PART 3 Directing Sales Force Operationsa good training.docx

PART 3 Directing Sales Force Operations
a good training program, and an adequate compensation plan are
practices that help eliminate expense account padding.
Methods of Controlling Expenses
First, management must decide whether the company will pay
for sales reps' field-selling costs or have the reps pay their own
expenses out of their earnings. Almost all firms pay for travel
and business expenses if salary is an element in the
compensation plan. If the sales reps pay all their own expenses,
chances are that they are compensated by the straight
commission method.
Salespeople Pay Own Expenses
Salespeople who are compensated by straight commission
usually pay their own selling expenses. Management usually
figures into the commission a certain percentage of sales for the
field sales function. It offers the total amount to the sales rep
and says, in effect, "What's left over after you pay your costs is
yours." The main reason for this is that some people paid a
straight commission might be tempted to cheat on an expense
account during periods of lean sales. Also, from management's
standpoint, the plan is simple and costs nothing to operate.
There are also at least two reasons reps themselves prefer to pay
their own expenses. First, such a plan gives them freedom of
operation—they don't have to explain their expenses to
management. Second, many reps gain income tax advantages
when paying their own expenses. They can deduct more
expenses than if their earnings and expenses are separated by
the company.
When salespeople pay their own expenses, however, the results

may not be what management wants. A company loses
considerable control over its reps' activities. For example, the
reps are not likely to travel long distances to call on and
entertain prospective new accounts who do not offer immediate
sales potential.
Unlimited-Payment Plans
The most widely used method of expense control is the
unlimited-payment plan, in which the company reimburses sales
representatives for all legitimate business and travel costs they
incur while on company business. There is no limit on total
expenses or individual items, but reps are "required to submit
itemized accounts of their expenditures.
The main advantage of the unlimited-payment method of
expense control is its flexibility. Cost differentials between
territories, jobs, or products present few problems under this
plan. Flexibility also makes the plan fair for both salespeople
and management, assuming that reps report their expenditures
honestly and accurately. Furthermore, this plan gives
management considerable control over the sales reps' activities.
If sales executives want a new territory developed or new
accounts called on in out-of-the-way places, the expense plan is
no deterrent.
Managementof a Sales Force, 12th Edition 300
301
CHAPTER 10 Sales Force Quotas and Expenses
Management of a Sales Force, 12th Edition
However, an unlimited-payment plan may not allow
management to accurately forecast its direct selling costs. The
unlimited feature is an open invitation for some people to be
extravagant or to pad their expense accounts with unjustifiable
items. The plan offers no incentive for a salesperson to
economize.
It is debatable whether the unlimited-payment method leads to
more or fewer disputes between management and the sales force

than other expense-control systems. The unlimited feature
should reduce the number of disagreements, but friction may
arise if management questions items on the expense reports.
Probably a manager's greatest need in an unlimited-payment
plan is to establish a successful method of controlling the
expenses. Certainly a sales manager should analyze the reps'
expense reports to determine what is reasonable and practicable.
Limited-Payment Plans
A limited-payment plan may take either of two forms. In one
form, the plan places a limit on the amount to be reimbursed for
each expense item. For example, a company may pay a
maximum of $140 a day for lodging, $7 for breakfast, $12 for
lunch, and $25 for dinner (or $44 each day for food). In the
other form, the plan provides a flat sum for a period of time,
such as a day or week. One company may allow $180 a day;
another firm may set its flat sum at $900 a week. Management
may set the same limits in all its territories, or it may establish
different limits to account for territorial cost differentials.
Setting limits on expense payments has some advantages.
Limited-payment plans are especially suitable when sales reps'
activities are routine and travel routes are repetitive. Then the
expenses can be more accurately forecast. These maximum
expense forecasts then aid in budget planning. Also, knowing in
advance what the limits are should reduce expense-account
disputes between management and the sales reps, particularly if
both parties perceive the limits to be fair.
The manager's major problem in administering a limited-
payment plan probably is establishing the limits for each item
or time period. Management may study past reports to determine
the mileage sales reps typically cover each day. It may examine
hotel and motel directories to establish limits on lodging. A
separate study should be conducted for each territory to ensure
that the plan reflects regional cost differentials. Also,
management should monitor the program to ensure that the
limits reflect a territory's current structure. Sales reps should be

included in these various deliberations, because limited-pay
plans are good only if the sales force believes the limits are
equitable.
Companies typically encounter several other problems in
limited-payment plans. High-caliber salespeople may object to
limits on expenses because they feel that the company does not
trust them. Also, the system can be inflexible. A sales rep may
have some unusual expense, such as an entertainment item he or
she could not escape without losing the account. If
entertainment is not an allowable expense, the rep may not be
reimbursed. Some companies avoid such inflexibility by
allowing these unusual expenses if they are reported separately
with an explanatory note.
301
302
301
302 Management of a Sales Force, 12th Edition
An Ethical Dilemma
301
Many companies control their sales reps' travel and other
business expenses by using some form of limited-payment plan.
That is, management will set a maximum amount that the
company will reimburse for specific items such as lodging,
meals, entertainment, and laundry. Typically, reps do not have

to furnish receipts for certain kinds of items—local
transportation, for example—or for items under the maximum
limit.
Sometimes under these limited-payment expense control plans,
the salespeople's expense accounts do not record what really
happened. A rep may overspend the dinner limit by $10 and
then make it up on the report by adding to an inexpensive
breakfast or lunch. One rep padded his taxi expenses (where no
receipts were required) to make up what he overspent on food.
He claimed that there was no way he could eat properly in that
city on the limited amount set by the company. In other cases,
reps may underspend the limit on meals or entertainment, but
their expense accounts state that they spent the maximum
allowed. The reps claim that they should be allowed to
economize in order to earn extra money, so long as their job
performance and customer service do not suffer.
Question: As a means of getting around the controls built into
limited-payment expense plans, are any or all of the above-
described practices ethical?
When management sets limits for each item, the plan may be
hard to control. Reps may switch expenditures among expense
items—that is, they may attempt to recoup money spent in
excess of the limit for one item by padding the claim for some
other item. Also, the plan cannot prevent a cheater from
economizing on some expenses and then padding the account up
to the allowable limits.
Combination Plans
The advantages of both the limited and unlimited plans can
sometimes be realized by developing a control method that

combines the two. Management may set limits on items such as
food and lodging, for example, but place no ceiling on
transportation. Another combination method is an expense-
quota plan. Under this system, management sets a limit on the
total allowable expense, but the ceiling is related to some other
item on the operating statement, such as net sales. For example,
a quota of $2,000 may be set for a month because monthly sales
are expected to be $40,000. Expenses can be tied to sales even
more directly by allowing sales representatives a monthly
expense account not to exceed 5 percent of their net sales. The
compensation plan can play some part in this expense-control
system by paying a bonus if the rep keeps expenses at an
amount under quota.
relate sales force expenses to net sales. In this method,
management has some control over this direct selling cost.
Furthermore, the reps have some operating flexibility within the
total expense budget. Reps who have been made expense-
conscious are not likely to be wasteful.
Control of Sales Force Transportation
One significant selling expense with little room for discretion is
the cost of transportation. Transportation expense decisions are
usually clear-cut because they are based on the costs and the
nature of the selling environment. The rep who covers
Manhattan must use taxis, buses, and the subway; a car would
be next to useless. Without a car in Los Angeles, however, the
rep goes nowhere. The situation largely dictates the
transportation required. Some aspects are open to managerial
control, however.
Ownership or Leasing of Automobiles
Since most sales travel is done by automobile, a car has become
almost standard equipment. Management may provide company-
owned cars or leased vehicles, or salespeople may use their own
cars. No one policy for car ownership is best under all
conditions. The final decision rests on a consideration of the

following factors:
· Size of sales force. With a small sales force, a company
achieves simplicity and economy either by having salespeople
use their own cars or by leasing cars for them. Only when its
sales force is large does a company generally find it
advantageous to own the cars.
· Availability of centralized maintenance and storage facilities.
Great Britain 17.5% Norway 22%
France 18.6% Sweden 25%
Holland 17.5% Denmark 25%
Germany 15% Spain 15%
Austria 21.2% Italy 19%
Most cars of the size that Bales reps are likely to rent have
standard (not automatic) transmis-
(
Renting cars in Europe for sales force transporta
tion can be a lot more expensive and troublesome than in the
United States. Gasoline prices in Eu
rope run $4 to $5 for a U.S. gallon. On aut
o rentals, the value-added tax—a form of sales tax—in vari
ous European countries is as follows:
sions
and no air conditioning, even in Greece, Italy, Spain, and
Portugal.
Besides the costs and car equipment, sales reps should be alert
for other potentia
l surprises. In Spain, for example, retail stores, including
nonair
-port rental agencies, typically close for three hours at
lunchtime. Obviously, this must influence a rep's planning for
an auto pickup or
dropoff
. Sometimes the rental location is difficul
t to find. It is likely to have a small store front and the cars are
parked in an underground garage or at some nearby location.
Customer service overseas may be of a differ

ent level than that in the United States. The cars may not be as
clean, nor be in
the condition that you have come to expect.
)If a company maintains centralized vehicle storage and repair
facilities, it is in a good position to furnish the sales force with
cars.
303
304
304
311
· Unusual design required. Some companies require that the cars
used by their salespeople be a special color, have a specially
constructed body, or carry some form of company advertising.
Sometimes the vehicle must double as a sales car and a delivery
truck. In these situations, the company should furnish the cars.
· Control of car's operating condition. If the company furnishes
the car, management is in a better position to demand that it be
kept presentable. The company probably can provide cars that
are newer than the average salesperson's own car. However,
sales reps may take better care of their own cars than they do of
company-owned or leased vehicles.
· Personal preferences. Some people are financially able and
willing to furnish their own cars for work. When sales reps must
provide the cars, however, management runs the risk of losing
good applicants. Some reps may not want to drive their own
cars for company business, or they may not have suitable cars.
· Annual mileage. A rep's average annual mileage influences the
automobile ownership decision. The more miles driven, the

more advantageous it becomes for the company to own the cars.
The point of indifference varies depending on the cars used and
the company's auto-expense allowances. Suppose the company
pays a flat 30 cents per mile auto allowance and that
management has calculated the cost of owning the preferred
model to be $4,000 a year, plus 10 cents a mile. Under these
circumstances, the point of indifference would be 20,000 miles.
If the salespeople covered less than this mileage, management
would probably encourage them to own the cars.
· Operating cost. It is hard to say definitively which of the three
alternatives—employee-owned, company-owned, or company-
leased—offers the lowest operating cost. It depends to a great
extent on rental costs, number of miles driven, and method of
reimbursing the sales force. It also is difficult to measure some
indirect costs of company ownership, such as the achninistrative
expense of operating the system.
e Investments. If the company is not in a strong financial
position or does not want to make the investment, it can lease
cars or have the salespeople provide their own.
· Administrative problems. One major administrative question
that comes up when the company furnishes cars is whether they
should be available for the reps' personal use and, if so, to what
extent. Most companies allow reps to use company cars for
personal transportation. Management may or may not suggest
some limits. If a company adopts a no-limit policy, reps may
choose not to buy their own cars, or they may use the company
car as a second family car.
Use of a company car for private purposes is another indirect
monetary payment, the same as group insurance or a paid
vacation. Some businesses ask the rep to pay for the gas when
driving the car for personal use. Others pay all expenses for
both business and private use. Some ask that operating expenses
be paid only on long personal trips such as vacations.
311
311

Leasing is the easiest way to put the sales force on wheels. The
sales executive does not have to be a transportation expert, and
the firm avoids the problems of buying the car, maintaining it,
and later reselling it. Marko Foam Products, a California firm
that leases a fleet of 45 automobiles, says that the company has
saved $2,000 to $3,000 per automobile since it started
leasing.11
The IRS's policy greatly encourages companies to lease
automobiles, particularly the more expensive models. Whereas
lease payments are deductible, almost without question, the IRS
often contests (in audits) depreciation deductions for expensive
company-owned cars. Leasing also minimizes a company's
record-keeping chores.
Reimbursement Plans for Employee-Owned Cars
Salespeople who use their own cars on company business are
often reimbursed for the cost. Three separate types of
expenditures are involved in owning and operating a car. One
type is variable costs, which are generally related directly to the
number of miles driven. Examples of variable-cost items are
gasoline, oil, lubrication, tires, and normal service maintenance.
A second class of expenditures is fixed costs, which tend to be
related to time rather than miles driven. Fixed costs include
depreciation, license fees, and insurance. The third group,
miscellaneous expenses, is difficult to standardize. Typical
items are tolls, parking, and major repairs. Usually
miscellaneous costs are not incorporated into one of the
ordinary automobile expense-control plans. These items are
listed separately on the expense account.
Salespeople may be reimbursed for using their cars on company
business by some kind of a fixed-allowance plan or by a
flexible-payment method.
Fixed-Allowance Plans

One general type of fixed-allowance plan is based on mileage;
another is based on a period of time. Under the first, the
employee is paid the same amount for each mile driven on
company business. The flat rate per mile is used by more
companies than any other major plan, although there is a trend
toward more flexible methods. Under the other type of fixed-
allowance plan, a flat sum is paid for each period of time, such
as a week or a month, regardless of the number of miles driven.
The reimbursements cover both fixed and variable automobile
costs.
Fixed-allowance plans have several advantages. They are
generally simple and economical to administer. Salespeople
know in advance what they will be paid. Also, if payment is
based on a flat allowance for a given period of time, the
company can budget this expense in advance. People who drive
few miles (5,000-10,000 per year) prefer it because they can
generally make money under such a plan.
The criticisms of fixed-allowance plans are so severe, however,
that we wonder why they remain popular. Generally speaking,
the plans are inflexible and may be unfair—some salespeople
may benefit, while others lose. The fixed sum for a given time
period can be reasonably good only if everyone
305
305
FIGURE 10-6 Example of results of flat-rate-per-mile plan
under varying annual mileages
Variable

Payment to
Costs at
Representatives
Annual
Fixed
21 Cents
Total
Per-Mile
at 40.5 Cents
Gain or Loss to
Mileage
Cost
per Mile
Costs
Costs
per Mile
Representatives
10,000
$8,000
$ 2,100
$10,100
1.01
$ 4,050
-$6,050
20,000
8,000
4,200
12,200
.61

8,100
-4,100
30,000
8,000
6,300
14,300
.48
12,150
-2,150
40,000
8,000
8,400
16,400
.41
10,200
-6,200
50,000
8,000
10,500
18,500
.37
20,250
+1,750
travels in a routine fashion and costs are the same in each
territory. Similarly, the flat-mileage allowance is equitable only
if all reps travel about the same number of miles in the same
type of cars under the same operating conditions. These
conditions are highly unlikely and unrealistic.
Consider the inequities introduced, for example, by variations
in the number of miles driven. In the operation of a car, some
costs are fixed regardless of the number of miles driven.
Therefore, the greater amount of driving, the more miles over
which to amortize the fixed costs. In other words, the fixed
costs per mile decrease as the total mileage increases. Under a

fixed allowance per mile, every additional mile works to the
financial benefit of the sales reps. An example is outlined in
Figure 10-6. Assuming annual fixed costs of $8,000, variable
costs of 21 cents per mile, and a mileage allowance of 40.5
cents, the results are shown for various annual mileages. A sales
representative who drives 10,000 miles per year receives
$4,050, when the total costs are $10,100. Thus, the rep's
earnings are reduced by $6,050. At the other extreme, a
representative who drives 50,000 miles gets $20,250, which is a
gain of $1,750 over actual costs. If the representative were paid
a fixed sum per month, similar inequities would result but in
reverse. That is, a payment of $400 a month would benefit the
low-mileage traveler at the expense of the person who drove
many miles in a year.
Flexible-Allowance Plans
To avoid the inherent weaknesses in a fixed-allowance system,
companies have developed several flexible-allowance plans.
A graduated-mileage rate plan pays a different allowance per
mile depending on the total miles driven in a time period. For
example, one firm pays 30 cents a mile for the first 15,000
miles driven in a year and 20 cents for every mile over 15,000.
Mileage allowances are graduated downward to reflect the fact
that total costs per mile decrease as mileage goes up. Although
a graduated plan corrects some of the faults of a flat-rate
method, it usually does not consider differences in territorial
costs and types of cars.
Under a plan that combines an allowance per time period with a
mileage rate, management figures automobile allowances in two
parts. Thus, the differences between fixed and variable costs of
owning and operating a car are reflected in the payment. To
cover fixed costs, the company makes a flat payment for each
given time period, such as a week or a month. In addition,
8
Ma nagement of a Sales Force, 12th Edition 306
306
Ma nagement of a Sales Force, 12th Edition 313

307 BBA3221
CHAPTER 10 Sales Force Quotas and Expenses OXt I
variable costs are reimbursed by mileage allowances, which
usually are flat
rates although they could be graduated. For example, one
company pays
* $500 a month plus 20 cents a mile; another pays $350 a
month plus 20 cents
a mile over 750 miles a month.
A widely recognized and respected plan was developed more
than 50 years ago by the founder of Runzheimer International, a
management consulting firm that specializes in employee
mobility issues, headquartered in Rochester, Wisconsin. This
company typically divides the United States into several
geographic regions and then computes the total annual costs,
which include ownership and operating expenses for cars in
each of these regions. As an example, Figure 10-7 shows the
cost allowances for a midsized car in St. Louis, Missouri, as of
May 2006.
In some respects, the Runzheimer plan gives the same results as
the graduated mileage system in that the more miles driven, the
smaller the per-mile allowance. However, the Runzheimer plan
is much more accurate because payments reflect variations in
types of cars, miles driven, and territorial operating costs. For a
midsized car in 2006, for instance, the annual fixed costs varied
from $11,114 in Detroit down to $7,131 in Sioux Falls, South
Dakota.12 In summary, a Runzheimer plan seems to be the most
equitable and accurate method available for paying salespeople
for the use of their cars.

Other Methods of Expense Control
Selling costs loom large in the expenses of most firms. Top
executives may worry about the cost of sales force
compensation, but they are even more concerned about their
reps' field-selling expenses. At this point we shall note
FIGURE 10-7 Runzheimer Annual Vehicle Costs for a
Midsized Four-Door Car in St Louis, Missouri
Annual Fixed Costs
1. Annual vehicle costs $8,600
2. Insurance 1,800
3. License and registration 150
4. Personal property tax 398
5. Total fixed costs 10,948
6. 71.4% of fixed costs 7,816
Operating Costs per Mile
7. Miles per gallon 23
8. Fuel price per gallon $2,118
9. Fuel and oil per mile $0,102
10. Maintenance per mile $0,062
11. Tires per mile $0,020
Standard Cost Reimbursement
A. Fixed cost per month $651.33
B. Operating cost per mile $0,184
Source: Runzheimer International Web site,
www.ninzheimer.cora/bvgc/htmlAi8vssprintJitm, March
10,2006.

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