Managing The Sales Force

UNIT 8 COMPENSATION MANAGEMENT

Objectives
After reading this unit you should be able to:
 describe the importance of sales compensation
 explain the direct and indirect types of sales compensation
 discuss compensation schemes used by different companies
 enumerate factors influencing the design of sales compensation plans

Structure
8.1 Introduction
8.2 Direct Compensation
8.3 Indirect Compensation
8.4 Factors Influencing Compensation
8.5 Sales Compensation Plan Design Criteria
8.6 Why Change the Sales Compensation Plan?
8.7 Summary
8.8 Keywords
8.9 Self-Assessment Questions
8.10 References/Further readings

8.1 INTRODUCTION
The sales personnel of every firm or company needs to be compensated
adequately to keep their individual motivational levels high while their morale
should be even more higher so as to enable the team to contribute to their
maximum.
Primarily, the direct salary and allowances etc., of compensating are similar
among majority of the firms. However, the indirect benefits (incentives
and perquisites) would generally differ from firm to firm. It is commonly
assumed that a trend is towards increasing the indirect incentives of the
sales force.
A salesforce is a representative of the company’s philosophy and business
principles. It is the medium that builds the company’s perception among its
clients.
The task of building the salesforce team is quite phenomenal and challenging
but its maintenance, as you will agree, is equally demanding and essential
too. This is possible through proper compensation schemes, including providing
indirect benefits in a planned manner. In this unit we will aquaint you with
the various methods being adopted by companies in designing their
compensation packages and keeping their salesforce motivated.
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It is important to understand that compensation is much more than money. Compensation Management
Besides, monetary benefits its the reward and return that an employee seeks
from the employer. The compensation mix concept suggests that the sales
managers has the liberty to decide the compensation components yet they
need to do this very carefully.
The components include the following:
a) A basic compensation plan
b) Special financial incentives
c) Non-financial rewards
While sales performance are rewarded in the following three ways:
a) Direct financial awards.
b) Career advancement.
c) Non-financial compensation.
Bonus: Individual or Group.
i. It is offered in addition to what is usually earned by the salesperson.
ii. Across-the-board bonus: Money is given to all salespeople regardless
of their productivity.
iii. Performance bonus: It is related to performance.
iv. Sales contest rewards: Special sales programs offering salespeople
incentives to achieve short-term sales goals. Apart from compensation,
these programs can increase team spirit, interest in the job, and job
satisfaction and decrease absenteeism and turnover. Hence, we will
discuss the same in Unit 9 under sales motivation techniques.
The primary compensation plans are primarily the direct financial compensation
to salespeople.

8.2 DIRECT COMPENSATION

As mentioned above, the direct compensation package for a salesperson is
more or less the same in all companies. However, you must have also seen
that a company employing a technical person as a salesperson to sell industrial
or electronic products may offer a high basic salary. During the introductory
stage of the product life cycle, the function of the salesperson is to create new
markets through customer education (e.g., a new consumer durable product
like vacuum cleaners or new product applications used by specific industries;
the basic salary of the salesperson may be on the higher side.
The direct compensation package of a salesperson thus consists of the basic
pay plus allowances covering all travel and entertainment expenses etc. If a
salesperson stays overnight, boarding and lodging allowances need provision.
All the costs, needless to say, are budgeted and controlled as per the
salesperson’s best route (cycle of traveling). The salesperson is customarily
required to present necessary vouchers to reimburse expenses.
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Managing The Sales Force The basic salary and other allowances are revised from time to time. They
also increase with the promotion of the salesperson. The other benefits available
to the salesperson are more important than the basic salary. We shall discuss
these in the next section.
A straight salary plan is the simple one where the salespeople get paid a specific
INR amount at regular intervals, e.g., monthly. It has the following advantages
for the salesperson:
a) Security of fixed income, irrespective of the variable sales volume
during different sales cycles.
b) This plan is independent of performance drop in the short run.
c) The salesperson knows the income, so accordingly, he can plan
expenses.
Even to the management, it has certain advantages as:
a) Economical and straightforward to administer.
b) Tasks are easier to assign.
c) Less resistance to assignments and transfers.
d) Managers can project compensation expenses.
Disadvantages of the straight salary plan:
a) A significant issue here is the lack of direct monetary incentives.
b) Lowering of work norms within sales group.
c) Salary is not proportional to sales made.
When to use straight salary plans?
i. Best when a high percentage of the workday is devoted to non-selling
activities.
ii. Also, when management cannot effectively evaluate performance.
Straight Commission Plans.
1. Complete incentive compensation; if you do not sell anything, you do not
earn anything.
2. Straight commission.
a. Pay related directly to performance.
b. percentage of commission is attached to the unit.
c. level at which commissions begin or change is established.
3. Drawing accounts.
a. One version combines the incentive of a commission plan with the
security of a fixed income.
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4. Advantages of straight commission plans. Compensation Management

a. Maximum incentive for salespeople.

b. Salespeople feel productive and independent.
c. It is simple to administer.
d. Selling costs are in proportion to sales.
e. Payment is received upon sale, shipping, or when the order is made.
5. Disadvantages of the commission plan.
a. Uncertainty and insecurity.
b. Often, little loyalty is developed from the company.
c. Salespeople are reluctant to split or change territories.
d. Cost of sales.
6. Administrative problems with the commission plan.
a. Policies must be provided for each circumstance to compensate and
prevent moral problems adequately.
b. How to handle bad customer debts.
a. How to handle sales returns?
Companies also use combination plans where a proportion of the salesperson’s
total pay is guaranteed, while some can come from commissions.

8.3 INDIRECT COMPENSATION

These consist of financial as well as non-financial incentives. The financial
incentives are again in more than one form as under:
i) salary plus commission on sales above a certain amount:
ii) salary plus a share in profits.
The following section discusses these two forms:
i) Salary plus commission on sales above a certain amount
Herein, the salesperson receives a direct salary and a commission in addition
to it. Every salesperson is assigned a set quota for every year. They receive a
commission on the achievement of the targeted quota. Again, a fixed percentage
of sales achieved over and above the target is also set. This compensation
scheme ensures a direct salary and an in-built motivation system through
incentives.
This method for compensation with an in-built incentive scheme is adopted
by most consumer non-durable and consumer durable sellers. Certain industrial
product companies, financial service companies, and insurance companies also
adopt this method.
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Managing The Sales Force ii) Salary plus share in profits
It is generally suggested for a company that sells high-value items with high-
profit margins. The incentive here is based on profits earned. Herein, the selling
expenses to sell a product may also be significant. It is incorporated in the
profit-sharing scheme as it acts as a control mechanism. Also, salespeople
working to obtain contracts are generally given a share in profits rather than
awarded on direct sales.
Non-financial incentives
The trend these days is to provide other non-financial incentives like:
a) Training programs
b) Awards, recognitions, and prizes.
Most companies offer training programs for their salespeople. A salesperson
has to undergo a training course every one or two years. These programs enable
interaction between salespeople of different territories and share the latest
developments. These training programs are viewed as an indirect benefit by
the salespeople. They may be held on the company premises or preferably
outside. They break the monotony of the salesperson’s job and make him feel
a part of the company team. A sense of belongingness gets cultivated, which
also motivates him. Certain companies with foreign holding companies may
also send their salespeople for training abroad, providing them with good
opportunities to learn about their field.
In addition to training programs, the award ceremonies for outstanding
achievements in sales are held in exotic locations like hill stations or five-
star hotels. The awards are presented through foreign dignitaries or essential
people in the field, thus providing the salesperson with much-needed recognition.
Compensation structure at Chhayos: A scenario
Chaayos serves its products through about 100 outlets. Tea being a perishable
product, its sales and volume change needs to be monitored daily. For smooth
running, each store outlet needs to make a certain daily sales. Chaayos assigns
a specific minimum sales volume for every store outlet. These volumes are
monitored daily. The responsibility of the quota completion is ascribed to every
position above the Shift Manager. Chaayos employ an APC (Advanced process
control) Matrix to judge the performance of each store. Employees occupying
positions above the post of Shift managers are eligible to win additional benefits
earned due to high scores allocated according to the APC matrix. Incentives
are in two forms:
 Monetary benefits: Cash benefits are offered in proportion to the sales
volumes and matrix score.
 Non-monetary benefits: Employees are also given non-monetary benefits
like holiday packages to Bangkok or gifts.

8.4 FACTORS INFLUENCING COMPENSATION

Although the basic structure of a compensation plan may be similar across
the companies, some factors predominantly shape the company’s compensation
166 plan design.
Stage of Product Life Cycle (PLC) Compensation Management

The amount of selling effort is directly related to the stage at which a product
is in its life cycle. When the product is in the introductory phase, the company
needs a dynamic salesforce to establish the product in the desired market. The
salesforce must have excellent product knowledge, communication skills, and
tremendous working stamina. They must be enterprising, willing to travel and
take criticism positively. Adequate compensation is the basic need to keep such
a salesforce motivated. So, in the introductory stage of PLC, the direct salary
may be on the higher side. Still, indirect benefits can also work at this point.
During the growth stage of the PLC, the company needs to ensure high
motivation of the salesforce to sustain and exploit all the opportunities available
in the market. They have to approach the market with renewed vigor. At this
point, indirect compensation schemes linked to incentives play an essential
role. Incentives tied to performance on assigned quotas; adequate feedback
on market dynamics and competitive activities will keep the salesforce going
with the growth phase.
Once the products are established, the salespeople need more indirect
compensation than direct financial ones. During the maturity stage of the PLC,
benefits like training and incentive travel to exotic foreign countries work
wonders. With the break in the monotony, specific problems with the product
which may have started emerging get due consideration. Schemes for sales
promotion and dealer promotion are inevitable at this stage to lend a push to
the selling effort. These need to be designed with a fresh outlook. However,
the minimum required increase in salary and incentives are made as per
schedule.
When the product is in the decline stage, creative and innovative incentive
schemes may be introduced in the compensation to generate a new push for
the product. The existing product managers who may be concentrating on a
more successful product line at this stage would require higher incentives to
revive the declining sales of the product concerned.
You are already familiar with the PLC curve. Incorporating the discussions
we have had above, a PLC curve about changes in the compensation over time
would look like Fig. 5.1

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Managing The Sales Force Compensation and Salespeople Demographics
You might be slightly surprised to know that the compensation package preferred
by the salespeople in practical situations depends on their demographic
characteristics. Their age and family size or the number of dependents play
an essential part in the preference for a basic salary and incentives. However,
this cannot be generalized and depends mainly on the individual. The table
below classifies the choice according to demographic data.

Role of selling in the Marketing strategy of the company

Compensation plans vary widely but include “accelerators,” i.e., increased
commission rates for employees who achieve target levels.
 Profit-Based: Commission rates change as margin levels increase. These
plans are generally based on invoice, product, or monthly averages
of margin generation.
 Revenue/Quota: Compensation is based on sheer volume achieved over
the previous sales period or on a percentage of quota achievement.
 Balanced: Compensation is based on margin, revenue, and a third
component, quota attainment.
 Team: Bonuses go to all team members when quarter-to-date (QTD)
sales goals are achieved.

8.5 SALES COMPENSATION PLAN- A DESIGN

CRITERIA
We can now set a few essential criteria which must be kept in mind while
designing a salesforce compensation package. These are primarily:
i. The budget is set for the compensation of the salesforce;
ii. A proper study of job requirements is the second step, followed by a
concise job description;
iii. Defining the organizational hierarchy of the salesforce, the role, and
function of each responsible person in the structure;
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 iv. The current trend is the competitors selling similar products in the Compensation Management
parallel markets;
v. The company’s policy of motivating salespeople, whether through an
in-built incentive system or provision of indirect benefits like
entertainment allowance /liberal traveling allowances, other out of
pocket expense reimbursements;
vi. Formal and compulsory training programs for all sales personnel to
make them feel a part of the company as well as to develop their skill
and provide them with the necessary break from the monotony of daily
routine sales reports;
vii. Human resource development programs create a feeling of attachment
toward the task at hand and imbibe the organization’s culture.
viii.The present-day trends emphasize the last two mentioned considerations
and a direct compensation program inclusive of direct salary. As selling
has become more complex, a good compensation package is necessary
to avoid high turnover within the salesforce.

8.6 WHY CHANGE THE SALES COMPENSATION

PLAN?
There can be three reasons a sound compensation plan is essential for
salespeople .
a. A sound compensation plan will help achieve marketing strategies and
sales objectives.
Without an effective sales compensation plan, a company will not
accomplish its marketing strategies and sales objectives. Winning and
keeping customers is the ultimate competitive challenge. The salesforce
must deal with changing customer demands and organizational requirements.
In most industries, the sales force is the primary customer contact. The
customer often sees the sales representative as the face of the organization.
The salesperson, therefore, occupies the position of helping customers meet
their objectives by presenting the company products and services that best
meet the buyer’s needs.
b. A sound compensation plan will attract and retain people with the right
skills and competencies to perform effectively.
Successful salespeople are always in demand. A company with a poorly
designed compensation plan runs the risk that it will not be able to attract
and retain the caliber of people it needs to sell its products and help
customers with their service requirements. By reading trade publications
and general business magazines and networking with one another at
conferences and conventions, salespeople today are more familiar with
compensation levels and practices than in the past. Increasingly, salespeople
express certain expectations about how they should be compensated for
a job well done. A practical and sound compensation plan must embrace
the values and expectations of the people for whom it is designed.
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Managing The Sales Force c. A sound compensation plan will control the cost of sales.
Compensation is frequently the highest cost of maintaining a sales
organization. Direct compensation—salary plus variable pay (commission
or bonus or both) can range from 2 to 20 percent of sales depending on
the industry. Today, many companies are concerned with customer
profitability: the mix of products they buy and the cost of serving them.
It means that volume alone does not constitute successful performance
for the sales force. One of the most effective ways to increase sales
profitability is through a compensation plan. The plan’s principal objective
is to direct salespeople to sell to and interact with customers effectively.
Whether a company wants an increased sales volume, a better mix of
customers or products, or more new accounts, the compensation plan can
help it accomplish its objectives.
Positive Business outcomes of a successful sales compensation plan
Sales compensation is one of the most powerful tools available to management
to achieve business results. The incentive component (commission or bonus)
communicates the results the company needs its sales personnel to perform.
In most sales organizations, the sales force is highly interested in the
compensation plan. Sales representatives typically judge the compensaton plan
by a single criterion—Am I making more money now than a year ago? On
the other hand, management typically considers the sales compensation plan’s
success on multiple criteria. In companies where sales compensation plays a
key role in shaping the adequate performance of the sales force, top management
looks to the plan to contribute positively to five business outcomes: growth,
profits, customer satisfaction, attraction and retaining sales talent, and sales
productivity.
 Growth
The desire to grow—by creating new markets, winning new customers, and
continually improving processes to retain current customers—is a top priority
at many companies. These companies resort to selling more to current accounts,
either new product sales to current buyers or more sales to new buyers within
the same account. This sales strategy suggests a compensation plan that rewards
the sales organization for (a) retaining and growing sales volume in current
accounts and (b) booking sales with new customers. The challenge is motivating
and rewarding the sales force for profitable top-line growth.
 Profits
Increasingly, companies want salespeople to focus on profitable business. The
availability of purchase transaction data at the customer level and the intense
pressure in many industries on operating profit margins motivate the companies
to examine the product mix sold to customers. Selling the right combination
of products may produce better profits. Therefore, a pivotal question to
investigate is—Is the sales force motivated to and rewarded for selling the
right mix of products?
 Attracting and retaining sales talent

170 In most companies, top management looks to the compensation plan to help
attract and retain the caliber of people it needs to sell to and interact with Compensation Management
customers successfully. A strong salesforce is a significant competitive
advantage. It is especially true in highly competitive markets characterized
by high product parity or where all the players offer equally high product quality
and customer service. Your company’s advantage is the relationship between
the customer and the salesperson in such situations. As one executive said,
his company’s objective in this competitive environment was to “shrink-wrap”
the salesperson around the product offering so that a company employee became
the source of differentiation. The sales compensation plan plays a pivotal role
in attracting and retaining talented salespeople. Thus, a current compensation
plan question is- Does it help the company hire and keep the right salespeople?
 Sales productivity
Today, most companies view their customers as “assets.” Thus, investments
in salespeople, who regularly interact with customers, are periodically reviewed
for improvement. The sales managers to justify the sales compensation in the
present competitive scenario. The sales volume must be high, and (2) the
business mix should be profitable across product types and customer classes.
Otherwise, we may get the sales volume but not good margins.
Why do sales compensation plans fail?
The following reasons may be attributed for its failure:
1. The sales compensation plan does not support the company’s business
objectives.
In a recent study of human resources professionals, 81 percent of the
respondentsreported that their company experienced some form of
restructuring during the past three years. They said they see improvements
in leadership, productivity, customer satisfaction, and employee teamwork
due to the restructuring efforts. Almost 91 percent of the respondents
reported that their company’s success was based on carefully linking its
compensation programs to its business objectives. This study is the most
recent of many we have seen over the years that makes a strong case for
tying the achievement of business objectives to compensation. Why then
is this the number one reason that sales compensation plans fail?
2. The sales compensation plan does not reflect how jobs operate within
the sales and customer relationship management processes. Increasingly,
senior sales executives ask their salespeople to channel their time and effort
toward high-value selling activities. For achieving the goal, it is essential
to map the optimal process for selling and interacting with customers. This
mapping process clarifies job roles and identifies the high-value selling
activities the compensation plan should direct, motivate, and reward.
3. It does not attract and retain the people required for sales success. A
well-designed sales compensation plan is a powerful communicator of a
company’s values regarding the types of business it goes after and the
people it intends to attract and retain. Typically, a sales compensation plan
fails a company when the skills required to be successful do not mesh
with the company’s definition of sales success. A common problem many
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Managing The Sales Force companies face is how to find the right balance between rewarding
salespeople for retaining and expanding business with current customers.
Also important is motivating and rewarding the same salespeople for
winning new customers. Too often, the sales compensation plan disguises
the fact that the company rewards salespeople at a disproportionately high
rate for retaining business with current customers. It does not direct,
motivate or reward them for expanding the business by winning new
customers for new business. When this happens over time, a salesperson’s
selling skills—particularly those needed to sell new accounts- atrophy;
the salesperson becomes incapable of growing the business by selling to
new customers.
4. It does not link the suitable sales performance measures to an
incentive compensation payment. Over the years, many studies have
determined the characteristics of effective sales compensation plans. The
studies consistently report that one of the most critical elements of plan
success is performance measurement. When we discover plan failure based
on performance measurement, we find that (a) the company uses
incomplete performance measures; (b) the company uses too few
measures; (c) the company uses too many measures, or (d) some
combination of the above.
5. It causes the selling cost to increase over an extended period. Today,
top management wants sales executives to maintain or reduce the current
selling expenses in most industries. Often, management takes this stance
because the firm has cut prices and, in turn, profit margins to gain a
competitive advantage. The company can cut selling expenses in two
ways. One way is to reduce headcount. It is not an attractive alternative,
mainly if the company views its customers as assets and its sales resources
as an investment in those assets. If the company reduces the headcount,
it will risk moving away from the revenue streams. So, It would be good
to examine the company’s selling and customer service processes to
determine a suitable compensation plan. The second course is almost
always possible.

8.7 SUMMARY
In this unit you have been exposed to the various dimensions of a compensation
scheme for a salesforce. Both direct and indirect compensation play their role.
However, of late, indirect sales compensation is assuming greater importance.
The list includes salesforce demographics, the sales strategy, competitive
practices, the company’s motivation and retention policy, the compensation
budget, etc. Maintenance of the salesforce through adequate compensation
schemes is imperative for the growth of any company. A salesforce compensation
plan should be simple enough for every salesperson to understand and sufficient
to remain motivated. The total sales compensation package includes what the
salesperson receives through numerous forms of financial compensation. The
non-financial rewards are many, as they can be sales awards, transfers,
promotions, praise, certificates of recognition, learning, and growth
opportunities.
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 Compensation Management
8.8 KEYWORDS
Bonus : A payment made at the discretion of
management for a particular achievement.
Combination plans : A compensation plan that uses a mix of
salary, commission, and bonus to
compensate the salesforce.
Commission : A payment based on performance.
Financial incentives : Direct monetary payments such as
salaries and commissions
Fringe benefits : Include Indirect benefits and rewards
such as paid vacations, medical
reimbursement, and insurance payments.
Motivation : The how-to aspect of getting salespeople
to do their jobs well.
Non-financial incentives : Incentive techniques are used for specific
situations that require more effort. Sales
conventions and meetings, sales contests,
honors and awards, special privileges, and
favorable communication are the primary
forms of non-financial incentives.
Variable commission plan : A compensation plan where higher
commissions are given for selling
products with high profitability. Lower
commissions apply for products with
smaller profitability.

8.9 SELF-ASSESSMENT QUESTIONS

1. Why is it necessary to have adequate compensation for the company
salesforce?
2. How do various companies’ compensation plans with diverse selling
situations differ?
3. What are the essential components of a compensation package?
4. What are your views on training programs as an indirect incentive to
salespeople?
5. How do the Product Life Cycle phases influence the sales comp plan?
6. How do the salesforce demographic characteristics influence the
compensation plan?
7. How the sales compensation plan design helps the sales managers in
fulfilling the motivational needs of salespeople?
8. Comment upon the benefits of non-financial incentives given to salespeople?
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Managing The Sales Force
8.10 REFERENCES/FURTHER READINGS
1. Frank Cespedes, Sales Management that works, Harvard Business Review
Press, 2021
2. Mark Roberge, The right ways to use compensation- To shift strategy,
choose how you pay your team, Harvard Business Review, April 2015
3. Still, Cundiff, Govoni & Puri: Sales and Distribution Management -
Decisions, Strategies & Cases, (2018) Pearson
4. Charles Futrell: Sales Management- Teamwork, Leadership, and Technology
5. Still, Cundiff & Govoni: Sales Management - Decisions, Strategies & Cases,
PHI
6. Spiro, Stanchart & Rich: Salesforce Management, 11 e, TMH
7. S. Neelamegham, Marketing in India, Cases and Readings’Vikas Publishing
House Pvt. Ltd.
8. www.salesandmarketingmanagement.com

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