1. Copyright © 2003 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

2. Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved. Fig 9-1 What a Good Sales Compensation Plan Should Do Efforts + Results = Reward Control activities of sales reps Treat customers properly Attract and keep good people Motivate the salesperson Good sales compensation plan Economical yet competitive FairSimple Flexible and stable Security and incentive

3. Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved. Potential conflicts in Compensation Plan Design Characteristics of Plan 1 2 3 4 5 6 7 8 9 10 11 12 1. 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

4. Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved. 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

5. Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved. Others Profit sharing Pension Moving Expenses Insurance Bonus CommissionPaid Vacation Lodging TravelSalary SECURITYINCENTIVESBENEFITSEXPENSES Fig 9-4 Building Blocks for a Sales Compensation Plan Profit Sharing Lodging Company Car Entertainment Others

6. Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved. 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

7. Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved. Possible Combination Compensation Plans COMMISSION BONUS SALARY

8. Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved. 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 - 300 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. Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved. Compensating Cross-Functional Teams Shared Reward Role-reward congruence Team-member input Peer evaluations