Chapter 7: Compensating (Remunerating) Sales People

7.1. Needs of Sound Compensation Plan

Employees are the backbone of an organization. The attainment of organizational objectives
largely depends on the motivation of employees to work. Among other things employees
are motivated to work when they are provided a fair financial and non-financial compensation
for service rendered to the organization.
Compensation is the reward employees receive in exchange for their performance. It is
concerned with wages and salaries, pay raises, and similar non-monetary exchange for
employee’s performance. Well-designed compensation system enables organizations to attract
qualified employees required and retain and motivate the existing work force towards goal
achievement.

Basically, a sound compensation plan is a useful strategy for compensating employees that can
benefit both employees and the organization. It can help to attract and retain talent, motivate
employees, align performance and rewards, ensure equity, promote organizational goals, and

enhance financial stability.

REQUIREMENTS OF A GOOD COMPENSATION PLAN

A good sales compensation plan meets seven requirements. These are:
1. It provides a living wage, preferably in the form of a secure income. Individuals
worried about money matters do not concentrate on doing their jobs well.
2. The plan fits with the rest of the motivational program-it does not conflict with
other motivational factors, such as the intangible feeling of belonging to the sales
team.
3. The plan is fair-it does not penalize sales personnel because of factors beyond
their control within the limits of seniority and other special circumstances, sales
personnel receive equal pay for equal performance.
4. It is easy for sales personnel to understand-they are able to calculate their own
earning.
5. The plan adjusts pay to changes in performance.
6. The plan is economical to administer.
7. The plan helps in attaining the objectives of the sales organization.
7.3. IMPORTANCE OF COMPENSATION
The objectives of compensation system is to create a system of reward that is equitable
to employers and employees alike, so that employees are attracted to work and motivated
to do good job for the employer.
• Acquire qualified personnel
• Retain current employees
• Ensure pay equity
• Reward desired behavior
• Control cost, comply with legal considerations, and facilitate understanding
• Attracting good employees
• Increase employee morale
• Reduce employee turnover
• Increase job satisfaction
• Motivate employees
• Enhancing the organizations image among employees and in the community
• It can be used to attract and hold successful salespeople by providing a good standard of
living for them, by rewarding outstanding performance and providing regularity of
income
• It is possible to design compensation schemes which allow selling costs to fluctuate in
line with changes in sales revenue. Thus, in poor years lower sales are offset to some
extent by lower commission payments, and in good years increased sales costs are
financed by higher sales revenue.
• Compensation plans can be formulated to direct the attention of sales personnel to
specific company sales objectives. Higher commission can be paid on product lines the
company particularly wants to move. Special commission can be paid to salespeople who
generate new active accounts if this is believed to be important to the company. Thus,
compensation plans can be used to control activities.
7.4. FACTORS AFFECTING COMPENSATION PLAN
A number of factors influence the compensation to employees. They can be categorized into:
external and internal factors.
Internal factors affecting compensation plan
• Ability to pay This is one of the most significant factors influencing employee
compensation. Generally, a firm, which is prosperous and successful, has the ability to
pay more than the competitive rate. This way it can attract a superior caliber of personnel.
Often the labor unions also demand an increase in compensation on the grounds that the
organization is prosperous and is able to pay more.
• Employee Numerous employees related factors also influence his or her compensation.
These include performance, experience, and seniority.
• Job requirements Wages are also influenced by the requirements of a job such as
physical and mental requirement. Jobs, which demand more skill, responsibility, efforts
and are of hazardous in nature, will carry high wage tag with them.
• Job evaluation Job evaluation establishes a consistent and systematic relationship among
base compensation rates for all jobs. In other words, it establishes the satisfactory wage
differentials.
• Organization’s strategy The organization’s strategy regarding wages also influences
employee compensation. For example, an organization, which wants rapid growth, will
set higher wages than competitors. On the other hand, organizations that want smooth
going and just maintain the current earning will pay average or below average.
External factors affecting compensation plan
• Laws and regulations
• Labor market
• Inflation
• Economy The state of economy also influences the wage and salary-fixation. Wage rates
will be different in a stable economy than in a depressed economy. In case of depressed
economy there may be increase in supply of labor and this result in the fixation of lower
wage rates.
• Technological changes Technological changes also influence the fixation of wage levels.
Due to the advancements in the technology there may be shortage of skilled manpower in
that area. So, the organization will provide high wages for skilled personnel.
• Academic institutions Having good academic qualifications from Reputed and standard
educational institution influences the compensation of the potential candidate in their
recruitment in companies.
7.5. TYPES OF COMPENSATION PLAN
When designing compensation plans, sales management need to recognize that not all of the
sales team may be motivated by the thought of higher earnings. There are three basic types of
compensation plans: Fixed salary/ Straight salary, Commission only and Salary plus
commission Each type of compensation plan is evaluated below in terms of its benefits and
drawbacks to management and salespeople,
• STRAIGHT SALARY The straight salary is the simplest compensation plan.
Salesperson receives fixed sums at regular intervals representing total payments for their
services. The straight salary was once the most popular sales compensation plan, but it
has been declining in importance. Such plans are more common among industrial goods
companies than among consumer-goods companies. Straight-salary plans are commonly
used for compensating salespeople heavily engaged in trade selling.
 From management’s standpoint, the straight-salary plan has important
advantages. It provides strong financial control over sales personnel, and
management can direct their activities along the most productive lines.
 The main attraction of the straight-salary plan for sales personnel is that
stability of income provides freedom from financial uncertainties inherent in other
plans. In addition, sales personnel are relieved of much of the burden of planning
their own activities. And, because of its basic simplicity, sales personnel have no
difficulty in understanding straight-salary plans.
 The straight-salary plan has weaknesses.
Since there are no direct monetary incentives, many salespeople do only an
average rather than an outstanding job.
Unless the plan is skillfully administered, there is a tendency to under
compensate productive salespeople and to overcompensate poor
performers.
If pay inequities exist for long, the turnover rate rises; and it is often the
most productive people who leave first, resulting in increased costs for
recruiting, selecting and training.
Because all the selling expense is fixed, it is difficult to adjust to changing
conditions
• STRAIGHT COMMISSION The theory supporting the straight-commission plan is
that individual sales personnel should be paid according to productivity. The assumption
underlying straight-commission plans is that sales volume is the best productivity
measure and can, therefore, be used as the sole measure. This is a questionable
assumption. The straight-commission plan, in its purest form is almost as simple as the
straight-salary plan, but many commission systems develop into complex arrangements.
Some provide for progressive or regressive changes in commission rates as sales volume
raises to different levels. Others provide for differential commission rates for sales of
different products, to different categories of customers, or during given selling seasons.
These refinements make straight-commission plans more complex than straight-salary
plans.
 Straight-commission plans fall into one of two broad classifications:
Straight commission with sales personnel paying their own expenses. Advances
may or may not be made against earned commission.
Straight commission with the company paying expenses, with or without
advances against earned commissions.
The straight-commission plan is used in situations where non-selling duties are
relatively unimportant and management emphasizes order getting. Straight commission plans are
common in the clothing, textile, and shoe industries and in
drug and hardware wholesaling.
The straight commission plan has several advantages.
It provides maximum direct monetary incentive for the salesperson to
strive for high-level volume.
The star salesperson is paid more than he or she would be under most
salary plans, and low producers are not likely to be overcompensated.
Provide a means for cost control—all direct selling expenses, except for
traveling and miscellaneous expenses fluctuate directly with sales volume
changes and sales compensation becomes virtually an all variable expense.
The straight-commission plan also is characterized by great flexibility
However, the straight-commission method has weaknesses.
It provides little financial control over salespeople’s activities, a weakness
further compounded when they pay their own expenses.
Unless differential commission rates are used, sales personnel push the
easiest-to-sell low-margin items and neglect harder-to-sell high margin
items; it management seeks to correct this through using differential
commission rates; it incurs increased record-keeping expenses.
The costs of checking and auditing salespeople’s reports and of calculating
payrolls are higher than under the straight-salary method.
• SALARY PLUS COMMISSION Most sales compensation plans are combinations of
salary and commission plans. Most developed as attempts to capture the advantages and

offset the disadvantages of both the salary and commission systems. Where the straightsalary
method is used, the sales executive lacks a financial means for stimulating the
sales force to greater effort. Where the straight-commission system is used, the executive
has weak financial control over non-selling activities. By a judicious blending of the two
basic plans, management seeks both control and motivation. Actual results depend upon
management’s skills in designing and administering the plan. Unless there is skillful
adjustment of salary and commission, weaknesses of both basic systems reappear
Advantages of Combination Plans
Sales personnel have both the security of stable incomes and the stimulus
of direct financial incentive.
Management has both financial control over sales activities and the
apparatus to motivate sales efforts.
Selling costs are composed of fixed and variable elements; thus, greater
flexibility for adjustment to changing conditions exists than under the
commission method.
If salespeople realize that the company shares their financial risks, a
cooperative spirit develops between them and the company.
Disadvantages of Combination Plans
The combination plan, however, has disadvantages.
Clerical costs are higher than for either a salary or a commission system.
More records are maintained and in greater detail.
There are risks that the plan will become complicated and that sales
personnel will not understand it.
Sometimes a company seeking both to provide adequate salaries, and to
keep selling costs down uses commission rates so low that the incentive
feature is insufficient to elicit needed sales effort. But, if the incentive
portion is increased, salespeople may neglect activities for which they are
not directly paid. Therefore, the ratio that the base salary and the incentive
portion bears to the total compensation is critical.