Compensating the Sales force

Meaning
• Compensation is the amount received by salespeople in exchange of work and service
performed by them. Compensation in the form of salaries or commissions enable the
sales people to meet their needs.
• A proper compensation structure structure not only retains competent and efficient
sales personnel- but also attract other outside the sales organization.
• A good compensation plan should consider objectives from the company’s and
salespeople’s viewpoint

Objectives of compensation plan from the company’s viewpoint

• To attract, retain, and motivate competent salespeople
• To control salespeople’s activities
• To be competitive, yet economical: It is difficult to balance these two
objectives
• To be flexible to adapt to new products, changing markets, and differing
territory sales potentials

Objectives of Compensation Plan from Salesperson’s Viewpoint

• To have both regular and incentive income
• Regular income by fixed salary to take care of living expenses
• Incentive income for above average performance
• To have a simple plan, for easy understanding
• This is in conflict with the objective of flexibility
• To have a fair payment plan
• Fair or just payment to all salespeople is ensured by selecting measurable and
controllable factors

Designing an Effective Sales Compensation Plan

• Designing a new compensation plan or revising an existing plan consists of the
following steps:
• Examine job descriptions
• Set up specific objectives for salespeople
• Decide levels of pay / compensation
• Develop the compensation mix
• Decide indirect payment plan or fringe benefits
• Pretest, administer, and evaluate the plan
• We shall examine these steps briefly

Examine Job Descriptions

• Separate job descriptions are required for different sales positions or jobs – E.G.
missionary salesperson, senior salesperson, key account executive
• Each job description should include responsibilities and key performance standards,
to decide how much to pay

Set up Specific Objectives for Salespeople

• These are derived from company’s sales and marketing objectives
 • Salespeople should have some control on the objectives – E.G. number of sales calls
made
• Objectives should be measurable. E.G. sales volume, selling expenses

Develop the Compensation Mix

• Widely used elements of compensation mix are:
(1) salaries,
(2) commissions,
(3) bonuses,
(4) fringe benefits (or perquisites)
• Expense allowances or reimbursements like travel, lodging, etc are not included
• Basic types of compensation plans are:
• Straight salary
• Straight commission
• Combination of salary, commission, and / or bonus
• 68 percent companies use combination plan and balance 32 percent firms use straight
salary or straight commission
• We shall briefly examine above compensation plans

Straight – Salary Plan

• Characteristics:
• 100 percent compensation is salary, which is a fixed component
• No concern for sales performance or salesperson’s efforts
• This plan is suitable for sales trainees, missionary salespeople, and when a
company wants to introduce a new product or enter a new territory
• Advantages:
• Salespeople get secured income to cover living expenses
• Salespeople willing to perform non-selling activities like payment collection,
report writing
• Simple to administer
• Disadvantages:
• No financial incentive to salespeople for more efforts and better performance.
Hence, superior performance may not be achieved
• May be a burden for new and loss-making firms
• Usability:
• Where several salesmen have to co-operate for a sale
• In seasonal product market
• A new market is to be explored
• New salesmen are employed

Straight – Commission (or Commission Only) Plan

• Characteristics:
• It is opposite of straight-salary plan
• Most popular commission base is sales volume or profitability
• Commission rate is a percentage of sales or gross profit
• This plan is generally used by real estate, insurance, and direct-sales (or
network marketing) industries
• Advantages:
 • Strong financial incentive attracts high performance, removes ineffective
salespeople and improves results
• Controls selling costs and requires less supervision
• Disadvantages:
• Focus is on sales and not on customer relationship
• Salespeople may pay less attention to non-selling activities
• Usability:
• When high incentives are required to achieve sufficient sales.
• When the firm cannot control the activities of the salesmen.

Combination Plan
• Characteristics:
• Combines straight salary & straight commission plan
• Four types of combination plans used by companies:
1) Salary plus commission: suitable for getting improved sales and
customer service
2) Salary plus bonus: a bonus is a lump sum, single payment, for
achieving short-term objectives. This plan is used for rewarding team
performance
3) Salary plus commission plus bonus: suitable for increasing sales,
controlling sales force activities, and achieving short-term goals. Also
suitable for selling seasonal products like fans
4) Commission plus bonus: Not popular. Used for team selling activities
for selling to major customers
• Advantages:
• Flexible to reward and control sales force activities
• Security for living costs and incentives for superior performance for
salespeople
• Rewards specific sales performance
• Different plans for different sales positions / jobs
• Disadvantages:
• Complex and difficult to administer
• May not achieve objectives if not properly planned, implemented and
understood

Fringe Benefits
Indirect payment plan, also called fringe benefits or perquisites, help in attracting and
retaining people, but have now come under government tax in India.
Time Organization dues
Holidays Trade association
Vacations Civic clubs
Sick leave Country clubs
Personal leave Professional association
Sabbaticals Pregnancy leaves

Retirement Programs Miscellaneous

Social security(mandatory) Automobile
Pension plan Use of vacation spot
 Profit sharing Dry cleaning and laundry
Salary reduction plans parking
Lunches
Insurance and medical Legal services
Physical examination financial counseling
Medical payments and
Reimbursements Career counseling
Hospitalization insurance Payment of moving expenses
Cancer insurance retirement counseling
Accident insurance child care payments
Life insurance credit unions
Company social events
Company sports tournaments

Pre-test, Administer, and Evaluate Compensation Plan

• Pre-testing the new / proposed Compensation Plan:
• Companies pretest a new (or proposed) plan, before adoption
• Either it is simulated on a computer, or pretested at one / more branches for 6-
12 months
• It should involve all concerned people
• Administering the new compensation plan
• Announce the plan in advance
• Explain the new plan and reasons for changing the previous plan
• Outsource administration if plans are changed frequently
• Evaluating the new compensation plan
• Find if objectives of the plan are achieved
• Some companies audit compensation plans

Complete Pay Program

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Components of Compensation System

Compensation System

Indirect Compensation Direct Compensation

1. Projection Program
 Medical Insurance
 Life Insurance
 Pension Plans
2. Pay for Time not for Work
 Vocational Holidays
 Sick Leaves
 Jury duty
3. Services & Prerequisite
 Car
 Low Cost Meal

1. Incentive Pay
 Bonus
 Commission
 Profit Sharing
2. Deferred Pay
 Saving Plans
 Stock Purchase
 Annuity
3. Base Pay
 Salary
 Wages
4. Merit Pay