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