Sales Force Management

*

11

Salesperson Compensation and Incentives

11-*

Great Compensation Plans

Source: HR Chally Group (2009).

Calibrate with firm’s overall profit objectives

Motivate to meet tactical sales and strategic objectives

Tie to measurable criteria representing

tactical/ strategic objectives

Include fixed and variable elements

Keep the plan simple yet thorough

Reward securing, building, maintaining long-term relationships

with profitable customers

Consider salespeople a mission-critical asset

Reward salesperson efforts according to worth (contribution)

Clearly differentiate payouts for top, average, and

inadequate performers

Distinguish between performing tasks and achieving results

Avoid direct competition between salespeople

Reduce role conflict, ambiguity, and stress

Generally don’t change plan too

quickly

When the time is right to change plan quickly, do so

Permit salespeople with above-adequate performance

to seek desired compensation potential w/out penalty

Acid test is how the plan impacts the customer marketplace

11-*

• Discuss advantages/limitations of straight salary, straight commission, combination plans
• Explain how/why a bonus might be used as an incentive
• Understand effective use of sales contests and their potential pitfalls
• Identify key nonfinancial rewards, why they might be important
• Recognize key issues surrounding expense accounts
• Discuss making decisions on mix and level of compensation

11-*

Key Compensation Questions

• Which compensation method is most appropriate for motivating specific activities in specific situations?
• How much of the total compensation should be earned through incentives?
• What is the best mix of financial and nonfinancial compensation and incentives?

11-*

Key Definitions

• Salary – a fixed sum of money paid at regular intervals
• Incentive Payments
• Commission – a payment based on short-term results, usually a dollar or unit sales volume
• Bonus – a payment made at management’s discretion for achieving or surpassing some set level of performance
• Quota - often the minimum requirement for a salesperson to earn a bonus
• Sales contests – encourage extra effort aimed at specific short-term objectives
• Benefits - medical and disability insurance, life insurance, retirement plan
• Non-financial incentives - opportunities for promotion or various types of recognition for performance

111-*

11.1

Components and

objectives of financial

compensation plans

11-*

111-*

11.2a

Compensation Methods for Salespeople

11-*

111-*

11.2b

Compensation Methods for Salespeople

11-*

111-*

11.2c

Compensation Methods for Salespeople

11-*

11-*

Combination Plans

• Offer a base salary plus some proportion of incentive pay
• Most popular form of compensation
• Well-suited for relationship selling by compensating for nonselling activities while providing incentives to motivate sales

11-*

Design Questions for Combination Plans

• Appropriate size of incentive relative to base salary?
• Should ceiling be imposed on incentive earnings?
• When should the sale be credited?
• Should team incentives be used? How?
• How often should incentive payments be made?

11-*

11.1 Tailor Compensation Packages to Company Needs

• Research compensation structures
• Define objectives
• Develop plan
• Type
• Target pay
• Results to reward
• Pay formula
• Test the plan on a spreadsheet
• Create an easily understood document

11-*

Sales Contests

• Short-term incentive programs to accomplish specific objectives
• Winners receive prizes, recognition, sense of accomplishment
• Successful contests require:
• Clearly defined, specific objectives
• An exciting theme
• Reasonable probability of rewards for all
• Attractive rewards
• Promotion and follow-through

11-*

11.2 Structuring Effective Sales Contests

• Prize structure
• Prize value
• Unique
• Rank-ordered
• Number of prize winners
• > 1
• Not so large incentive is lessened
• Contest structure will be unique for each situation

11-*

Criticisms of Sales Contests

• May not produce lasting improvements
• Salespeople may borrow sales from another period to increase sales during contest period
• Poorly administered contests can hurt cohesiveness and morale

11-*

Nonfinancial Rewards

• Recognition makes peers and superiors aware of outstanding performance
• Effective recognition programs:
• Offer everyone a reasonable chance of winning
• Recognize best performers across several dimensions

111-*

Guidelines for effective formal recognition programs

11.3

11-*

11-*

Expense Accounts

• Often, field selling expenses may be $25K or more per salesperson
• Types
• Direct reimbursement – of all “allowable and reasonable” expenses
• Limited reimbursement – sets expense limits by-item or provides predetermined lump sum
• No reimbursement – salespeople covers all expenses; usually combined with higher total compensation

11-*

Making Programs Work

• Effective?
• Too complex?
• Well-matched to current conditions?
• Key
• Assess relationship selling objectives
• Determine job performance aspects to reward

11-*

11.3 Rewarding A While Hoping for B?

• Straight commission may work for transactional selling, but…
• Relationship selling is more complex; requires
• Operating within a team
• Securing, building, long-term relationship with profitable customers
• Organizations must reward these additional behaviors

Source: Steven Kerr, “On the Folly of Rewarding A, while Hoping for B,” Academy of Management Executive, 9:1 (1995), pp. 7–14.

11-*

Assessing Relationship Selling Objectives

• How are salespeople spending time?
• Do most time-intensive tasks match organization’s goals?
• If not, may be time to adjust quotas to change motivations

11-*

11.4 Compensation Changes are Tricky

• Compensation changes can be detrimental
• Change to a less performance sensitive scheme
• Frequent changes
• Compensation changes should be made
• When current scheme contradicts company objectives
• When changes will add value

111-*

11.4

Sales activities and performance outcomes that might be encouraged by

compensation and incentive programs

11-*

11-*

Mix and Compensation Level

• Maximize compensation plan’s motivational value
• Be fair
• Remain consistent with firm’s resource capabilities

McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Mark W. Johnston | Greg W. Marshall