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Salesperson Compensation and Incentives

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1 Salesperson Compensation and Incentives
11 Salesperson Compensation and Incentives McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

2 Great Compensation Plans
Calibrate with firm’s overall profit objectives Motivate to meet tactical sales and strategic objectives Tie to measurable criteria representing tactical/ strategic objectives Include fixed and variable elements Keep the plan simple yet thorough Reward securing, building, maintaining long-term relationships with profitable customers Consider salespeople a mission-critical asset Reward salesperson efforts according to worth (contribution) Clearly differentiate payouts for top, average, and inadequate performers Distinguish between performing tasks and achieving results Avoid direct competition between salespeople Reduce role conflict, ambiguity, and stress Generally don’t change plan too quickly When the time is right to change plan quickly, do so Permit salespeople with above-adequate performance to seek desired compensation potential w/out penalty Acid test is how the plan impacts the customer marketplace Source: HR Chally Group (2005), Principles of Sales Compensation. Dayton, OH: HR Chally Group.

3 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

4 Key Compensation Questions
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?

5 Key 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

6 11.1 Components and objectives of financial compensation plans

7 11.2a Compensation Methods for Salespeople

8 11.2b Compensation Methods for Salespeople

9 11.2c Compensation Methods for Salespeople

10 Combination Plans Offer a base salary plus some proportion of incentive pay Most popular form of compensation Well-suited for relationship selling by compensating for nonselling activities while providing incentives to motivate sales

11 Design Questions for Combination Plans
Appropriate size of incentive relative to base salary? Should ceiling be imposed on incentive earnings? When should the sale be credited? Should team incentives be used? How? How often should incentive payments be made?

12 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

13 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

14 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

15 11.3 Guidelines for effective formal recognition programs

16 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 – salespeople covers all expenses; usually combined with higher total compensation

17 11.3 Dumb-Down Pay Programs
Eliminate nonselling activities No more than three performance measures Exclude inappropriate measures Hold supervisors accountable Tighten sales credit rules Source: David Cichelli, “Dumb Down Your Pay Programs,” Sales & Marketing Management, September 2003, p. 88. joh29877_ch11_ indd 360 1/4/08 10:49:25 AM

18 11.4 Rewarding A While Hoping for B?
Straight commission may work for transactional selling, but… Relationship selling is more complex; requires Operating within a team Securing, building, long-term relationship with profitable customers Organizations must reward these additional behaviors Source: Kerr’s original article was updated and republished as follows—Steven Kerr, “On the Folly of Rewarding A, while Hoping for B,” Academy of Management Executive, 9:1 (1995), pp. 7–14.

19 Assessing Relationship Selling Objectives
How are salespeople spending time? Do most time-intensive tasks match organization’s goals? If not, may be time to adjust quotas to change motivations

20 11.5 Your Quota System Isn’t Working If…
Nobody makes a goal There are no over-achievers Only superstars make goal Source: Julia Chang, “Numbers Crunching,” Sales & Marketing Management, February 2003, p. 49.

21 Sales activities and performance outcomes that might be encouraged by
compensation and incentive programs 11.4

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