Sales Compensation
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salescompensations2020.pptx
SIE 415/515 April 7, 2020 A wise person should have money in their head, but not in their heart. – Jonathan Swift
Sales
Compensation
Administration – Remaining Assignments
H/W 5 will be assigned today and due 16 April
The Proposal Project: all due on 30 April
PPT charts (same as you would present) with annotated notes
Marketing Media (Ex business cards, brochures, etc) – softcopy or pictures
Written Proposal
Website
515 Project due 5 May
H/W 6 will be assigned 21 April and will be due 30 April
Discussion topics
We will give the final exam via D2L (same process as with the Mid-Term – tentatively the exam will be available on D2L from May 9 (Sat AM) – through May 12 (Tues PM)
Note: You will have until 6 May to elect to change your grading to Pass/Fail
Today’s Topic
Sales Compensation
Reading: Sales Compensation Handbook, Chapter 11, pp. 140-151 (see D2L Content)
HW #5, Sales Compensation due April 16th
Sales Compensation Plans
What are objectives of a sales compensation plan?
The major objective is to motivate the sales force to perform in a manner consistent with the objectives of the company…
Sales Compensation Plans
Other Objectives:
Motivate sales force by linking achievement to monetary reward
Attract and retain successful salespeople
Provide regularity of income
Reward outstanding performance
Allow selling costs to fluctuate in line with changes in sales revenue
Major Types of Sales Compensation Plans
Salary-Only
Commission-Only
Salary Plus Commission
Salary Plus Bonus
Salary Plus Commission and bonus
S
C
B
Salary-Only Plans
Appropriate in some situations:
Highly technical sales where salesperson has little direct influence on the sale, salesperson becomes more of a coordinator
Extremely large, infrequent sales, such as commercial aircraft
Demand-generation sales, such as a focus on customer education rather than the sale
Volatile or unpredictable markets
New or transitioning sales professionals
Commission and Bonus Plans Two Philosophies
Cost-of-Sales
Sales people receive % (commission) regardless of how much they earn relative to other employees
Compensation cost as a % of revenue
Appropriate when sales professional “owns” the customer
Cost-of-Labor
Sales people are paid a pre-determined amount (bonus) for reaching a set goal
Sales people have a defined value in market, Company pays what the market demands
Often use goals or quotas to equalize territories
Appropriate when company “owns” the customer
Commission-Only Plans
Commission: a percentage of a sale in dollars
Relatively uncommon in technology sales, where success depends on numerous people
Cost of sales philosophy prevalent
May be appropriate when:
Sales representatives’ performance can be measured accurately on short-term basis
Short sales cycle
Few outside influences on sales success
No significant non-sales activities
Minimal cyclicality or seasonality
Limited investment in salespeople – salespeople may be agents (eg independent contractors)
Commission-Only Plans
Benefits
Sales cost can expand and contract with business base
Can motivate high performers
Can weed out low performers quickly
Easy to administer
Weaknesses
Sales team will migrate to maximize return with minimum effort which may or may not be in the best interest of the company
Reduces management ability to direct sales force
No motivations for Sales People to perform non-sales related jobs
Can tend to reward sales people at a higher level based on best territory and on-going business verses opening up new markets
Fosters minimal company loyalty
Difficult for new sales people to earn adequate $$ when first starting out
Constant Rate Commission Plan
Progressive Rate Commission Plan
Regressive Rate Commission Plan
Combination Progressive/Regressive Rate Plan
Salary Plus Commission Plans
Cost of sales philosophy prevalent
May be appropriate when:
Barriers to entry require a level of guaranteed income
Sales results are influenced by efforts of salespeople
Company and salespeople share risk
Company needs to maintain some control over non-selling activities
Salary Plus Commission Plans, continued
Relative weight of salary vs. commission influenced by:
Company’s philosophy on risk
Prominence of the sales job
Prevailing market pay practices
What can be negotiated
Salary Plus Bonus Plans
Bonus: all or a portion of a predetermined dollar amount for achieving an objective or quota
Cost-of-labor philosophy is prevalent
May be appropriate when:
Salespeople have lower degree of influence on actual sales, example; they are part of a team
Important objectives exist that cannot be measured or motivated by volume-only commission plans
Sales territories are unequal in sales potential
Many times is difficult and complicated to manage
Setting the proper goal(s) can be an inexact process
Combination Plans
Salary plus commission and bonus incentives:
Incorporate both cost-of-labor and cost-of-sales philosophies
Good for companies in established markets that are not yet fully mature
Are very flexible, but can lead to higher costs for the company if not properly managed
Contrasting Commissions and Bonuses
http://www.youtube.com/?v=Vqr724m70IM&feature=plcp
Note: “Spiff” = a bonus paid to an employee for an action or accomplishment in a sales capacity
Sales Compensation Methods
In the past, many companies used homegrown, disjointed methods for managing sales compensation
Cumbersome, complex, time-consuming
Lack flexibility
Create confusion and conflict
Difficult to share, collaborate
Error-prone
Limited reporting abilities
Software packages and on-demand solutions have become much more effective and are readily available
Sales Compensation Homework
You are the sales manager of the Sales Department for the Epic Widget Manufacturing Company
The company’s senior management has asked your department to sell the following products during the upcoming fiscal year:
QTY PRODUCT PRICE PER WIDGET
100 Large Widgets $45,000
150 Medium Widgets $35,000
225 Small Widgets $10,000
The company is willing to spend up to 10% of total gross sales on total sales force compensation
The sales force professionals consist of:
3 Senior Sales Representatives
5 Regular Sales Representatives
2 Sales Trainees
Sales Compensation Homework
Using the Widgets spreadsheet on D2L Content (follows HW #5), design a sales compensation plan for Widget Manufacturing’s sales force
For each type of sales professional, include plans for:
Base salary
Commission rate (constant, progressive, regressive) for each of the three categories of widgets
Any notes and explanations regarding your compensation plan can go into the spreadsheet just under the existing material
Working in a team of 2 – 3 is fine, but each must create and submit an original spreadsheet
Sales Compensation Homework
Effective Sales Compensation plans have many facets and require careful planning
HW #5: You are allowed to work in small groups, but each student must create their own spreadsheet and submit it to the D2L Dropbox by April 16th
Complete the reading on D2L re: Sales Compensation
Today’s Conclusion
http://www.compensationcafe.com/sales-compensation/
http://www.vapartners.ca/b2b-sales-compensation-plans-for-startups/
Colt, Stockton B., The Sales Compensation Handbook. AMACOM; 2nd edition (July 1, 1998).
Resources
Constant Rate
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
$0$500$1,000$1,500$2,000$2,500$3,000$3,500
Performance (in Thousands)
Earnings
Progressive Rate
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
$80,000
$90,000
$0$500$1,000$1,500$2,000$2,500$3,000
Performance (in thousands)
Earnings
Regressive Rate
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$0$500$1,000$1,500$2,000$2,500$3,000
Performance (in thousands)
Earnings
Combination Rate
$0
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
$0$500$1,000$1,500$2,000$2,500$3,000
Performance (in thousands)
Earnings
