Chapter

9 Sales Force
Compensation

How little you know about the

age you live in if you fancy that
honey is sweeter than cash in
hand.
Ovid

Motivation and Compensation …

Fig 9-1 What a Good Sales
Compensation Plan Should Do
Efforts + Control Treat Attract and
Results = activities of customers keep good
Reward sales reps properly people

Motivate the Good sales Economical yet

salesperson compensation plan competitive

Security and Flexible and

Fair Simple
incentive stable
Fig 9-2 Steps in designing a sales
compensation plan

Review job Identify plan’s Establish level of

description objectives
compensation

Develop the method Decide on indirect Pretest and

of compensation monetary compensation install plan

Consider current salary levels for sales people and

sales executives
In 2003 a firm hired several college graduates for sales jobs at a yearly salary of
$36,000 plus travel expenses. By 2007, most of these people were making a salary
of $40,500 to $41,000 a year, plus travel expenses. In 2007, the same company hired
more graduates and paid them $39,500 a year, plus travel expenses. This was the
salary being offered to qualified college grads for entry-level sales jobs in this
company's industry that year. Thus, the people with no experience received almost
the same pay as those with four years' experience. What would you do?

One of the most difficult personnel problems facing

many firms today. Here are some solutions which
have been adopted:

a. Raise the level of pay for all workers up the ladder.

b. Do not pay competitive salaries.
c. Talk at some length with the older employees,
explaining the problem and urge their understanding.
d. Make no explanation.
Compensation Levels
 2008 Sales Compensation Canada
 World At Work
Fig 9-4 Building Blocks for a Sales
Compensation Plan

Others

Profit sharing Others

Pension Entertainment

Profit Sharing Moving Expenses Lodging

Company Car

Bonus Insurance Lodging

Salary Commission Paid Vacation Travel

SECURITY INCENTIVES BENEFITS EXPENSES

Method Advantage Disadvantage Best Used

Straight Provides security and Direct incentive is easily For products that require a lot of
salary stability for reps lost if not administered presale and/or post-sale service
properly
Better for directing and For building long-term customer
controlling sales Represents a fixed cost relationships
activities
Requires supervision to When supervision is available for
Ensures proper direct, control, and new recruits
treatment of customers evaluate
For new territories
For missionary sales
Straight Provides a strong Difficult to direct and When a strong incentive is needed to
commission incentive supervise sales people attain sales
Sales people have Customers’ best interests For products that require little
more freedom may be ignored presale and/or post-sale service
Acts as a screening Sales people’s earnings The sale is a one-time sale
method may fluctuate widely
Adequate field supervision is not
available
Company is in a weak financial
position
Company uses part-time or
independent sales people
Bonus Added incentive Added cost To encourage above-normal
performance of specific activities
Can be used for specific May be seen as
activities - flexible inequitable if not
administered properly
 Drawing Account Examples
Non-Guaranteed Plan
Month Draw Sales Commission
Volume Earned End-of-Month Payment to Rep
January $1,800 $40,000 $4,000 $2,200 ($4,000 - $1,800 = $2
February $1,800 $15,000 $1,500 $0 (rep owes $300)
March $1,800 $30,000 $3,000 $900 (computed as follows
Commission = $3,000
Less draw - 1,800
Less February debt - 300
Net $ 900

Guaranteed Plan
Month Draw Sales Commission
Volume Earned End-of-Month Payment to Rep
January $1,800 $40,000 $4,000 $2,200 ($4,000 - $1,800 = $2,200)
February $1,800 $15,000 $1,500 $0 (rep owes $0)
March $1,800 $30,000 $3,000 $1,200 ($3,000 - $1,800 = $1,200)
 Possible Combination
Compensation Plans
COMMISSION

SALARY BONUS

Four signs your compensation system is failing:

 It doesn’t offer choice.
 It doesn’t drive culture initiatives
 Unhappy salespeople.
 Mass confusion.
Source: Eileen Neuborne, “2003 Salary Report: A Compensation Plan Checkup”, Sales and Marketing
Management, (May 2003).
Consider the best compensation plan
for salespeople in the following firms.
a. Manufacturer of small airplanes used by executives.
 This type of product takes a lot of lead time to sell and a lot of post-sale
activity as well.
 salary plus commission plan, with salary comprising at least 50 percent of the
total.

b. Wholesalers of office equipment and supplies.

 This sales job also requires some pre-sale and post-sale service, but the
lead times would not be very long.
 salary plus commission basis, but the salary proportion would be less than 50
percent and the commission percentage would be greater than 50 percent.

c. Automobile dealer.
 There is no pre-sale or post-sale activity. The sales cycle is fairly short.
 commissioned based.
 Compensation Plans to Avoid Common
Problems Faced by Sales Managers
 Salespeople tend to overemphasize the easy-to-sell parts of multiple
product lines in an effort to build sales volume; other more profitable lines
are forced into the background.
 Base part of the plan on commission based on gross margin.
 Encourages emphasis on higher margin items

 Salespeople need to spend more time developing new accounts.

 Salary plans can require salespeople to do some specific activity.
 Point systems based on the number of new accounts called on or sold may solve
this problem.

 To improve a company's long-term position, salespeople should be doing

more missionary work and developing long-term customers to meet
expected competition.
 Do not pay commission on net sales volume
 Emphasize the salary part of the pay plan; and/or
 Establish a series of missionary activities with a point system attached; and
 Use a customer satisfaction surveys as part of compensation level calculation
CASE 9-3: IMAGINATIVE STAFFING,
INC. (B) -- Compensating a Sales Team

Key Issue(s):
 Who should comprise the sales team?
 How should the team be compensated?

Situation Analysis
 In order to shorten the sales cycle, Imaginative Staffing sales director Susan Borland is
considering using a sales team.
 She plans for the account manager to join the regular sales rep to make the team.
 She is also considering herself, her assistant, or the president of the company to round
out the team.
 She is concerned that the current compensation plan is not appropriate for team selling
compensation and is considering ways to compensate the sales rep and the account
manager as well as any other team member.
 SWOT
IMAGINATIVE STAFFING, INC. (B)
Alternatives
 Possible Alternatives being considered:
 Team composition
 Include president on sales team
 Include herself (sales director) on sales team
 Include her assistant on sales team
 Compensation
 Do not compensate team effort separately

 Compensate team effort separately

 Decision Criteria
 shorten selling cycle?
Team Composition -
Will it shorten the sales cycle to include these people?
The president
 Lean management structure as is; her efforts better directed elsewhere
 If she is relied upon for major presentations where CEO of client in attendance, but not
routine sales

Sales director
 Directly responsible for sale fxn (experience, history, day-to-day interest)
 She can help move the sale along more quickly given her history with the company and
her greater authority.
 She already provides help in selling situations to the reps and is therefore familiar and
effective.

Assistant
 No indication of experience level
 Possible familiarity, but will likely slow process (or allow it to move at constant rate)
 No evidence this indiv. can speed up the process
 One of the potential problems with using upper
management is who will be the team captain?
 The sales rep needs to be in the position of directing
the team, but this can be confusing when one's
manager is present.
Should the team receive compensation for their
productivity, or should the team work be considered
part of their job?
 Sales rep
 Currently receives 10 percent of first year sales as a commission
 Shortening cycle benefits rep greatly (more sales/yr)
 Redesigning pay structure to lessen commission will not be viewed positively (therefore
decreases buy-in to the team approach)

 Account manager
 Current pay structure will come at a cost to these people
 The work on the initial sale will cut into her/his incentive compensation that would be
earned if s/he had spent the selling time to develop her/his current accounts. (therefore,
no buy-in)
 Therefore, in order to get the account manager to buy into the team selling concept, the
compensation system will need to reward the account manager for these efforts.

 Top management person

 Financial compensation not entirely necessary because it is sales director’s job currently to
direct sales effort (salary)
 As a member of the team, however, she needs to be recognized
 Larger year-end bonus?
 Title change (vice-presidency)?
 Opportunity to develop her assistant to take over the team selling management?
Compensating Cross-Functional Teams

Shared Reward
Role-reward congruence
Team-member input
Peer evaluations
Case Assignment
 Johnson Drug Company, Case A-4 , p. 539 of your text.
 Case Evaluation
 Part 1
 Submit Key Issues and Situation Analysis at beginning of
class on Tuesday, March 17, 2009
 Graded on scale of 0-2 (0=no submission; 1=some depth of
understanding; 2=well done, a clear understanding of the
situation and the problem)
 Part 2
 Submit analysis (alternative eval, recommendation,
implications) in a maximum of 3 pages at the beginning of
class on Thursday, March 19, 2009.
 Evaluation Criteria