Chapter 13

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Chapter 13

  1. 2. C HAPTER 13 C OMPENSATION FOR H IGH P ERFORMANCE
  2. 3. <ul><li>Why compensation is so important for establishing an effective sales force. </li></ul><ul><li>How to design, implement, and evaluate a compensation program. </li></ul><ul><li>The advantages and disadvantages involved in the three types of compensation plans: straight salary, straight commission, and combination salary. </li></ul><ul><li>The different types of sales force expenses and transportation. </li></ul><ul><li>The total compensation package and how to develop a proper compensation mix. </li></ul><ul><li>What is involved in designing a new compensation plan. </li></ul>L EARNING O BJECTIVES Suitable compensation is a must for companies striving for a satisfied and high-quality sales force. This chapter should help you understand:
  3. 4. Sales is one of the few jobs where you earn your money – every day.
  4. 5. Any type of sales organization can reward sales performance in three fundamental and interrelated ways: 1. Direct financial rewards. 2. Career advancement and personal development opportunities. 3. Nonfinancial compensation. C OMPENSATION I S M ORE T HAN M ONEY
  5. 6. A sales reward system is not the only means of motivating salespeople, but it is the most important. Measuring sales performance but not properly rewarding it severely limits the achievement level for salespeople.
  6. 7. P URPOSES OF C OMPENSATION <ul><ul><li>Connect individual with organization. </li></ul></ul><ul><ul><li>Influence work behavior. </li></ul></ul><ul><ul><li>Organizational choice. </li></ul></ul><ul><ul><li>Influence satisfaction. </li></ul></ul><ul><ul><li>Feedback. </li></ul></ul><ul><ul><li>Reinforcement. </li></ul></ul>
  7. 8. FIGURE 13.1 EFFECTS OF PAY DISSATISFACTION Absenteeism Grievances Job Dissatisfaction Turnover Performance
  8. 9. Individuals are satisfied with the rewards they receive in the following terms: <ul><ul><li>How much reward is actually received in relation to how much was expected to be received. </li></ul></ul><ul><ul><li>How the rewards received compare with what others received. </li></ul></ul><ul><ul><li>Whether the rewards lead to other rewards. </li></ul></ul><ul><ul><li>The level of extrinsic and intrinsic satisfaction from the rewards. </li></ul></ul><ul><ul><li>The value of different rewards. </li></ul></ul>
  9. 10. FIGURE 13.2 FORMAL COMPENSATION PROCESS
  10. 11. D ESIGNING A C OMPENSATION P ROGRAM Compensation plans should have general and specific objectives: <ul><ul><li>Attaining yearly sales volume and gross margins (general). </li></ul></ul><ul><ul><li>Attaining monthly sales volume and sales on specific products (specific). </li></ul></ul><ul><ul><li>Market penetration and exploiting the territory’s potential (general). </li></ul></ul>
  11. 12. Compensation plans should have general and specific objectives: continued <ul><ul><li>Call management and development of potential in key accounts as well as development of new accounts (specific). </li></ul></ul><ul><ul><li>Introduction of new products (specific). </li></ul></ul>
  12. 13. D ETERMINE M AJOR C OMPENSATION F ACTORS <ul><ul><li>Wage level. </li></ul></ul><ul><ul><li>Wage structure. </li></ul></ul><ul><ul><li>Individual wage. </li></ul></ul><ul><ul><li>Administration procedures. </li></ul></ul>
  13. 14. I MPLEMENT L ONG AND S HORT- R ANGE C OMPENSATION P ROGRAMS Communicate compensation policy.
  14. 15. <ul><ul><li>1. The salesperson needs to know what part the sales force is expected to take in attaining the organization’s goals. </li></ul></ul><ul><ul><li>2. The salesperson’s role in achieving sales objectives should be thoroughly discussed. </li></ul></ul><ul><ul><li>3. The limitations and weaknesses of the compensation program should not be hidden from the salesperson. </li></ul></ul>The compensation message should contain several elements:
  15. 16. R ELATE R EWARDS TO P ERFORMANCE Rewards and promotions should be tied directly to the salesperson’s individual contributions to sales force objectives.
  16. 17. M EASUREMENT OF P ERFORMANCE Companies need to regularly measure individual, sales group, and organizational performance to determine whether the compensation program’s objectives are being met.
  17. 18. A PPRAISAL AND R ECYCLING <ul><li>Key questions in terms of the success of a plan: </li></ul><ul><ul><li>Are the compensation objectives being met? </li></ul></ul><ul><ul><li>Is the firm able to attract new salespeople with this plan? </li></ul></ul><ul><ul><li>What is the relationship of compensation to turnover? </li></ul></ul>
  18. 19. P ERFORMANCE- B ASED P AY: P REREQUISITES AND O BSTACLES If pay is going to influence salespeople’s performance, the following factors are important: <ul><ul><li>The salesperson must perceive a close relationship between performance and pay. </li></ul></ul><ul><ul><li>Pay must be important to the salesperson. </li></ul></ul>
  19. 20. If pay is going to influence salespeople’s performance, the following factors are important: continued <ul><ul><li>The salesperson must be able to perform what is necessary to achieve the pay. </li></ul></ul><ul><ul><li>The salesperson must know what is expected. </li></ul></ul><ul><ul><li>Performance must be measurable, and its evaluation must be fair. </li></ul></ul>
  20. 21. For these conditions to exist, the organization must do its part, which means: <ul><ul><li>Sales territories must have equal potential. </li></ul></ul><ul><ul><li>The salesperson must know and understand how the pay program works. </li></ul></ul><ul><ul><li>The performance appraisal system must be free from potential bias. </li></ul></ul><ul><ul><li>Managers must be trained in giving feedback. </li></ul></ul>
  21. 22. For these conditions to exist, the organization must do its part, which means: continued <ul><ul><li>The amount of money set aside for merit or incentive pay must be sufficiently large to make extra effort worthwhile. </li></ul></ul><ul><ul><li>The job evaluation must be valid so the overall salary relationships are equitable. </li></ul></ul><ul><ul><li>The sales culture must be such that the high performers are encouraged rather than discouraged by their peers. </li></ul></ul>
  22. 23. FIGURE 13.3 TYPICAL COMPENSATION PLANS
  23. 24. S TRAIGHT S ALARY T YPES OF C OMPENSATION P LANS Of all the compensation plans, the straight salary plan is the simplest: The salesperson is paid a specific dollar amount at regular intervals.
  24. 25. TABLE 13.1 PROFILE OF A STRAIGHT SALARY COMPANY <ul><li>Dominant market share in mature, stable industry </li></ul><ul><li>Highly defined and stable customer base </li></ul><ul><li>Strongly centralized and closely managed selling effort </li></ul><ul><li>Significant number of house accounts </li></ul><ul><li>Highly team-oriented sales effort </li></ul><ul><li>Service versus selling emphasis </li></ul>
  25. 26. STRAIGHT COMMISSION PLANS <ul><li>Two basic types of commission plans exist: </li></ul><ul><ul><li>Straight commission. </li></ul></ul><ul><ul><li>Draw against commission. </li></ul></ul>The straight commission plan is a complete incentive plan. If salespeople do not sell anything, they do not earn anything.
  26. 27. Drawing Accounts Drawing accounts combine the incentive of a commission plan with the security of a fixed income.
  27. 28. Situations where commission plans can be used: <ul><ul><li>Little nonselling, missionary work involved. </li></ul></ul><ul><ul><li>The company cannot afford to pay a salary and wants selling costs to be directly related to sales. </li></ul></ul><ul><ul><li>The company uses independent contractors and part-timers. </li></ul></ul>
  28. 29. TABLE 13.2 PROFILE OF A COMMISSION PLAN COMPANY <ul><li>Low barriers to entry into the job </li></ul><ul><li>Limited corporate cash resources </li></ul><ul><li>Small entrant into an emerging market or market segment </li></ul><ul><li>High risk reward sales force culture </li></ul><ul><li>Undefined market opportunity or customer base </li></ul><ul><li>Inability to set quotas or other performance criteria </li></ul><ul><li>Volume-oriented business strategy </li></ul>
  29. 30. H OW TO C ALCULATE I NCENTIVES <ul><ul><li>Factors on which to base quotas: </li></ul></ul><ul><ul><li>The past year’s sales. </li></ul></ul><ul><ul><li>The sales force’s forecast of the coming year’s sales. </li></ul></ul><ul><ul><li>Corporate marketing targets. </li></ul></ul><ul><ul><li>A specific net profit target. </li></ul></ul><ul><ul><li>Geographic market potentials. </li></ul></ul>
  30. 31. Consider Profitable Products <ul><ul><li>The profitable products can carry a higher commission or incentive reward. </li></ul></ul><ul><ul><li>The more profitable products can be weighted so one of them counts as much as two or three of the routine products. </li></ul></ul><ul><ul><li>Separate quotas can be set for each product line. </li></ul></ul><ul><ul><li>Salespeople can be paid on the basis of their individual contributions to profit. </li></ul></ul>
  31. 32. Who Should Participate? <ul><ul><li>Split credit </li></ul></ul><ul><ul><li>Support people </li></ul></ul>The question of who gets incentive payments has two aspects:
  32. 33. <ul><ul><li>Salary and commission </li></ul></ul><ul><ul><li>Salary and bonus: individual or group bonus </li></ul></ul><ul><ul><li>Salary, commission, and bonus: individual or group bonus </li></ul></ul>Numerous types of combination salary plans exist. The more popular plans are:
  33. 34. <ul><ul><li>Nonproductivity bonus </li></ul></ul><ul><ul><li>Productivity bonus </li></ul></ul>Bonus: Individual or Group
  34. 35. Sales contests are special sales programs offering salespeople incentives to achieve short-term work goals.
  35. 36. TABLE 13.3 PROFILE OF A COMBINATION-PAY PLAN COMPANY <ul><li>Established company with growth potential, many products, and active competition </li></ul><ul><li>Need to direct a complex set of behaviors </li></ul><ul><li>Need for a variable pay component that will ensure top performers are rewarded commensurately </li></ul>
  36. 37. <ul><ul><li>To motivate the sales force. </li></ul></ul><ul><ul><li>To attract and hold good people. </li></ul></ul><ul><ul><li>To direct the sales force efforts in a profitable direction. </li></ul></ul>When to Use a Combination Salary Plan
  37. 38. S ALES F ORCE E XPENSES Expense plans have the same basic objectives as a compensation system, that is, to motivate the salesperson’s behavior in terms of membership, performance, and attendance.
  38. 39. <ul><ul><li>Fair for the salesperson. </li></ul></ul><ul><ul><li>Fair for the company. </li></ul></ul><ul><ul><li>Cost effective. </li></ul></ul><ul><ul><li>Understandable. </li></ul></ul><ul><ul><li>Convenient. </li></ul></ul>Several criteria for an effective expense plan:
  39. 40. <ul><ul><li>The company pays all expenses. </li></ul></ul><ul><ul><li>The salesperson pays all expenses. </li></ul></ul><ul><ul><li>The company partially pays expenses. </li></ul></ul>Types of Expense Plans:
  40. 41. <ul><ul><li>Benefits that are required legally </li></ul></ul><ul><ul><li>Pension and retirement programs </li></ul></ul><ul><ul><li>Nonworking time </li></ul></ul><ul><ul><li>Insurance </li></ul></ul><ul><ul><li>Miscellaneous services </li></ul></ul>F RINGE B ENEFITS Five basic classifications of salespeople’s benefits and services are:
  41. 42. F ACTORS TO C ONSIDER W HEN D EVELOPING A N EW P LAN <ul><ul><li>Companies with a sales force on a straight salary may find it highly advantageous to move to a salary-plus-incentive plan. </li></ul></ul><ul><ul><li>Companies with a sales force on straight commission may sometimes adopt a salary-plus-incentive plan to gain more control over the sales force. </li></ul></ul>
  42. 43. Information to Collect <ul><ul><li>Competitor’s plans </li></ul></ul><ul><ul><li>Product profitability </li></ul></ul><ul><ul><li>Sales force activities </li></ul></ul>
  43. 44. TABLE 13.5 KEY INDICATORS FOR POSSIBLE SALES COMPENSATION PROBLEMS <ul><li>Declining revenues </li></ul><ul><li>Declining market share </li></ul><ul><li>Declining profitability </li></ul><ul><li>Insufficient premier accounts </li></ul><ul><li>High sales force turnover </li></ul><ul><li>Uneven sales force performance </li></ul><ul><li>Inadequate servicing of customers </li></ul><ul><li>Concentrating on easy-to-sell and unprofitable products </li></ul>
  44. 45. Pretest the Plan <ul><ul><li>In boom times. </li></ul></ul><ul><ul><li>During a recession. </li></ul></ul><ul><ul><li>If a runaway market occurs for one product. </li></ul></ul><ul><ul><li>If old products are dropped or new ones added. </li></ul></ul>
  45. 46. T HE B OTTOM L INE Compensation given for certain behaviors have major influences on a sales force’s culture. Compensation is one part of the salesperson’s behavioral model. Money can be an extremely powerful performance motivator if used with the right compensation program. Under a combination salary plan, a proportion of the salesperson’s total pay is guaranteed, and the rest is incentive pay. Daily expenses of field salespeople are a major part of the sales force budget.
  46. 47. When developing a new pay plan, managers must consider the nature of the job, the market, channels of distribution, the caliber of the salespeople, a company’s financial condition, and suggestions made by sales personnel. The sales manager can better “sell” the job to prospective salespeople by determining the dollar value of fringe benefits and presenting pay and benefits as a total compensation package. T HE B OTTOM L INE

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