Incentives for salespeople Sales compensation plans typically rely heavily on incentives in the form of sales commissions. However some salespeople get straight salaries, and most receive a combination of salary and commission
The widespread use of incentives for salespeople is due to 3 factors: tradition, the unsupervised nature of most sales work, and the assumption that incentives are needed to motivate salespeople.
Salary plan In a salary plan, some companies pay sales people fixed salaries, (perhaps with occasional incentives in the form of bonuses sales contest prizes). Straight salaries particularly make sense when the main task involves prospecting (finding new clients) or when it mostly involves account servicing (such as executing product training programs for a customer’s sales force or participating in trade shows). This is why technology based industries like aerospace and transportation equipment tends to emphasize sales salary plans.
There are advantages to paying salespeople on a straight salary. In this ways, Salespeople know in advance what their income will be, and the employer also have fixed, predictable sale force expenses. Straight salary makes it easier to switch territories or to reassign sales people and it can foster sales loyalty. Commissions tend to shift the salesperson’s emphasis to making the sale rather than to prospecting and cultivating long term customers. The main disadvantage is that pay isn’t proportionate to results. This can de-motivate potentially high performing salespeople.
Commission plan Commission plans pay sales people for results, and only or results.(Pay directly for sale proportion: sale more get more) Under these plans salespeople have the greatest incentive. Commission plans tend to attract high performing salespeople who see that effort clearly produces rewards. Sales costs are proportionate to sales rather than fixed and the company’s fixed sales costs are thus lower. It’s a plan that’s easy to understand and compute.
The commission plan also has drawbacks, Sales people tend to focus on making the sale and on high volume items, and may neglect non-selling duties like servicing small accounts, cultivating dedicated customers and pushing hard to sell items. Wide variations in pay may occur; this can lead to some feel the plan is inequitable.
More serious is the fact that salespeople are encouraged to neglect other duties, like servicing small accounts. In addition, salesperson pay my be excessive in boom times and low in recessions Another potential drawback of commission only plans is that working without a financial safety net can be unsettling. If I go on vacation I lose money. If I’m sick, I lose money. If I’m not willing to drop everything on a moment’s notice to close with customer I lose money can’t see how anyone could stay in this job for long.
Combination plan Combination plans provide some of advantages of both straight salary and straight commission plans, and also some of their disadvantages. Salespeople have a floor to their earning. Furthermore, the company can direct its employees’ activities by detailing what services the salary component.
However, the salary component is not tied to performance, and the employer is therefore trading away some incentive value. Combination plans also tend to become complicated, and misunderstandings can result. It might not be a simple” salary plus commission” plans. For example, there is a “commission + bonus” plan, salespeople are again paid primarily on the basis of commissions, but they are given a small bonus for directed activities, like selling slow-moving items.
Sales compensation in the E-commerce Era The traditional product-based sale compensation focuses on the amount of product sold. But, what about the E-commerce Era? In the Internet age, an integrate team work together to position the company with prospects, make sales, and service account. For customer, they know what they want, or what they need. Therefore, rapid low-cost purchases can be made over the Internet. Sale incentive plans now need to encourage the sale force to focus on the customer, integrate with e-commerce, and support rapid change.
Chapter 12 pay for performance and financial incentives final
Pay for Performance and incentives
Definition: Incentives are financial rewards paid to workers whose
production exceeds a predetermined standard
A gentleman called Frederick Taylor made the system of financial
incentives popular in the late 1800, when he realized the pace at
which the employees were working and the amount been produced.
We will be talking about pay for performance and incentives plans
whether monetary or non-monetary for above standard work which
is in line with the company’s objectives.
Plans which are geared towards different people within the
Developing and implementing effective incentive plans and the
employees recognition programs
Individual programs which are for employees who are
paid more than their base salary to do work that is
above their performance standard.
Informal incentives are given to worker for
achievements that are not measured by a standard for
example an award given for above and beyond customer
service during the week.
Group incentive are the same as individual, however the
reward is given to the group.
Organization-wide incentives are for everyone in the
organization and the final one is
Non-monetary or performance rewarded without money
but rather praise and expressions of appreciation.
• Piecework is when a
worker is paid a sum
called a piece rate for
each unit he or she
Straight Piecework plan
Piecework Incentive plans
A plan by which a
worker is paid a basic
hourly rate plus an
extra percentage of
his/her base rate for
Team or Group
Short-term Incentives:The annual bonus
Executive Manager Supervisor
80% 30% Up to 15%
Fund-size Determination (3 formulas)
10% net income after deducting 5% average capital
invested in business
12.5% of the amount by which net income exceeds 6%
of shareholders’ equity
12% net earnings after deducting 6% net capital
corporate performance or
some combination of
a true individual incentive
Long-term Incentives: an encouragement
for the executives to stay with the company
accumulating the capital based on the
company’s long-term success.
Performance share unit plans (profit or
growth in earnings per share)
A restricted share unit plan
A deferred share unit plan
Relating strategy to executive
context when designing
a compensation plan
in the E-
the unsupervised nature of most
the assumption that incentives are
needed to motivate salespeople.
Straight salary makes it simple to switch
territories or to reassign salespeople, and it
can foster loyalty among the sales staff.
The main disadvantage is that pay isn’t
proportionate to results.This can de-
motivate potentially high performing
Pays salespeople for results, and only for
results; thus, they tend to attract high-
performing salespeople who see that effort
clearly leads to reward.
But Sales people tend to focus on making the
sale and on high volume items, and may
neglect non-selling duties like servicing small
accounts, cultivating dedicated customers and
pushing hard-to-sell items.
Most companies pay salespeople a combination of salary and
commission, usually with sizable salary component. Commission plans
give salespeople a floor to their earning, and still proved an incentive for
But they can become complicated, and misunderstandings can result.
Sales compensation in the E-commerce Era
For customer, they know what they want, or what they need.Therefore,
rapid low-cost purchases can be made over the Internet.
Face-to-face sales are now reserved for high-volume customers and
Merit pay or a merit raises any wage increase that is
awarded to an employee based on his or her
individual performance in workplace. However, it is
different from a bonus in that is usually represents a
continuing increment. Merit pay has both advocates
and is the project of much debate. Furthermore,
Advocates claim that only pay or other rewards tied
directly to performance can motivate improved
performance. In addition, merit pay detractors
present excellent reasons why merit pay can backfire.
Incentives for Professional Employees
As we can see from the textbook, professional employees are those
whose work is to involve the application of learned information to the
solution of the employer’s issues. For examples, they include lawyers,
doctors, economists, and engineers. Professionals reach their positions
through prolonged periods of formal study.
Profit sharing plan
A plan that gives employees a share in the profits of the company. Each
employee receives a percentage of those profits based on the company's
Employee stock ownership plan
Employee stock ownership plans can be used to keep plan participants
focused on company performance and share price appreciation.
gain-sharing plan is best showed as a system of management in which an
organization finds higher levels of performance through the involvement
and participation of its individuals.
Gains and resulting payouts are self-funded based on savings generated by
Gain-sharing commonly applies to a single site, or stand-alone organization.
Many plans often have a year-end reserve fund to account for deficit periods.
Employees often are involved with the design process.
A supporting employee involvement system is part of the plan in order to drive
₪ Pay for performance
₪ Link incentives to events
that make employees
engage in the organization
₪ Link incentives to
that the important to the
₪ Match incentives to culture
of the organization
₪ Keep incentives clear and
₪ Remembering the work
itself is the greatest
₪Lack of recognition is #1 cause of employee turnover
₪Personal & memorable
₪Improves employee’s attitude & productivity
₪Motivates high performers
₪Important communication tool
₪ Most management employees
receive short-term incentives
₪ Long-term incentives rewarded
to top employees in management
₪ Salary plans can be effective but is
not based on performance
₪ Commission plans motivate well
since it is Performance equals
₪ Profit-sharing plans, purchase
stock ownership plans, and gain
sharing plans are organization-
wide incentive plans
₪ Employee recognition plans
becoming more common as an
inexpensive way to keeping