McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 9 Sales Force Compensation How little you know about the age you live in if you fancy that honey is sweeter than cash in hand. Ovid

9-2 Fig. 9-1 What a Good Sales Compensation Plan Should Do Good sales compensation plan Correlate efforts and results with rewards Control salespeople’s activities Ensure proper treatment of customers Attract and keep competent salespeople Motivate salespeople Be economical yet competitive Provide choice Be fairBe simple Provide secure and incentive income Be flexible yet stable

9-3 Potential Conflicts in Compensation Plan Design Characteristics of Plan Reward results__ 2. Reward effortsC __ 3. Provide steady incomeC __ __ 4. Provide incentive__ C C __ 5. FairC C C C __ 6. Flexible__ C C __ __ __ 7. SimpleC __ __ C C C __ 8. Economical__ C C __ C __ C __ 9. Competitive__ C C __ __ __ C C __ 10. Controls and directsC __ __ C C C __ __ __ __ 11. Consistent w/ company objectivesC C C C __ __ C __ __ __ __ 12. StableC C __ C C C __ C __ C C __ C = Potential for conflict

9-4 Review job description Identify plan’s objectives Establish level of compensation Pretest and install plan Fig 9-2 Steps in Designing a Sales Compensation Plan Develop the method of compensation Decide on indirect monetary compensation

9-5 Fig 9-4 Building Blocks for a Sales Compensation Plan Others Profit sharing Pension Moving Expenses Insurance Bonus CommissionPaid Vacation Lodging TravelSalary SECURITYINCENTIVESBENEFITSEXPENSES Profit Sharing Lodging Company Car Entertainment Others

9-6 Method Advantage Disadvantage Best Used Straight salary Provides security and stability for reps Better for directing and controlling sales activities Ensures proper treatment of customers Direct incentive is easily lost if not administered properly Represents a fixed cost Requires supervision to direct, control, and evaluate Difficult to direct and supervise sales people Customers’ best interests may be ignored Sales people’s earnings may fluctuate widely Added cost May be seen as inequitable if not administered properly For products that require a lot of presale and/or post-sale service For building long-term customer relationships When supervision is available for new recruits For new territories For missionary sales Straight commission Bonus When a strong incentive is needed to attain sales For products that require little presale and/or post-sale service The sale is a one-time sale Adequate field supervision is not available Company is in a weak financial position Company uses part-time or independent sales people Provides a strong incentive Sales people have more freedom Acts as a screening method Added incentive Can be used for specific activities - flexible To encourage above-normal performance of specific activities

9-7 Possible Combination Compensation Plans COMMISSION BONUS SALARY

9-8 Non-Guaranteed Plan Month Draw Sales Commission Volume Earned End-of-Month Payment to Rep January $1,800$40,000 $4,000 $2,200 ($4,000 - $1,800 = $2,200) February $1,800$15,000 $1,500 $0 (rep owes $300) March $1,800$30,000 $3,000 $900 (computed as follows) Commission = $3,000 Less draw - 1,800 Less February debt Net $ 900 Guaranteed Plan Month Draw Sales Commission Volume EarnedEnd-of-Month Payment to Rep January $1,800 $40,000 $4,000 $2,200 ($4,000 - $1,800 = $2,200) February $1,800 $15,000 $1,500 $0 (rep owes $0) March $1,800 $30,000 $3,000 $1,200 ($3,000 - $1,800 = $1,200) Drawing Account Examples

9-9 Compensating Cross-Functional Teams  Shared Reward  Role-reward congruence  Team-member input  Peer evaluations