1. Salesperson Compensation and Incentives11
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