Sales Force Management

Sales Force Management 11th Edition Mark W. Johnston Greg W. Marshall Routledge 2013

Implementation of the Sales Program Part 2 Routledge 2013

Chapter 11 Salesperson Compensation and Incentives Routledge 2013

Characteristics of Great Sales Compensation Plans Routledge 2013

Learning Objectives • Discuss advantages/limitations of straight salary, straight commission, combination plans • Explain how/why a bonus might be used as an incentive • Understand effective use of sales contests and their potential pitfalls • Identify key nonfinancial rewards, why they might be important • Recognize key issues surrounding expense accounts • Discuss making decisions on mix and level of compensation Routledge 2013

Three Questions to Drive Successful Compensation Programs • Which compensation method is most appropriate for motivating specific activities in specific situations? • How much of the total compensation should be earned through incentives? • What is the best mix of financial and nonfinancial compensation and incentives? Routledge 2013

Compensation Terms and Definitions • Salary – a fixed sum of money paid at regular intervals • Incentive Payments • Commission – a payment based on short-term results, usually a dollar or unit sales volume • Bonus – a payment made at management’s discretion for achieving or surpassing some set level of performance • Quota–often the minimum requirement for a salesperson to earn a bonus • Sales Contests – encourage extra effort aimed at specific short-term objectives • Benefits–medical and disability insurance, life insurance, retirement plan • Non-Financial Incentives –opportunities for promotion or various types of recognition for performance Routledge 2013

Innovation: Outsourcing Incentives • Indicators to outsource an incentive program: • Multiple individuals maintaining the incentives program at moderate salary budgets • Company invests heavily on incentives but the program lacks accountability, reporting tools, and cost/benefit outcomes • Employees complain about inconsistent practices and/or a lack of meaningful rewards • Many organizations need complex structures and tracking mechanisms for the program’s goals • Most common objection to outsourcing is the cost Routledge 2013

Exhibit 11.1 Components and Objectives of Financial Compensation Plans Routledge 2013

Compensation Plans • Three primary methods of compensating salespeople are: • Straight salary • Straight commission • Combination of base salary plus incentive pay • Recently, a steady trend developed toward use of combination plans as managers seek a “pay for performance” plan Routledge 2013

Straight Salary • Two conditions favor use of straight salary: • When management wishes to motivate salespeople to achieve objectives other than short-run sales volume • When the individual salesperson’s impact on sales volume is difficult to measure in reasonable time • Advantages • Require salespeople to spend time on activities that may not result in immediate sales • Can use when difficult to measure actual impact on sales • Easy to compute and administer • Limitations • Pay is not tied to any aspect of job performance • No direct incentive to improve sales-related performance Routledge 2013

Straight Commission • Payment for achieving a level of performance • It is popular to base commission on the profitability of sales to motivate the sales force to focus on the most profitable products or customers • Advantages • Strongly motivated salespeople to improve productivity • Easy to administer and compute • Compensation costs vary directly with sales volume • Limitations • Management has little control over the sales force • Difficult to motivate salespeople to build relationships with clients • Little motivation to engage in market analysis and other similar functions that take time away from selling activities Routledge 2013

Combination Plans • Offer base salary plus a proportion of incentive pay • Base salary provides salesperson with a stable income and gives a method for rewarding salespeople for performance • Questions to consider while designing the plan: • What is the appropriate size of incentive relative to base? • Should a ceiling be imposed on incentive earnings? • When should the salesperson be credited with a sale? • Should team incentives be used and how should they be allocated across members of a sales team? • How often should the salesperson receive incentive pay? Routledge 2013

Proportion of Incentive Pay to Total Compensation • Proportion of incentive to base salary should be based on the degree of relationship selling involved in the job. • If short-term sales then a relatively large incentive component should be offered • If customer service and non-sales objectives are emphasized then the incentive component should be small • If a combination plan is not very effective at motivating salespeople, a common reason is that the incentive portion is too small to generate interest Routledge 2013

Incentive Ceilings • Incentive Ceilings are dealt with differently across companies and industries • Ceilings protect against windfalls such as increased sales due to the introduction of successful new products that sells without increased sales efforts • Issues in incentive compensation for team selling environments • Problems occur with international sales • Desired effects of ceilings can be accomplished without limiting the motivation of the sales force by having management test any new or revised compensation plan before it is implemented Routledge 2013

When is a Sale a Sale? • The precise meaning of a sale must be defined to avoid confusion and irritation • Most plans credit salesperson with sale when the order is accepted by the company, less any returns and allowances • Sometimes sales are only credited after the goods have been shipped or payment has been received from the customer • Other plans credit salespeople with half a sale when the order is received and the other half when payment is received Routledge 2013

Team versus Individual Incentives • Increased use of cross-functional teams to win new customers and service major accounts raises issues about kinds of incentives to use in combination plans • Should incentives be tied to the performance of the team? • Should incentives be based on individual performance of each team member? • Should there be both team and individual incentives? • Sales managers must address these questions when designing team-based incentives Routledge 2013

When Should the Salesperson Receive Incentive Payment? • Survey of 500+ compensation plans showed: • 21% paid incentive earnings annually • 3% paid incentive earnings semiannually • 24% paid incentive earnings quarterly • 52% paid incentive earnings monthly • In general, plans offering salary plus commission offer monthly payments, whereas salary plus bonus plans often make quarterly or annual payments • There is no “one size fits all” formula for compensation plans design Routledge 2013

Steps to Executing Compensation Plans 5-Step Plan that can be used to tailor compensation packages to a specific company: • Research – look at past sales and relationships to compensation structures • Define objectives – what are the goals? • Develop plan – choose pay plan type, target pay, results to be rewarded and pay formula • Test – test the plan on a spreadsheet using realistic sales results • Document – this should be easily read and understood by the sales force Routledge 2013

Exhibit 11.2 Characteristics of Compensation Methods for Salespeople Routledge 2013

Sales Contests • Short-term incentive programs to accomplish specific objectives • Winners receive prizes, recognition, sense of accomplishment • Successful contests require: • Clearly defined, specific objectives • An exciting theme • Reasonable probability of rewards for all • Attractive rewards • Promotion and follow-through Routledge 2013

Contest Objectives • Contests supplement the firms’ compensation program, their objectives should be very specific and clearly defined • Incentive compensation needs to be consistent with stated corporate objectives • Average duration of a sales contest is three months • Contest themes: • Exciting theme helps build enthusiasm and promote the event • Theme should be designed to stress the objectives and appeal to all the participants Routledge 2013

Probability of Winning • Three popular contest formats: • Salespeople compete with themselves by attaining individual quotas • All members of the sales force compete with each other • Organize sales force into teams, which compete for group and individual prizes • It is essential for every member of the sales force to have a chance of winning an award • Increasingly companies are focusing on incentive programs like contests that seek to reward more rather than fewer people Routledge 2013

Types of Contest Rewards • There is not a “one size fits all” reward • Incentive Federation survey found that 79% of respondents found non-cash rewards to be extremely effective in motivation to achieve goals • Merchandise also gives an opportunity to make the reward presentation as part of a ceremony celebrating success • Regardless of form of reward the monetary value must be large enough to be attractive to participants given their level of compensation Routledge 2013

Contest Promotion and Follow-Through • To generate interest, contests should be launched with a fanfare • Firms should announce contests at national or regional sales meetings • Follow-up promotion is necessary to maintain interest during the contest • Salespeople should get frequent feedback throughout the contest periods • Winners should be recognized within the company and prizes should be awarded promptly Routledge 2013

Criticisms of Sales Contests • May not produce lasting improvements • Salespeople may borrow sales from another period to increase sales during contest period • Poorly administered contests can hurt cohesiveness and morale Routledge 2013

Nonfinancial Rewards • Recognition makes peers and superiors aware of outstanding performance • Effective recognition programs: • Offer everyone a reasonable chance of winning • Recognize best performers across several dimensions • Nonfinancial rewards include perks, which may include higher compensation, better automobiles, and better office facilities Routledge 2013

Recognition Programs • Effective recognition programs should offer a reasonable chance of winning for everyone in the sales force • If a large proportion of the sales force achieves recognition, then programs lose appeal • Effective programs recognize the best performers across several different performance dimensions • Recognition is an attractive reward because it makes a salesperson’s peers and superiors aware of the outstanding performance Routledge 2013

Exhibit 11.3 Guidelines for Effective Formal Recognition Programs Routledge 2013

Expense Accounts • Often, field selling expenses may be $25K or more per salesperson • Types • Direct reimbursement – of all “allowable and reasonable” expenses • Limited reimbursement – sets expense limits by-item or provides predetermined lump sum • No reimbursement – salesperson covers all expenses; usually combined with higher total compensation Routledge 2013

Making Compensation andIncentive Programs Work • Effective? • Too complex? • Even well-designed motivational programs lose their effectiveness overtime • Two major issues involved: • Assess relationship selling objectives • Determine job performance aspects to reward Routledge 2013

Assessing the Relationship Selling Objectives • Managers should evaluate how salespeople are allocating their time • What activities do they spend time on? • How much time do they devote to each? • How good are their current outcomes on various dimensions of performance such as total sales volume, sales to new customers, or retention of existing customers? • Compare current performance to firm objectives for relationship selling • Managers may need to adjust quotas to change motivations Routledge 2013

Leadership: The Perils of Rewarding “A” While Hoping for “B” • Frequently organizations establish reward systems that pay off one behavior even though the rewarder hopes for another behavior to occur • Sales managers need to consider their reward systems if salespeople’s behaviors do not match organization goals • Steven Kerr –“For an organization to act upon its members, the formal reward system should positively reinforce desired behaviors, not constitute an obstacle to be outcome” Routledge 2013

Determining Which Aspects of Job Performance to Reward • Different components of a compensation program can be designed to reward different activities and achieve multiple objectives • Issues when rewards are tied to numerous aspects of performance: • Becomes difficult for a salesperson to focus on improving performance dramatically in any one area • Salesperson is more likely to be uncertain about how total performance will be evaluated and about what rewards can be obtained as a result of performance Routledge 2013

Exhibit 11.4 Sales Activities and Performance Outcome that Might be Encouraged by Compensation and Incentive Programs Routledge 2013

Deciding on the Most Appropriate Mix and Level of Compensation • Maximize compensation plan’s motivational value • A wise preliminary step in designing a sales compensation and incentive package is for a firm to determine its salespeople’s current preferences for various rewards • Remain consistent with firm’s resource capabilities • To compete for the best talent, determine how much total compensation other firms in the industry or related ones pay people in similar jobs Routledge 2013

Dangers of Paying Too Much • Some firms offer their salespeople opportunities to make very large amounts of financial compensation • Overpaying salespeople unnecessarily increases selling costs and reduces profits • Creates resentment and low morale from other firm employees and executives when sales people earn significantly more money • At some level of compensation the next dollar earn would begin to show diminishing returns in terms of sales person motivations Routledge 2013

Dangers of Paying Too Little • When buying talent in the labor market a company tends to get what it pays for • If poor salespeople are hired at low pay, poor performance will likely result • If good salespeople are hired at low pay, there will likely be high turnover • Cutbacks in compensation budgets can result in short term cost savings at the expense of long-term market opportunity Routledge 2013

Changing the Compensation Plan Two Main Forms of Change: • Changing from a performance-sensitive scheme to a less performance-sensitive scheme – This can lead to poorer performance and, perhaps more importantly, the loss of higher-performing salespeople from the company. • Frequent changes, regardless of the type – many companies, when underperforming, look to the compensation program as a tool and paying staff to do more or different tasks will not fix the underlying problems within the firm Routledge 2013

Routledge 2013

Sales Force Management