COMPENSATION FOR SALES PERSONNEL

There is no single sales compensation plan that is suitable for all organizations. Every organization has to design its own compensation plan that will enable it to fulfill sales objectives and to attract and retain sales personnel. A truly successful sales compensation plan must help achieve overall organizational goals and not just sales goals. The objectives of a compensation plan should be clearly stated, so that it becomes easier to determine whether the organization is able to achieve them. The compensation plan must fulfill the primary objective of balancing the needs of the sales personnel, and provide them income and security.

It should also be effective in all business conditions good or bad. It should be fair, flexible, easy to administer, fulfill the needs of sales personnel and lead to the achievement of organizational objectives. Organizations compensate sales forces in many ways. The compensation plan may be a straight salary type, a commission-based type or a combination of salary, commissions and incentives. While deciding on the type, it is necessary to consider the differences in territory characteristics, sales activities and objectives of sales personnel.

Sales contests are widely used as a source of compensation, especially when an organization wants to emphasize certain activities with the primary aim of increasing profits. A sales manager must plan a sales contest well in advance and avoid indiscriminate usage. Otherwise, sales contests will lose their efficacy. Compensation plans have an impact on recruitment, training, evaluation and control functions too. While designing a compensation plan, its objectives must be stated. Next, the level of payment should be established. Different industries have different levels of payments. The last step in designing the plan is deciding on the method of payment for the sales force. It may be in the form of a straight salary, commission or bonus or a combination. Drawing account, special cash and non-cash incentives and fringe benefits are also used as a form of payment to the sales force. The effectiveness and success of a compensation plan depend on its execution. The plan should be tested in a territory before it is implemented throughout the organization. To ensure success, periodic monitoring is also essential.

Sales force expenses make up a large portion of total organizational expenditure. To ensure profitability, a sales manager should control sales force expenses in the form of expense quotas. An expense plan must be easy to administer, beneficial to the organization and sales personnel and must be communicated clearly to the sales force. In most organizations, selling expenses are be reimbursed either completely, partially or in the form of an excess commission that sales personnel must use for meeting selling expenses.

Fringe benefits have become a common method of compensation in most organizations. This is also called indirect compensation. Fringe benefits may be in the form of retirement benefits, insurance schemes, employee stock options, medical benefits and paid holidays. With changes in the global environment, organizations have started formulating tailor-made sales compensation plans for individual sales personnel. Ultimately, the success or failure of a compensation plan is dependent on its ability to motivate sales personnel to fulfill organizational objectives and to retain the best talent in the organization.

Introduction
Compensation in the global market is an extremely important managerial area This is because the compensation plan: Helps attract potential salespersons Impacts a salespersons motivation Is a determinant of status and value Determines lifestyle and purchasing power

The Global market

Compensation package is complex and affected by multiple forces: A balance between company policies and country-specific elements Total compensation package includes financial Salary, commission, bonus, stock options, benefits

and non-financial incentives Awards, recognition, vacation, and promotion

Compensation Plans
Hard to compare compensation plans because of their differences Lower salary, but higher deferred components Cannot simply transfer a compensation plan from one culture to another What works in one culture will not work in another!

Compensation should motivate sales force to accomplish goals set by management Compensation may be changed to meet firm goals

Three types of Compensation Plans

Straight Salary Straight Commission Combination Plan

Straight Salary
Salesperson paid a set amount of money based upon hours or days worked Often adopted when salesperson must devote significant amounts of time to other duties Market research, customer service, administration

Simple to administer by sales manager But, no direct link between performance and reward! More commonly used in Europe and may be difficult to change by global sales managers

Straight Commission
Adopted by performance-oriented firms that pay salesperson for their achievements Each person is paid a percentage of their total sales Easy to evaluate performance Plans encompass an element of insecurity Not believed acceptable in some cultures, like EU Some evidence of acceptance in Japan Can lead salesperson to shirk duties or pressure customers to buy

Combination Pay Plan

The combination plan is the most popular Employed by more than 80% of US firms May appear in many forms: Salary, commission, individual and group bonuses

Basic security bestowed by set salary Motivation introduced by commission/bonus

Combination plans more time consuming for sales managers to oversee

Ethical Compensation Issues

Major dilemma hire the best salesperson for the lowest possible salary. dilemmas include: Pay at, below or above market salaries? Setting a cap on total pay? Assigning lucrative sales territories? Team vs. individual incentives? Frequency of paying commission? Pay discrimination? Other

Ethical Compensation Issues

Major dilemma hire the best salesperson for the lowest possible salary. dilemmas include: Pay at, below or above market salaries? Setting a cap on total pay? Assigning lucrative sales territories? Team vs. individual incentives? Frequency of paying commission? Pay discrimination? Other

Sales contests
Sales contests are short-term incentive programs implemented to motivate salespersons to achieve specific goals or activities For sales contests to be successful: Objectives must be specific and clearly defined Contest theme must be exciting and clearly communicated Each salespersons must believe they can win Awards must be attractive to participants Contest must be promoted and managed properly

Sales Contest Elements

Contest Objectives Theme Contests receive a theme to create excitement To increase total and product sales most common Sales force must be given sufficient time All contest information and rules must be clear

Chance of winning Compete against self, others, or as a team? In U.S. salesperson has about a 40% chance of winning

Types of Rewards
Sales contests can offer many types of reward in the form of: Cash, prizes, or travel Perceived value very important as it must be of sufficient value to motivate additional effort Promotion of contest important Launched as a special event with handouts Large scorecards to communicate progress Newsletter articles or interim prizes can keep motivation up

Sales Contest Concerns

A number of concerns have been raised about sales contests When not properly designed contests take a lot of managerial time to administer Improper contests can actually de-motivate Do sales contests generate additional sales? Should sales force be paid twice for doing job? If contests are for short-term, then why have a never-ending sales contest?

Non-Financial Incentives
Human needs require approaches other than compensation to remain satisfied Ability to grow Recognition programs Salesperson of the year, Presidents Club

Opportunity to travel Educational assistance

Sales Expense Plans

Linked to salary in some ways Globally, firm may pay salespersons expenses to live overseas that include family Expatriate expenses are significant

Expense plans include Unlimited

Per diem Limited expense plan

Unlimited Expense Plan

All legitimate expenses are reimbursed Plan has a number of advantages Communicates trust to the sales force Sales manager can focus on more important issues Salesperson cannot complain that resources not available to make sale

Sales force must be given guidance and expenses must still be monitored to insure sound judgment Reimbursed expenses vary by country e.g. entertainment and alcohol

Summary
Compensation plan helps attract and maintain quality sales force Compensation is culturally influenced

Sales contests can provide short term motivation Must be properly planned and managed

Expense plans important Cover legitimate expenses, but always remember that Sales Expenses = Profits

Rules for sales force compensation, contests, and expenses must be simple and unambiguous!