Part V

SALES FORCE
LEADERSHIP

Chapter 12:
Compensating
Salespeople
Goals of a Sales Force
Reward System
 Acceptable ratio of costs to sales force
output
in volume, profit, or other objectives
 Encourage activities consistent with firm’s
overall, marketing, and sales force objectives

and strategies
 Attract and retain competent salespeople,
thereby enhancing long-term customer
relationships
 Be clear and be flexible enough to allow
adjustments that facilitate administration
 The Customer-Product
Matrix

New Convergence New Business

Selling Development

CUSTOMERS

Account Leverage
Current
Management Selling

Current New
PRODUCTS

Figure 14-1: The Customer-Product Matrix

Compensating Salespeople

Components Needs
SALARY  Motivate effort on non-selling activities
 Adjust for differences in territory potential
 Reward experience and competence
COMMISSIONS  Motivate a high level of selling effort
 Encourage sales success
INCENTIVE  Direct effort toward strategic objectives
PAYMENTS  Provide additional rewards for top (Bonus)
performers
 Encourage sales success
Stimulate additional effort targeted at specific
SALES 

short-term objectives
CONTESTS
PERSONAL  Satisfy salespeople’s security needs
BENEFITS  Match competitive offers
Aligning Pay With Strategy
 Government Computer Sales, Inc.’s compensation
plan ties a portion of reps' pay to the information
they obtain from their clients.
 Mandates reps to dig deeper and put GCS in the
minds of the government agencies and educational
institutions that use its products.
 If a rep has $15,000 of available commission for
the first ½ of the year the plan would work as
follows:
− 40% ($6,000) is tied to account management (i.e., customer
information)
− 60% ($9,000) is tied to a profit dollar quota
− Reps who meet the documentation requirements receive all
− $6,000; those who meet less than 85% do not receive the
$6,000.
Use of Compensation Plans

Percentage of
Companies Using
Straight Salary 18

Straight Commission 19

Combinations Plans (63%)

Salary Plus Bonus 24
Salary Plus Commission 20
Salary Plus Bonus Plus Commission 18

Commission Plus Bonus 1

TOTAL 100%
Compensating Salespeople
Compensation
Advantage Disadvantage
Plan
Salary  No motivation
 Favors unproductive
sales people
 High costs when
sales are low
Compensating Salespeople
Compensation
Advantage Disadvantage
Plan
Salary  Reduced turnover  No motivation
 Simple  Favors unproductive
 Easy to administer sales people
 Good when difficult  High costs when
to determine who sales are low
made the sale
 Good when service
is required
 Promotes long-term
goals
 Good during drastic
business swings
 Easier to transfer
salespeople
Compensating Salespeople
Compensation
Advantage Disadvantage
Plan
Commissions  Motivational
 Relates directly to
performance
 Unlimited income
(assuming no cap)
 Good for saving
money on
unproductive
salespeople
 Perceived fair
Compensating Salespeople
Compensation
Advantage Disadvantage
Plan
Commissions  Motivational  No loyalty
 Relates directly to  Little security
performance  Short range view
 Unlimited income  High turnover
(assuming no cap)  Management has
 Good for saving less control
money on
unproductive
salespeople
 Perceived fair
Comparing Salary and Commission Plans
Use of Compensation Plans
Total cost per person

50,000 Straight
Salary
(thousands $)

40,000

o n
s i
30,000 is
m
Com
20,000
10%

10,000

0 100 200 300 400 500

Sales Per Person in Thousands

Advantages of Frequent vs.
Infrequent Incentive
Payments
Frequent Payment Advantages
(Monthly/Quarterly)
 Salespeople receive frequent
feedback and rewards when
selling cycle is short.
 Rewards are close in time
proximity to the successes that
provided the reward.
 Strong link between successful
behavior and reward –
motivation increased.
Infrequent Payment
Advantages
(Semiannually/Annually)
 Payments at bonus time are
larger and have greater impact.
 Performance is more stable
because short-term sales
variations are smoothed over
the longer time horizon.
 Incentives are not paid till end
of year – smoother cash flow.
Customer Satisfaction and
Compensation
 IBM places significant resources toward monitoring customer
satisfaction.
 All customers are surveyed annually on:
– Overall customer satisfaction
– The rep’s knowledge of the customer
– The transaction or solution itself
– How satisfied the customer is with the solution
– The installation process (smooth or disruptive), including how long it took
– The extent and clarity of the education provided
– The time needed to get the application(s) up and running
– The capability and speed of technical support
 Results are benchmarked against prior IBM performance, as well as
the competition
 Results are used for compensating sales reps and managers.
Gross Margin
Commission Problem

Marketing Discounted %
Plan Price Decline

Selling Price $100 $92 8%

Assume the following:

 The salesperson makes 20% commission on the gross
margin
 It costs $80 to make the product.
 Overhead is $10.
Gross Margin
Commission Problem
Marketing Discounted %
Plan Price Decline

Selling Price $100 8%

Cost of Goods Sold (80)

Gross Margin $ 20

GM% Commission x 20%

$ Commission $ 4.00

Contribution 16.00

Overhead Costs (10.00)

Net Profit (Loss) $ 6.00

Gross Margin
Commission Problem
Marketing Discounted %
Plan Price Decline

Selling Price $100.00 $ 92.00 8%

Cost of Goods Sold 80.00 80.00

Gross Margin $ 20.00 $ 12.00

GM% Commission x 20% x 20%

$ Commission $ 4.00 $ 2.40 40%

Contribution 16.00 9.60

Overhead Costs 10.00 10.00

Net Profit (Loss) $ 6.00 $ (0.40) 106%

Compensation Levels for
Firms Using Salary Plus
Incentives
$160,000

Base Salary
$140,000
Bonus + Commission $139,826 $136,403
$120,000

$100,000

$97,097
$80,000
$82,566
$60,000

$55,842
$40,000

$20,000

$0

Average Poorly Midlevel Top Sales

Sales Rep Performing Performing Performing Executive
Rep Rep Rep
 Compensation Levels by Account Relationships

ENTERPRISE RELATIONSHIPS $121,800

Customer solution more important than price; team selling approach
$64,400
$43,300

CONSULTATIVE RELATIONSHIPS $97,100

Creates new value; tailors product to customer needs
$62,700
$42,300

TRANSACTIONAL RELATIONSHIPS $83,300

Sells on price; product is a commodity
Top-Level
$52,500
Mid-Level
$36,700
Entry-Level
Selecting Benefits

 Salespeople expect cars

 Insurance and travel are very common
 Some plans offer a choice of
alternatives
NOTE:

Additional Slides below –

not discussed in the Instructor’s Note,
but can be used to further enhance your
discussion.
Other Considerations

 Trend toward TEAM selling

– difficult to reward team members for group effort
– usually emphasize shared commissions / bonuses
 Profit-Based Commissions
– Gross margin commissions
 Salesperson & firm attempt to maximize same $$
 raise wages for salespeople often at expense of company
profits
 tends to increase industry price competition
 tends to raise price elasticities in the long run
Comparing Gross Margin
Commissions on Two Orders
Percentag Percentag
e Gross e Commissio
Margin on Gross Commissio n Paid to
Order Each Size of Margin to n on Gross Salesperso
Number Order Order Company Margin n

$1,000,00
1 10 $100,000 15 $15,000
0

2 20 $ 500,000 $100,000 15 $15,000

Expense Accounts &
Benefits
 Objective - enough, but not too
much.
 Types of Plans
– Unlimited
 Low supervision
 Easy to abuse
– Per diem
 Controls costs but may restrict coverage of distant
accounts
 Needs constant adjusting
– Limited
 Can lead to wasted time on “cheat sheets”
 Limits for each category
Benefits Offered by
Companies
Percentage of
Benefit Firms Offering
Hospital Costs 90%
Lift Insurance 77
Dental Plan 69
Long-Term Disability 56
Pension Plan 55
Short-Term Disability 49
Profit Sharing 44
Thrift Savings 22
Employees Stock Purchase Plan 21