Professor Chip Besio Sales Management Marketing 3345 Customer Satisfaction and Compensation

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

Comp TypeBest 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 Compensating Salespeople

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

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

Straight Salary17 Straight Commission19 Combination Plans (83%) Salary Plus Bonus24 Salary Plus Commission20 Salary Plus Bonus Plus Commission18 Commission Plus bonus 1 Total 100% Percentage of Companies Using Use of Compensation Plans Source: Adapted from Sales Compensation Concepts and Trends (New York: Alexander Group, 2004).

Comparing Salary and Commission Plans for Field Sales Representatives ,000 20,000 30,000 40,000 Straight Salary 10% Commission Total cost per person (thousands $) Sales Per Person in Thousands 50,000 Comparing Salary and Commission Plans

 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 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. Customer Satisfaction and Compensation

Total SalaryIncentive Compensation Position($000) ($000) ($000) Top Sales Executive$91.0 $29.0 $120.0 National Account Manager Regional Sales Manager District Sales Manager Key Account Rep Senior Sales Rep Intermediate Rep Entry Level Rep Compensation Levels for Firms using Salary Plus Incentives Sales & Marketing Management Compensation Survey, 2012

ENTERPRISE RELATIONSHIPS $121,800 Customer solution more important than price; team selling approach 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 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 TRANSACTIONAL RELATIONSHIPS $83,300 Sells on price; product is a commodity $52,500 $36,700 Top-Level Mid-Level Entry-Level Compensation Levels by Account Relationships, 2012

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

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 Compensation Methods

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

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

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

Percentage Size Gross Percentage Commission Order Gross Margin ofMargin to Commission on Paid to Number on Each Order OrderCompany Gross Margin Salesperson 1 10 $1,000,000 $100, $15, $500,000 $100, $15,000 Comparing Gross Margin Commissions on Two Orders

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

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 Expense Accounts & Benefits

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

Hospital costs90% Life insurance77 Dental plan69 Long-term disability56 Pension plan55 Short-term disability49 Profit sharing44 Thrift savings22 Employees stock purchase plan21 Percentage of Firms Offering Benefit Benefits Offered by Companies

Salary Commissions Incentive payments (bonus) Incentive payments (bonus) Motivate effort on non-selling activities Adjust for differences in territorial potential Reward experience and competence Motivate effort on non-selling activities Adjust for differences in territorial potential Reward experience and competence Motivate a high level of selling effort Encourage sales success Motivate a high level of selling effort Encourage sales success Direct effort toward strategic objectives Provide additional rewards for top performers Encourage sales success Direct effort toward strategic objectives Provide additional rewards for top performers Encourage sales success COMP TYPES Source: Adapted from Sales Compensation Concepts and Trends (New York: Alexander Group, 2012). Compensation Methods - Recap BEST PERFOMANCE IMPACT

Sales contests Sales contests Personal benefits Personal benefits Stimulate additional effort targeted at specific short-term objectives Stimulate additional effort targeted at specific short-term objectives Satisfy salespeople’s security needs Match competitive offers Satisfy salespeople’s security needs Match competitive offers Source: Adapted from Sales Compensation Concepts and Trends (New York: Alexander Group, 2012). Compensation Methods - Recap COMP TYPES BEST PERFOMANCE IMPACT