Exceptional candidates can beoffered exceptional compensation
24.01.07 R. Sunitha , INCMethods of payment• Depends on the analysis of sellingactivities– Develop customer relations– Prospecting time– Negotiating price– Training and educating etc.
24.01.07 R. Sunitha , INCCompensation plangenerally includes:a. Salaryb. Commissionc. Bonusesa. Qualitative basisb. Quantitative basisd. Employee stock optione. Special prizesf. Drawing account (fixed rate of interest is charged)g. Special cash incentivesh. Non cash incentivesi. Fringe benefitsj. Sales force expenses
24.01.07 R. Sunitha , INCImplementingcompensation plans• Sales manager should know thetasks which are to be compensated• Compensation to be fixed based onthe task• Successful implementation requiresthe following1. Pre testing2. Periodic monitoring
24.01.07 R. Sunitha , INCPre testing• Probable sales at both extremesand its compensation isdetermined• Cost of implementation• Implemented in s select territory• While pre testing extreme variablesare to be considered
24.01.07 R. Sunitha , INCPeriodicmonitoring• Measurement criteria to bedeveloped• Monitoring must include nonselling activities also• Authority to monitor should bedecentralized
24.01.07 R. Sunitha , INCSales contests• Useful in short term• Primary objective is to attain newcustomers• Increasing sales volume per call isanother objective• Travel, special prizes, privilegeawards and incentives are given onsuccess• Mainly conducted for sales force
24.01.07 R. Sunitha , INCPlanning salescontests• Appropriate theme, format toachieve desired objectives, timing,no. of awards etc.• Proper planning should be done• Should be in tune withorganizational objectives• Tempo to be continued throughout the period of contest
24.01.07 R. Sunitha , INCEvaluating salescontests• When to be evaluated?(before/during/after)• Effect on organization and sales forceto be measured• Impact of sales contests– On organization– On sales force– On customers• Used as a promotional tool
24.01.07 R. Sunitha , INCProcess1. Identifying the effect of salescontest on various functions2. Rank aspects according to theimpact3. Impact of sales contest4. Probable situation without salescontest should be taken into view
24.01.07 R. Sunitha , INCSales forceexpenses• Size of sales force• Methods of compensation• What are the expenses salespersons meets with?
24.01.07 R. Sunitha , INCExpense plans• It should mention the type ofexpenses that are to be allowed• Good plan must be:– Beneficial to sales person– Beneficial to organization– Easy to administer– Easy to understand
24.01.07 R. Sunitha , INCTypes of expenseplans1. Company pays all expenses2. Sales person pays all expenses3. Company partially paysexpenses• Fixed amount and fixedtime
24.01.07 R. Sunitha , INCFringe benefits• Indirect compensation• Not directly linked to money• Elements:– Social security– Pension and retirement programs– Insurance– Holidays– Time off with pay– Other benefits
24.01.07 R. Sunitha , INCElements in fringebenefits1. Benefits provided under thelegal framework2. Pension, PF, gratuity3. Insurance4. Reimbursement for vacations,sick and medical leaves5. Miscellaneous
24.01.07 R. Sunitha , INCSOCIAL SECURITY1. Salaries are adjusted on thebasis of their location (urban,rural, metro)2. Higher amounts are Disbursedat the time of lay off3. Income security4. Up gradation of skills
24.01.07 R. Sunitha , INCPension andretirement programs• Differed payment programs• Successors will be providedwith job in the case of death• Eligible for old-age treatment,subsidized by the organization
24.01.07 R. Sunitha , INCInsurance• Group insurance applicable tofamily members also• Medical and accidentalinsurance
24.01.07 R. Sunitha , INCHolidays• Encashment of earned leaves• Company pays annual holidaytrip
24.01.07 R. Sunitha , INCTime off with pay• Paid leave for training / higherstudies• Maternity leave• Leave to attend seminars orpresent papers
24.01.07 R. Sunitha , INCOther benefits• Company car• Interest free loans• Subsidized housing and food• Mobile telephones• Customer entertainment expenses• Others– Flexi time– Work from home etc.
24.01.07 R. Sunitha , INCAdvantages offringe benefits1. Largely Non taxable2. Educational, vacation allowancesand group insurance are highlyvalued by employees thanmonetary benefit3. Sense of security to salespersonnel