Professor Chip Besio Sales Management Marketing 3345

1. Customer Satisfaction and Compensation Professor Chip Besio Sales Management Marketing 3345

2. Convergence selling New business development New Customers Account management Leverage selling Current Current New Products The Customer-Product Matrix

3. Compensating Salespeople Comp Type Best Performance Impact * Motivate effort on non-selling activities Salary *Adjust for differences in territory potential * Reward experience and competence Commissions * Motivate a high level of selling effort * Encourage sales success

4. Compensating Salespeople Comp Type Best Performance Impact * Direct effort toward strategic Incentiveobjectives Payments * Provide additional rewards for (Bonus) top performers * Encourage sales success Sales * Stimulate additional effort Conteststargeted at specific short- term objectives

5. Compensating Salespeople Comp Type Best Performance Impact Personal* Satisfy salespeople’s Benefits security needs * Match competitive offers

6. Use of Compensation Plans Percentage of Companies Using Straight Salary 17 Straight Commission 19 Combination Plans (83%) Salary Plus Bonus 24 Salary Plus Commission 20 Salary Plus Bonus Plus Commission 18 Commission Plus bonus 1 Total 100% Source: Adapted from Sales Compensation Concepts and Trends (New York: Alexander Group, 2004).

7. Comparing Salary and Commission Plans Straight Salary 50,000 40,000 10% Commission Total cost per person (thousands $) 30,000 20,000 10,000 0 100 200 300 400 500 Sales Per Person in Thousands Comparing Salary and Commission Plans for Field Sales Representatives

8. 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

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

10. Compensation Levels for Firms using Salary Plus Incentives Total Salary Incentive Compensation Position ($000) ($000) ($000) Top Sales Executive $91.0 $29.0 $120.0 National Account Manager 72.2 26.0 98.2 Regional Sales Manager 74.5 21.9 96.4 District Sales Manager 64.5 20.3 84.8 Key Account Rep 57.4 22.9 80.3 Senior Sales Rep 47.5 26.0 73.5 Intermediate Rep 36.1 15.3 51.4 Entry Level Rep 29.7 13.4 43.1 Sales & Marketing Management Compensation Survey, 2005

11. Compensation Levels by Account Relationships, 2005 • ENTERPRISE RELATIONSHIPS $121,800 • Customer solution more important than price; team selling approach $64,400 $43,300 • CONSULTATIVE RELATIONSHIPS $97,100 • Creates new value; tailors product to customer needs $62,700 $42,300 • TRANSACTIONAL RELATIONSHIPS $83,300 • Sells on price; product is a commodity Top-Level Mid-Level Entry-Level $52,500 $36,700

12. Selecting Benefits • Salespeople expect cars or allowances • Insurance and travel are very common • Some plans offer a choice of alternatives

13. Compensation Methods A. Straight Salary • Control wage levels • easier to control rep’s activities • increases loyalty to firm • fails to provide incentives • high costs when sales are low • most common in complex business selling

14. Compensation Methods B. Straight Commission • maximum incentive • all variable cost • low costs when sales/salesperson is low

15. Compensation Methods B. Straight Commission • hard to control reps • low loyalty • pay low when business is weak • used in small firms, door-to-door, retail sales, insurance, stock brokerage, printing

16. Compensation Methods C. Combination Plans • Most common today 1. Salary + Commission • base for non-selling activities • commission for incentive to push complex industrial accounts

17. Compensation Methods C. Combination Plans • Most common today 2. Salary + Bonus • base for non-selling activities • bonus to reward completion of special tasks in consumer products selling 3. Salary + Commission + Bonus • rewards every activity, BUT costly to administer

18. Other Considerations • Trend toward TEAM selling • difficult to reward team members for group effort • usually emphasize shared commissions / bonuses

19. Other Considerations • 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

20. Comparing Gross Margin Commissions on Two Orders Percentage Size Gross Percentage Commission Order Gross Margin of Margin to Commission on Paid to Number on Each Order Order Company Gross Margin Salesperson 1 10 $1,000,000 $100,000 15 $15,000 2 20 $500,000 $100,000 15 $15,000

21. Gross Margin Commission Problems % Decline Marketing Plan Discounted Price Selling Price $100$92 Cost of Goods Sold 80 80 Gross Margin 20 12 GM% Commission 20%20% $ Commission $ 4$ 2.4040% Contribution 1612 Overhead Costs 1010 Net Profit $ 6$ 266%

22. 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

23. Expense Accounts & Benefits • Types of plan (Cont’d.) • Limited • can lead to wasted time on “cheat sheets” • limits for each category

24. Benefits Offered by Companies Percentage of Firms Offering Benefit Hospital costs 90% Life 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