OLPSHR04 – COMPENSATION AND ADMINISTRATION
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CHAPTER 9 - SALES FORCE COMPENSATION AND SALES INCENTIVE
Objectives:
a.) Understand the sales force compensation;
b.) List different need for salesmen compensation plan;
c.) Know the methods of rewarding sales personnel;
d.) To evaluation the steps in devising salesmen compensation plan;
e.) Know introduction to incentives;
f.) Understand the different types of incentives;
g.) Find out the steps in developing incentive structure;
h.) Know fringe benefits offered to sales personnel.
A. INTRODUCTION
• Compensation is essential for the purpose of retaining and motivating the sales force. Since
monetary rewards are important factors in the motivation of salesman, they are considered
the methods of compensating them. Monetary incentives may be in the form of salary,
commission, bonus, etc., the commission is considered to be a useful method of
compensating because it provides a direct link between sales performance and
compensation. A minimum amount of salary is guaranteed to salesmen to ensure the safety
of, and satisfaction with the job. Commission and salary are combined to compensate
salesmen and stimulate them to achieve the targets. The salaries are commensurate with
the responsibility and nature of job. Travel and out-station allowance should be adjusted
properly to motivate them. Compensation may be in the form of a straight salary plan, a
straight commission plan, a salary-plus-commission plan, and salary –plus bonus plan, and
a salary-plus-bonus-plus commission plan.
B. NEED FOR SALESMEN COMPENSATION
• First it provides a living wages, preferably in the form of secure income. Individuals worried
about money matters do not concentrate on doing their jobs well.
• Secondly, the plan fits with the rest of the motivational program. It does not conflict with other
motivational factors, such as the intangible feeling of belonging to the sales team.
• Thirdly, the plan is fair. It does not penalize sales personnel because of factors beyond their
control within the limits of seniority and other special circumstances, sales personnel receive
equal pay for equal performance.
• Fourth, it is easy for sales personnel to understand they are able to calculate their own
earnings.
• Fifth, the plan adjusts pay to changes in performance
• Sixth, the plan is economical to administer
• Seventh, the plan helps in attaining the objectives of the sales organization.
C. FACTORS AFFECTING SALEMSAN RENUMERATION
• An ideal compensation scheme necessarily maximizes the goals of the firm as well as of the
sales force. No doubt, the method of remuneration differs from firm to firm but there are
several factors which influence the remuneration plan of any organization directly. These
factors determine the nature and amount of remuneration of the sales force.
D. METHODS OFREWARDING OF SALES PERSONNEL
• Not all employees are the same, nor are the jobs they hold. Some groups within an
organization need special compensation systems in order to take advantage of the type of
person that is attracted to that type of job and the special characteristics of the job. In most
organizations the compensation program for sales personnel is different and separate from
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that of other employees. This different treatment has to do with the nature of the job, the
importance of the job, and the nature of sales personnel. The dominant feature of sales
compensation is the use of variable pay. Whereas variable pay plans are becoming more
popular for a wide range of employee groups, the sales group has always been paid on a
variable pay system due to the nature of the job. To attract, retain and motivate the best
salespeople one should pay them more than they are worth. The following figure shows that
the different compensation rewarding methods followed by the companies to their sales
personnel.
o Straight Salary Plan - The straight salary plan normally offers the maximum security
to salesmen. The management guarantees payment of at least a minimum salary to
salesman and expects from the a minimum productivity. This method is based on the
time-wage system. The salary is fixed whether work is more or less. However,
salesmen are paid travelling expenses and other expenses incurred by them in the
discharge of their duties.
o Straight Commission Plan - The straight commission plan incorporates payment of
compensation on the basis of the sales made by each salesman. The payment is
made on the basis of sales performance. The commission may be paid on the net
sales or on the total number of units sold. The compensation based on commission
is not fixed. It varies from salesman to salesman, depending upon their sales
performance. It provides direct financial incentive. Since the sales result is the basis
of compensation, the total sales performance is maximized.
o Salary Plus Commission Plan - The salary plus commission plan combines two
methods. A fixed salary is paid to all salesmen. If they sell more than the minimum
requirement, they are given commission at a fixed rate on the total sales effected by
them. Salesmen are satisfied with the fixed regular salary because it assures safety
and security. On the other hand, industrious, energetic, efficient and enterprising
salesmen earn a larger amount on the basis of their sales performance. Incentives
and safety are combined.
o Salary Plus Bonus Plan - Bonus is paid when a particular sales quota is achieved,
or when promotion activities are undertaken, or when the objectives are attained and
all the assigned jobs have been performed. The salary plan offers safety and
satisfaction, while bonus is an additional incentive for the attainment of targets. Bonus
is given only for performance above the standard level, while commission is paid on
every sale made by the salesman. Bonus is infrequently, but commission is frequent.
o Commission Plus Bonus Plan - Salesmen may be motivated by the offer of
commission and bonus if their performance is better than the average laid down.
Bonus is paid when the sales are higher than the targeted level. In some cases, bonus
is paid if the commission exceeds a fixed amount. Salesmen are motivated to earn a
higher amount by way of bonus on higher sales.
o Salary Plus Commission and Bonus Plan - Salesmen may be given salary as well
as commission on their regular sales. If their performance exceeds the prescribed
level, they are rewarded with a bonus. The bonus stimulates, the commission gives
incentives, and the salary ensures security. Thus, the three elements are combined
to ensure the highest performance.
E. STEPS IN DEVISING SALESMEN COMPENSATION PLAN
• Whether contemplating major or minor changes or drafting a completely new sales
compensation plan, the sales executives approaches the project systematically. Good
compensation plans are build on solid foundations. A systematic approach assures that no
essential step is overlooked. The following are the steps followed while framing
compensation plan for the sales personnel.
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o Customer to whom the Salesperson going to deal - The nature of the sales job
varies not only with where in the process the sales person operates, but also with the
customers that they deal with. New vs. existing accounts is one distinction.
o Analyze the Nature of Sales Job - Sales work involves working with customers to
convince them to order the products or services of the organization. The importance
of this activity is obvious. Except in the odd circumstance where the organization’s
product sells itself, this activity is vital to the continuing operation of the organization.
Furthermore, this importance of the job is highly visible in the organization, making
the impact of the job even clearer. But an in-depth analysis shows two things about
sales work that should be kept in mind: not all of the salesperson’s activities are sales
work, and not all sales activity is carried out by staff labeled as sales personnel.
o Evaluate the Types of Sales Activity Salesperson going to carry out - Most sales
jobs include activities such as soliciting orders, servicing customers, seeking out
buyers, obtaining information, and performing cold calls and product promotion.
Some sales personnel also engage in credit-information collection and analysis,
product modification, customer-personnel training, and technical advice and
assistance. All sales jobs require that the salesperson perform some administrative
work, such as making reports and keeping records. Depending upon the market, the
products, and the organization, various aspects of these activities are more or less
important in particular sales jobs. Further, although some of these activities are
important and necessary, they may not really be sales work, indicating that sales
personnel do more than just sell.
o To find out Salesperson support to the Organization Sales - The typical mental
picture of a salesperson is someone operating alone with the customer. For some
positions this is an inaccurate depiction. Sales work requires the support of others in
the organization. At one level there is administrative support enabling the salesperson
to operate in the field. Some of this support is clerical. Another level in today’s
complex economic environment is support of the field sales effort by inside sales
personnel. Many sales situations also require help in the form of technical expertise
that is available from others in the organization. All of this support changes the picture
of a salesperson. They are no longer seen as an independent operator and this has
a considerable impact on developing incentive programs, which assume that it is the
activity of the salesperson that brings in the sales orders.
o Consider Compensation Patterns in Community and Industry - Compensation
levels for sales personnel are related to external supply and demand factors, it is
important to consider prevailing compensation patterns in the community and
industry.
o Consult the Present Sales Force - Management should consult the present sales
personnel in as much as many grievances have roots in the compensation plan.
o Determine the Compensation Level - Management must determine the amount of
compensation a salesperson should receive on the average. Although the
compensation level might be set through individual bargaining, or on an arbitrary
judgment basis, neither expedient is recommended. Management should ascertain
whether the caliber of the present sales force measures up to what the company
would like to have.
o Provide for the various Compensation Elements - A sales compensation plan has
as many as four basic elements: 1) a fixed element, either a salary or a drawing
account, to provide some stability of income 2) a variable element for example a
commission, bonus, or profit sharing to serve as an incentive, 3) an element covering
the fringe or plus factor such as paid vacations sickness and accident benefits, life
insurance, pension and the like and 4) an element providing for reimbursement of
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expenses or payment of expenses allowances. Not every company includes all four
elements. Management selects the combination of elements that best fits the selling
situations.
o Implement the Plan and Provide for Follow-up - At the time the new plan is
implemented, it is explained to sales personnel. Management should convince them
of its basic fairness and logic. The sales personnel are made to understand what
management hopes to accomplish through the new plan and how this is to be done.
Details of changes from the old plan, and their significance require explanation.
F. INTRODUCTION TO SALES INCENTIVE
• Sales force incentives are a vital part of business and one of the best reasons is that they
work. This is one of the few motivators that can rev up a sales force for pennies on the dollar.
However it has to be well designed and executed to reap the full benefits and get the most
out of sales force. The reasons sales force incentives are so effective, is that they appeal to
the basic instinct of a true sales person. The need to compete, to be recognized for doing
well and essentially having their ego stroked and last but not least the ability to acquire more
stuff for doing what they love to do. A good sales force incentive program can almost always
assure a business owner that they will get results, but there are several rules of engagement
that they have to keep in mind. The sales force incentive requires a concise goal. This may
be as basic as increasing sales, but there are other objectives that can be added to a sales
force incentive. These range from generating new accounts to launching new products or
even expanding sales territory. The sales force incentives goals will greatly depend on where
that particular business sees they are lagging behind the competition, or that there is an
untapped market they need to explore.
G. DEFINING INCENTIVES
• Incentive pay, also known as “pay for performance” is generally given for specific
performance results rather than simply for time worked. While incentives are not the answer
to all personnel challenges, they can do much to increase worker performance. Although
each rewards specific employee behaviors, they differ substantially. In structured incentives,
workers understand ahead of time the precise relationship between performance and the
incentive reward. In a casual approach, workers never know when a reward will be given.
H. INCENTIVE PLAN DESIGN PROCESS
• In determining the appropriate sales incentive measures, it is critical to first understand the
entire process
o Step 1. Evaluate Business Economic Value Drivers - Every sales force is impacted
by the marketing strategy and how senior management communicates it. The sales
force is also directly impacted by how the business is organized, how it is managed
and by its unique value drivers.
o Step 2. Analyze Current Plan Effectiveness - Is the current incentive plan working
as well as management would like? It could be that there is significant turnover in the
sales force. Perhaps the commission or salary structure is creating problems.
o Step 3. Part A. Determine Pay Strategy - What is the current pay strategy? What
level of pay and performance is required to reach the 50th or 75 th percentile of the
market? Are there unique industry characteristics that require sales people with
special scientific or technical skills? Sales compensation should be designed so that
it is planned and predictable. It is a variable cost that fluctuates as sales change. A
sales incentive program should never be designed to cause a lower or higher
expense than planned.
o Step 4. Analyze Companies that are in different stages of maturity typically
have different products and unique strengths and weaknesses - Plan design will
follow those characteristics. For example, in certain instances a pay system may be
dominated by a commission schedule. In others it may be a traditional salary plus
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incentive structure, and yet in others it may follow a hybrid of the two, where the base
salary level and cost is built into the sales expectation.
I. TYPES OF INCENTIVES
• Casual Incentives - A bonus given routinely soon becomes part of the expected
compensation package. Casual incentives communicate to employees that you have noticed
their efforts. People thrive on positive feedback. Drawbacks
• Structured Incentives - Structured incentives can help direct employee efforts. Other
benefits include cost certainty and cost reductions.. Benefits to employees include higher pay
and satisfaction.
J. TYPES OF SALESMEN INCENTIVES
• Choosing the right sales incentives to motivate a team can be challenging. On the one hand,
they need to be exciting enough to motivate a sales force to change their behavior, or at least
point it in a certain direction. On the other hand, they also need to fit within an organization’s
budget and not cost so much that they cancel out the benefit of holding a sales contest in the
first place.
o Job-Related Incentives - This should be the least expensive form of incentive, since
it can consist of items like additional vacation time which have no out-of-pocket cost.
Non-tangible benefits like vacation time are only appropriate in a company culture
which would allow employees to take advantage of them.
o Tangible Incentives - To understand what prize salespeople may desire, the sales
manager should know the profiles of the members of their sales forces. On the other
hand, for a sales team which maintains a business-formal dress code, a couple of
custom-tailored suits could be very exciting.
o Experience Incentives - Surveys have shown that experiences impact happiness
more than purchases. There is a way to squeeze more performance out of an
experience incentive. Instead of sending one salesperson to Hawaii for a week,
creating a team-based contest with a team experience as a prize can add an
additional level of effectiveness, e.g., a nice team dinner or a team outing.
K. FRINGE BENEFITS TO SALES PERSONNEL
• Fringe benefits, which do not bear direct relationship to job performance, ranges from 30 to
40 percent of the total sales compensation packages. The sales job requires sales manager
to address different levels of human needs. Sales manager agree that salary is an important
incentive; however, the fringe benefits (non-financial compensation) contributes success of
the sales person discussed as follows:
o Based on Time - Holidays, Vacations, Sick leave, Personal leave, Sabbaticals, and
Pregnancy leave
o Based on Organization Dues - Trade association, Civic clubs, Country clubs, and
Professional association
o Based on Retirement Programme - Social security, Pension, Profit Sharing, and
Salary reduction plans
• Insurance and Medicals - Physical examination, Medical payments and reimbursements,
Hospitalization insurance, Dental insurance, Disability insurance, Life insurance, Travel
insurance, Accidents insurance, Worker’s compensation, Unemployment insurance, and
Cancer Insurance.
• Miscellaneous - Automobile, Use of vacation spot, Parking, Dry cleaning and laundry,
Secretarial services. Employee stock purchase plan, Company-provided housing, Legal
services,
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REFERENCES:
Bhatia S.K.(2003), NEW COMPENSATION MANAGEMENT IN CHANGING
ENVIRONMENT, Deep and Deep, Publishers, New Delhi.
Chappra T.N. (2006) ESSENTIALS OF ORGANIZATIONAL BEHAVIOR,
Dhanpat Rai and Company Delhi.
Fisher, Cynthia D, Schoenfeld Lyle F. Shaw James. B (2004) HUMAN
RESOURCE MANAGEMENT, Biztantra, New Delhi p.543.
Flippo, Edwin B. (1989), PERSONNEL MANAGEMENT, Mc-Graw-Hill, Tokyo.
Gupta. C.B. (2005): HUMAN RESOURCE MANAGEMENT, Sultan Chand
Publishers, New Delhi
Khan, S.M. “EFFECT OF LIKING SYNDROME ON COMPENSATION NEED
SATISFACTION” Indian Journal of Industrial Relations, 38 (2) Oct.2002, 199-210.
Mathis, Robert L. and Jackson Jphn. H (2003), HUMAN RESOURCE
MANAGEMENT, Thomson South Western, Australia
LINKS
TOPICS LINKS FOR VIDEO
Need for Salesmen Compensation https://youtu.be/QghBO_LGJfs
Factors Affecting Salesman Remuneration https://youtu.be/RgZx1MK0hoI
Methods of Rewarding of Sales Personnel https://youtu.be/HlYTJuK2ec8
Defining Incentives https://youtu.be/zuoO4url2bs
Incentive Plan Design Process https://youtu.be/igXTi2RUhWA
Types of Incentives https://youtu.be/SOGjVviwPgA
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