13. compensating sales personnel

24.01.07 R. Sunitha , INC
Compensating sales
personnel
• 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

Introductio
n
• What is compensation?
• How it motivates sales
personnel?
• How to formulate it?

Objectives of
compensation plans
1. Balancing the needs of sales
personnel
a) Secure income and security
b) Desire for personal recognition
and status
c) Reinforcement for doing good
work
2. Managing effects of time

Characteristics of
compensation plans
1. Fairness to all
2. Flexibility
3. Provide incentive &
motivation
4. Lead to direction of efforts
towards company objectives
5. Ease of administration and
comprehension

Types of
compensation plans
I. Straight salary plan
II. Straight commission plan
III.Combination salary plan

Straight salary
plan
• When it is suitable?
–Prospecting is the main
activity
–Team selling
–Continuing existing relations
–Technical products are dealt

Straight salary plan -
Advantages
1. Regular, fixed, guaranteed income
2. Reduces cost of organization
3. Easy to administer
4. Switching and reassigning
territories is easier as there won’t
be any resistance

Straight salary plan –
Disadvantages
1. Sales person need not put in
extra effort
2. Lack of uniformity in selling
products (sells only least effort
products)
3. No distinction between
efficiency and inefficiency

Straight
commission plan
• A fixed % of sales volume is fixed
as compensation
• Serves as primary mode of payment
in the initial stages
• Calculated either on gross sales or
net profits
• Sales person gets eligibility to get
commission only after attaining the
quota.

Straight commission
plan – Advantages
1. Easily acceptable by sales persons
as it depends on their
performance
2. Measures performance
3. As the sales volume increases, per
unit sales expenses decreases
4. Helps in setting targets
5. Motivates sales personnel

Straight commission
plan – Disadvantages
1. No focus on non selling activities
2. Focus only on increase in sales
volume not in profit
3. Customer service may be overlooked
4. Regular transfers and redesigning the
territories is difficult
5. Differences among compensation
may lead to conflicts between sales
personnel

Straight commission
6. Income of sales person depends on
economy
7. Excessive turn over
8. Sales people focus on selling them
selves rather than the products
9. No focus on building long term
relation ship with the customers.

Combination salary
plan
• Salary + commission + incentives
• Suitable for organization with
varied products and divisions
• More flexible (80 – 20, 70 – 30, 60 –
40)

Combination salary
plan – Advantages
1. Regular incentives motivates sales
people
2. Advantages of both fixed salary
and variable income
3. Non selling activities are not
overlooked
4. Opportunity to earn more
5. Preferred by younger sales people

Combination salary
1. Lot of calculation and
administration
2. Administering costs are high
3. External environment is to be
regularly analyzed to modify the
compensation plan
4. Greater monitoring and control is
required

Designing compensation
plans
• It should meet the needs of
organization
• Should attract and retain
employees
• Should be viewed as a tool to
derive desired sales volume but not
as a control element

plans – main factors to be
considered
• Specific objectives
• Levels of sales force
compensation
• Method of compensation

• Type of industry and
organization
• Its position in the industry
• Awareness of company
objectives
plans – other aspects

1. Determine specific objectives
2. Establish desired levels of
earnings
3. Methods of payment
Designing
compensation plans

Determine specific
objectives
• Need of specific objectives
• Balancing the different objectives is
needed to avoid conflicts
• Following objectives must be
achieved to make compensation
plan a successful one
1. Income and security
2. Equity
3. Flexibility
4. Economy

Establish desired
levels of earnings
• Pay structure offered by competitors
• Industry average
• Type of selling activities
• Experience and ability of sales
personnel
• Correlation with nature of job
• Exceptional candidates can be
offered exceptional compensation

Methods of payment
• Depends on the analysis of selling
activities
– Develop customer relations
– Prospecting time
– Negotiating price
– Training and educating etc.

Compensation plan
generally includes:
a. Salary
b. Commission
c. Bonuses
a. Qualitative basis
b. Quantitative basis
d. Employee stock option
e. Special prizes
f. Drawing account (fixed rate of interest is charged)
g. Special cash incentives
h. Non cash incentives
i. Fringe benefits
j. Sales force expenses

Implementing
compensation plans
• Sales manager should know the
tasks which are to be compensated
• Compensation to be fixed based on
the task
• Successful implementation requires
the following
1. Pre testing
2. Periodic monitoring

Pre testing
• Probable sales at both extremes
and its compensation is
determined
• Cost of implementation
• Implemented in s select territory
• While pre testing extreme variables
are to be considered

Periodic
monitoring
• Measurement criteria to be
developed
• Monitoring must include non
selling activities also
• Authority to monitor should be
decentralized

Sales contests
• Useful in short term
• Primary objective is to attain new
customers
• Increasing sales volume per call is
another objective
• Travel, special prizes, privilege
awards and incentives are given on
success
• Mainly conducted for sales force

Planning sales
contests
• Appropriate theme, format to
achieve desired objectives, timing,
no. of awards etc.
• Proper planning should be done
• Should be in tune with
organizational objectives
• Tempo to be continued through
out the period of contest

Evaluating sales
contests
• When to be evaluated?
(before/during/after)
• Effect on organization and sales force
to be measured
• Impact of sales contests
– On organization
– On sales force
– On customers
• Used as a promotional tool

Process
1. Identifying the effect of sales
contest on various functions
2. Rank aspects according to the
impact
3. Impact of sales contest
4. Probable situation without sales
contest should be taken into view

Sales force
expenses
• Size of sales force
• Methods of compensation
• What are the expenses sales
persons meets with?

Expense plans
• It should mention the type of
expenses that are to be allowed
• Good plan must be:
– Beneficial to sales person
– Beneficial to organization
– Easy to administer
– Easy to understand

Types of expense
plans
1. Company pays all expenses
2. Sales person pays all expenses
3. Company partially pays
expenses
• Fixed amount and fixed
time

Fringe benefits
• Indirect compensation
• Not directly linked to money
• Elements:
– Social security
– Pension and retirement programs
– Insurance
– Holidays
– Time off with pay
– Other benefits

Elements in fringe
benefits
1. Benefits provided under the
legal framework
2. Pension, PF, gratuity
3. Insurance
4. Reimbursement for vacations,
sick and medical leaves
5. Miscellaneous

SOCIAL SECURITY
1. Salaries are adjusted on the
basis of their location (urban,
rural, metro)
2. Higher amounts are Disbursed
at the time of lay off
3. Income security
4. Up gradation of skills

Pension and
retirement programs
• Differed payment programs
• Successors will be provided
with job in the case of death
• Eligible for old-age treatment,
subsidized by the organization

Insurance
• Group insurance applicable to
family members also
• Medical and accidental
insurance

Holidays
• Encashment of earned leaves
• Company pays annual holiday
trip

Time off with pay
• Paid leave for training / higher
studies
• Maternity leave
• Leave to attend seminars or
present papers

Other benefits
• Company car
• Interest free loans
• Subsidized housing and food
• Mobile telephones
• Customer entertainment expenses
• Others
– Flexi time
– Work from home etc.

Advantages of
fringe benefits
1. Largely Non taxable
2. Educational, vacation allowances
and group insurance are highly
valued by employees than
monetary benefit
3. Sense of security to sales
personnel

13. compensating sales personnel

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