Sales Force Leadership

Part V

SALES FORCE LEADERSHIP Chapter 12:

Compensating Salespeople

Goals of a Sales Force Reward System 

Acceptable ratio of costs to sales force output in volume, profit, or other objectives



Encourage activities consistent with firm’s overall, marketing, and sales force objectives and strategies



Attract and retain competent salespeople, thereby enhancing long-term customer relationships



Be clear and be flexible enough to allow adjustments that facilitate administration

The Customer-Product Matrix

New

Convergence Selling

New Business Development

Account Management

Leverage Selling

CUSTOMERS Current

Current

PRODUCTS Figure 14-1: The Customer-Product Matrix

New

Compensating Salespeople Components

Needs

SALARY

  

COMMISSIONS

 

INCENTIVE PAYMENTS



SALES CONTESTS PERSONAL BENEFITS

 



Motivate effort on non-selling activities Adjust for differences in territory potential Reward experience and competence Motivate a high level of selling effort Encourage sales success Direct effort toward strategic objectives Provide additional rewards for top (Bonus) performers Encourage sales success Stimulate additional effort targeted at specific short-term objectives

 

Satisfy salespeople’s security needs Match competitive offers

Aligning Pay With Strategy 

Government Computer Sales, Inc.’s compensation plan ties a portion of reps' pay to the information they obtain from their clients.



Mandates reps to dig deeper and put GCS in the minds of the government agencies and educational institutions that use its products.



If a rep has $15,000 of available commission for the first ½ of the year the plan would work as follows: − 40% ($6,000) is tied to account management (i.e., customer information) − 60% ($9,000) is tied to a profit dollar quota − Reps who meet the documentation requirements receive all − $6,000; those who meet less than 85% do not receive the $6,000.

Use of Compensation Plans Percentage of Companies Using Straight Salary

18

Straight Commission

19

Combinations Plans (63%) Salary Plus Bonus

24

Salary Plus Commission

20

Salary Plus Bonus Plus Commission

18

Commission Plus Bonus

TOTAL

1 100%

Compensating Salespeople Compensation Plan

Salary

Advantage

Disadvantage  



No motivation Favors unproductive sales people High costs when sales are low

Compensating Salespeople Compensation Plan

Salary

Advantage    









Reduced turnover Simple Easy to administer Good when difficult to determine who made the sale Good when service is required Promotes long-term goals Good during drastic business swings Easier to transfer salespeople

Disadvantage  



No motivation Favors unproductive sales people High costs when sales are low

Compensating Salespeople Compensation Plan

Commissions

Advantage  







Motivational Relates directly to performance Unlimited income (assuming no cap) Good for saving money on unproductive salespeople Perceived fair

Disadvantage

Compensating Salespeople Compensation Plan

Commissions

Advantage  







Motivational Relates directly to performance Unlimited income (assuming no cap) Good for saving money on unproductive salespeople Perceived fair

Disadvantage     

No loyalty Little security Short range view High turnover Management has less control

Total cost per person (thousands $)

Comparing Salary and Commission Plans Use of Compensation Plans 50,000

Straight Salary

40,000

30,000

m

n o i s

is

om

20,000

0%

C

1

10,000

0

100

200

300

400

Sales Per Person in Thousands

500

Advantages of Frequent vs. Infrequent Incentive Payments Frequent Payment Advantages (Monthly/Quarterly) 





Salespeople receive frequent feedback and rewards when selling cycle is short. Rewards are close in time proximity to the successes that provided the reward. Strong link between successful behavior and reward – motivation increased.

Infrequent Payment Advantages (Semiannually/Annually)  Payments at bonus time are 



larger and have greater impact. Performance is more stable because short-term sales variations are smoothed over the longer time horizon. Incentives are not paid till end of year – smoother cash flow.

Customer Satisfaction and Compensation 



IBM places significant resources toward monitoring customer satisfaction. All customers are surveyed annually on: – – – – – – – –





Overall customer satisfaction The rep’s knowledge of the customer The transaction or solution itself How satisfied the customer is with the solution The installation process (smooth or disruptive), including how long it took The extent and clarity of the education provided The time needed to get the application(s) up and running The capability and speed of technical support

Results are benchmarked against prior IBM performance, as well as the competition Results are used for compensating sales reps and managers.

Gross Margin Commission Problem

Selling Price

Marketing Plan

Discounted Price

% Decline

$100

$92

8%

Assume the following:  The salesperson makes 20% commission on the gross margin  It costs $80 to make the product.  Overhead is $10.

Gross Margin Commission Problem Marketing Plan

Selling Price Cost of Goods Sold Gross Margin GM% Commission $ Commission Contribution

$100 (80) $ 20 x 20% $ 4.00 16.00

Overhead Costs

(10.00)

Net Profit (Loss)

$ 6.00

Discounted Price

% Decline

8%

Gross Margin Commission Problem Marketing Plan

Discounted Price

% Decline

$100.00

$ 92.00

8%

80.00

80.00

$ 20.00

$ 12.00

x 20%

x 20%

4.00

$ 2.40

Contribution

16.00

9.60

Overhead Costs

10.00

10.00

6.00

$ (0.40)

Selling Price Cost of Goods Sold Gross Margin GM% Commission $ Commission

Net Profit (Loss)

$

$

40%

106%

Compensation Levels for Firms Using Salary Plus Incentives $160,000

$140,000

Base Salary Bonus + Commission

$120,000

$139,826 $136,403

$100,000

$97,097 $80,000

$82,566

$60,000

$55,842

$40,000

$20,000

$0

Average Sales Rep

Poorly Performing Rep

Midlevel Performing Rep

Top Performing Rep

Sales Executive

Compensation Levels by Account Relationships

ENTERPRISE RELATIONSHIPS Customer solution more important than price; team selling approach

$121,800

$64,400 $43,300 CONSULTATIVE RELATIONSHIPS Creates new value; tailors product to customer needs

$97,100

$62,700 $42,300 TRANSACTIONAL RELATIONSHIPS Sells on price; product is a commodity $52,500 $36,700

$83,300 Top-Level Mid-Level Entry-Level

Selecting Benefits 

Salespeople expect cars



Insurance and travel are very common



Some plans offer a choice of alternatives

NOTE:

Additional Slides below – not discussed in the Instructor’s Note, but can be used to further enhance your discussion.

Other Considerations 



Trend toward TEAM selling –

difficult to reward team members for group effort

–

usually emphasize shared commissions / bonuses

Profit-Based Commissions –

Gross margin commissions 

Salesperson & firm attempt to maximize same $$



raise wages for salespeople often at expense of company profits



tends to increase industry price competition



tends to raise price elasticities in the long run

Comparing Gross Margin Commissions on Two Orders Order Number

Percentag e Gross Margin on Each Order

1

10

$1,000,00 0

$100,000

15

$15,000

2

20

$ 500,000

$100,000

15

$15,000

Size of Order

Gross Margin to Company

Percentag e Commissio n on Gross Margin

Commissio n Paid to Salesperso n

Expense Accounts & Benefits 

Objective - enough, but not too much.



Types of Plans –

–

–

Unlimited 

Low supervision



Easy to abuse

Per diem 

Controls costs but may restrict coverage of distant accounts



Needs constant adjusting

Limited 

Can lead to wasted time on “cheat sheets”



Limits for each category

Benefits Offered by Companies Benefit

Percentage of Firms Offering

Hospital Costs

90%

Lift Insurance

77

Dental Plan

69

Long-Term Disability

56

Pension Plan

55

Short-Term Disability

49

Profit Sharing

44

Thrift Savings

22

Employees Stock Purchase Plan

21