11 salesperson compensation and incentives mcgraw-hill/irwincopyright © 2009 by the mcgraw-hill...
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11
Salesperson Compensation and Incentives
McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
11-2
Great Compensation Plans
Source: HR Chally Group (2005), Principles of Sales Compensation. Dayton, OH: HR Chally Group.
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
relationshipswith profitable
customers
Consider salespeople a
mission-critical asset
Reward salesperson
efforts according to worth
(contribution)
Clearly differentiate
payouts for top, average, andinadequate performers
Distinguish between
performing tasks and achieving
results
Avoid direct competition
between salespeople
Reduce role conflict,
ambiguity, and stress
Generally don’t change
plan tooquickly
When the time is right to
change plan quickly, do so
Permit salespeople with above-adequate
performanceto seek desired compensation potential w/out
penalty
Acid test is how the plan impacts the customer
marketplace
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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
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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?
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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
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11.1Components andobjectives of
financialcompensation plans
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11.2a
Compensation Methods for Salespeople
No incentive
Requires close supervision
Selling expenses remain same during sales declines
Maximum security
Control over reps
Easy to administer
Predictable expenses
New sales reps
New sales territories
Many required nonselling activities
Straight Salary
DisadvantagesAdvantagesEspecially Useful For
Compensation Method
No incentive
Requires close supervision
Selling expenses remain same during sales declines
Maximum security
Control over reps
Easy to administer
Predictable expenses
New sales reps
New sales territories
Many required nonselling activities
Straight Salary
DisadvantagesAdvantagesEspecially Useful For
Compensation Method
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11.2bCompensation Methods for Salespeople
Little security
Little control over reps
Reps may provide inadequate service to smaller accounts
Selling costs less predictable
Maximum incentive
Managers can encourage sales of certain items
Selling expenses relate directly to selling resources
Highly aggressive selling
Minimal required nonselling tasks
When company can’t closely control sales force
Straight Commission
DisadvantagesAdvantagesEspecially Useful For
Compensation Method
Little security
Little control over reps
Reps may provide inadequate service to smaller accounts
Selling costs less predictable
Maximum incentive
Managers can encourage sales of certain items
Selling expenses relate directly to selling resources
Highly aggressive selling
Minimal required nonselling tasks
When company can’t closely control sales force
Straight Commission
DisadvantagesAdvantagesEspecially Useful For
Compensation Method
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11.2cCompensation Methods for Salespeople
Selling expenses are less predictable
May be difficult to administer
Some security
Some incentive
Selling expenses vary with revenue
Manager has some control over nonselling activities
Similar sales potential across territories
When company wants to offer incentive but maintain some control
Combination
DisadvantagesAdvantagesEspecially Useful For
Compensation Method
Selling expenses are less predictable
May be difficult to administer
Some security
Some incentive
Selling expenses vary with revenue
Manager has some control over nonselling activities
Similar sales potential across territories
When company wants to offer incentive but maintain some control
Combination
DisadvantagesAdvantagesEspecially Useful For
Compensation Method
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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
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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?
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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
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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
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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
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Guidelines for effective formal recognition programs11.3
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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
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11.3 Dumb-Down Pay Programs
Eliminate nonselling activities No more than three
performance measures Exclude inappropriate
measures Hold supervisors accountable Tighten sales credit rules
Source: David Cichelli, “Dumb Down Your Pay Programs,” Sales & Marketing Management, September 2003, p. 88. joh29877_ch11_343-376.indd 360 1/4/08 10:49:25 AM
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11.4 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: Kerr’s original article was updated and republished as follows—Steven Kerr, “On the Folly of Rewarding A, while Hoping for B,” Academy of Management Executive, 9:1 (1995), pp. 7–14.
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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
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11.5 Your Quota System Isn’t Working If…
Nobody makes a goal There are no over-
achievers Only superstars make goal
Source: Julia Chang, “Numbers Crunching,” Sales & Marketing Management, February 2003, p. 49.
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11.4
Sales activities and performance outcomes that might be encouraged bycompensation and incentive programs