Sales Force Management 2013 Course Outline (5/10) Krzysztof Cybulski Ph.D. Marketing Chair Faculty of Management Warsaw University

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1 Sales Force Management 2013 Course Outline (5/10) Krzysztof Cybulski Ph.D. Marketing Chair Faculty of Management Warsaw University

2 Program of Sales Force Management Course 1. Creating The Sales Force 2. Hiring the Best, Terminating the Rest 3. Training for Results 4. Motivating Salespeople 5. Sales Force Compensation 6. Sales Force Organization 7. Forecasting, Planning and Goal Setting 8. Performance Management 9. Special Sales Force Management Problems 10. Some Key Trends in Selling and Sales Force Management Final Test

3 Agenda: Sales Force Compensation Compensation is More than Money Sales Force Compensation Conflict Designing Compensation Program Compensation Objectives Establishing Level and Structure of Compensation Determinants of Compensation Alternative Compensation Methods Communication of Compensation Policy The Manager s Compensation New trends in compensation

4 Sales Force Compensation Compensation is more than money: Compensation is one of the most important tools for motivating and retaining field salespeople. However, sales force compensation is a cost that can quickly spiral out of control if the compensation plan is designed improperly. The design and implementation of effective sales reward system is directly related to the sales force s success level. Any type of sales organization can reward sales performance in three fundamental but interrelated ways.

5 Sales Force Compensation Compensation is more than money: 1. Direct financial rewards e.g. merit salary increases, bonuses, commission, contests, bonuses, retirement programs, insurance etc. 2. Carrier advancement such larger account and better sales territories and promotions upward in the organization and personal development opportunities such as attractive training. 3. No financial compensation such as recognition dinners, small gifts, a certificate of achievement, features in sales newsletters, trophies and membership in a special group.

6 Sales Force Compensation Conflict Sales Force Compensation Goals Provide Competitive Package to the Marketplace Control Company s Selling Expenses

7 Sales Force Compensation Difficult task of designing compensation plan that motivate sales force to reach company goals and satisfy customer without bankrupting the firm.

8 Purposes of Compensation: Connect Individual with Organization Influence Work Behavior Organization Choice Influence Satisfaction Feedback Reinforcement

9 Connect Individual with Organization Compensation provides sales personnel with a means of bridging the gap between sales force objectives and the individual salesperson s expectations and aspirations. The reward system must satisfy the individual needs of sales force members and must be tied directly to performance to maximize the possibility of obtaining sales force objectives.

10 Influence Work Behavior Compensation can directly motivate salespeople to behave in ways they otherwise would not behave. Sales managers consider pay as a major means of influencing salespeople s work behavior so they will improve their sales performance in organization. Thus, this is the main purpose of compensation!!!

11 Organizational Choice Any good compensation plan should serve to help in recruiting and hiring qualified salespeople. It must also aid in retaining top performers. The choice of joining or leaving the organization is mostly influenced by compensation expectancy.

12 Influence Satisfaction: Compensation can affect strongly a salesperson s satisfaction. Satisfaction with pay is both fairly simple & straightforward and complex. Simple because that pay satisfaction is based on the difference between: (1) What salesperson s perceived the pay should be as opposed to (2) The amount of pay actually received. Pay satisfaction is complex because of large individual differences among salespeople. The reward systems should take into consideration these individual differences. Pay dissatisfaction can have costly consequences.!

13 Pay Dissatisfaction Desire for More Pay Performance Job Dissatisfaction Psychological Withdrawal Stress Anxiety Poor Mental Health Grievances Turnover Absenteeism

14 Relationship between Rewards and Satisfaction How much reward is actually received in relation to how much is expected to be received? How the rewards received compare with other received? Whether the rewards lead to other reward? What is the level of extrinsic and intrinsic satisfaction from the rewards? What is the value of different rewards?

15 Sales Force Compensation Products Current New Customers New (4)CONVERGENCE SELLING (3) NEW BUSINESS DEVELOPMENT Current (1) ACCOUNT (2) LEVERAGE MANAGEMENT SELLING

16 Sales Force Compensation Customers New Current Current (4)Also require a greater proportion of incentives better suited to: salary plus bonus or salary plus commission plan (1) Involve a greater account servicing components and better suited to a: straight salary compensation plan Products New (3) Require a greater proportion of incentives better suited to: salary plus commission plus bonus plan (2) Should have a combination of salary and incentive better suited to: salary plus commission plan

17 Defining the Goals of The Company Translating the Company Goals into Sales Force Targets Deciding on Sales Force Compensation Objectives Determining Major Compensation Factors Developing Compensation Plan Communication and Implementation the Plan

18 Determining Sales Force Compensation Objectives: Compensation plans should have general and specific objectives for the individual performer. Examples follow: Attaining yearly sales volume and gross margins (general) Attaining monthly sales volume and sales specific products (specific) Market penetration and exploiting the territory s potential (specific) Call management & development of potential in key account as well as development of new accounts (specific) Introduction of new product (specific)

19 Major Compensation Factors Wage Level Wage Structure Individual Package Procedures

20 Sales Force Compensation Alternative Compensation Methods: Straight salary: the person receives a fixed amount of money at fixed intervals, such as weekly or monthly. Straight commission: the person receives an amount that varies with results, usually sales or profits. Bonus payments: a lump sum of money or stock for some exceptional performance, such as making quota, obtaining a new customer account or selling a desired products mix. Bonuses may be paid for individual performance or group achievement. Usually companied pay bonuses annually, however there are some companies that pay incentive earnings on a semiannual, quarterly or even monthly basis.

21 Sales Force Compensation Alternative Compensation Methods: Fringe benefits: there are a host of fringe benefits that companies may consider using to reward high-performing executives. Although most are reserved for top-level management, fringes such as a company car & stock options are frequently available to the sales force. Combination: the person receives a mix of salary, commission, and / or bonus. Sales contests; sales force contests are short-term incentive programs that uses prizes an awards to motivate sales reps to achieve goals specified by management. Contests are a popular motivational device.

22 Wage Level The most important factors determining average level of pay for a sales force are following: The skills, experience, and education required to do the work successfully; The level of income for comparable job in the company; The level of income for comparable jobs in the industry (that is, the competitive environment); Living costs; Earnings ceilings. The importance of each of these factors will vary from one situation to another.

23 Wage Level It is generally agreed that companies and industries with low average levels of compensation tend to suffer high turnover rates. Therefore, it is necessary that the general level of compensation be sufficiently competitive to attract and retain competent salespeople.

24 Wage Structure: Wage structure 1 20% 50% Salary Commission Bonus 30%

25 Wage Structure: Wage structure 2 20% Salary Bonus 80%

26 Wage Structure: Wage structure 3 30% Salary Commission 70%

27 Individual Package: Salary and Fringe Benefits for New Salesperson Based on Starting Salary of 2,200 USD per month with automatic increase to 2,500 USD after training completion.

28 Individual Package: Salary and Fringe Benefits for New Salesperson 2, USD Company contribution to pension plan for future service only (9%) 1, USD Company contribution to group health insurance, major medical, and life insurance plans USD Telephone allowance 3, USD Estimating value of having car at salesperson disposal 33, Salary including fringe benefits (2, per month)

29 Individual Package continued: Additional benefits that are not measured in USD but that contribute materially to salesperson standard of living 1. Under 5 year, two weeks of vacation; after 5 years three weeks of vacation, after 15 years, four years; after 25 years, five weeks of vacation. 2. Seven paid holidays 3. Christmas furlough 4. Pension plan that is rated as one of the best in the industry 5. Group health insurance and major medical plan cover a spouse, unmarried children under age 19 and student children to age 26

30 Individual Package continued: Additional benefits that are not measured in USD but that contribute materially to salesperson standard of living 6. Liberal sick-pay plan 7. New long-term disability (LTD) plan 8. Employee s education fund pays half of the tuition for approved courses successfully completed; and 75% of costs after 1 year of employment period 9. Twenty weeks of intensive training follow by constant supervision of manager 10. Regular reviews of job performance for salary consideration

31 Sales Force Compensation Alternative Compensation Methods Straight Salary Straight Commission Salary plus Bonus Salary plus Commission Salary plus Commission plus Bonus Commission plus Bonus

32 Straight Salary: Types of compensation plan Straight salary plan Main circumstances when the company enter on the new market when the no selling tasks are in very importance when salesperson s impact on sale outcome is limited in situations where is difficult to assess sales force activities and performance in companies where salespeople spend a lot of time on service and paperwork salary is also used when team selling is important, as in sales of complex products and services salary is also appropriate in situations where products are presold through advertising and the salesperson primarily takes orders

33 Straight Salary: Types of compensation Advantages Disadvantages Straight salary plan more control over wage levels & salespeople activities lower compensation for field salespeople easy to administer offers security for the salesperson more motivation to help the customer than to make a sale helps develop a sense of loyalty to the company permits rapid adaptation of sales force efforts to changing market conditions no incentives for extra effort high fixed salary costs more supervision is needed often leads to income inequities leads to not superior performance salary plans often overpay the least productive members of the team salespeople

34 Straight Commission: Types of compensation plan Straight commission plan Main circumstances straight commission plan rewards people for their accomplishments rather than their time or efforts straight commission work on the principle that salesperson will add value above his or her cost when the company wants to penetrate an existing market when the no selling tasks have got little importance e.g. minimum after service is required when salesperson s impact on sale outcome is crucial e.g. door to door selling, car dealrships the potential to earn higher wages tends to attract better qualified applicants and provides a strong incentive to work efficiently very often commission is based on the profitability

35 Straight Commission: Types of compensation Straight commission Advantages income is directly related to productivity - costs are proportional to sales maximum incentive to perform well less control needed, because salespeople have maximum work freedom commission is easy to calculate, so salespeople may keep track of their earnings easy to understand no fixed salary costs income is based strictly on accomplishments, not on subjective evaluations by sales managers Disadvantages less control over activities of salespeople salespeople are less motivated to perform non-selling activities service mainly the best accounts wide variations in salary for the salespeople selling costs less predictable salespeople have little loyalty to the company e.g. high turnover rate when business conditions are bad salespeople may neglect customers requirements and inventory problem

36 Combinations: Types of compensation Combination Advantages provides the greatest flexibility and control over salespeople provides security plus incentive allows frequent reinforcement of desired sales behavior fluctuation of selling costs with sales Disadvantages can be complex and misunderstood can be expensive to administer, particularly if not computerized higher & less predictable selling costs may fail to achieve management objectives if not carefully conceived

37 Salary plus Bonus Applications: Growing popularity of this compensation plan Are used to provide salespeople with income security while the bonus gives added incentives to meet company goals Probably the most widely used basis for determining bonus pay is sales to quota Another popular basis is average gross margin achieved by the rep Other bonus factors are new accounts, unit sales, and overall company performance Salary plus bonus plans are the most preferred compensation plans

38 Salary plus Bonus Plan Advantages it balance the need to control selling expenses and provide extra rewards for added results it lead to lower turnover among salespeople, very important when buying cycles are long and rep must invest time to understand how the customer do business sometimes bonus is increasing as a function of employment longevity Disadvantages the size of bonus sometimes has been arbitrary managers who fail to communicate how bonuses are determined ca lose some of their effectiveness as motivational devices sometimes weak relationship between performance and rewards e.g. bonus paid annually, salesperson instrumentality perceptions may be reduced

39 Salary plus Commission Applications: Managers who use the salary plus commission plan tend to use the commission part of the plan to motivate certain salespeople behaviors during the year It is flexible that is particularly appeal in industries where business fluctuates with seasonal or economic cycles mostly industrial markets e.g. building materials, machinery, electrical supplies, paper products.

40 Salary plus Commission: Advantages commission rates can be adjusted to promote the sale of individual products or to intensify efforts among specific market segments many firms vary commission rates according to the profitability of product commissions are usually paid monthly, providing almost immediate reinforcement for the salesperson s efforts sometimes commissions are spreading over period of time to ensure that salespeople will continue to service their accounts Disadvantages commissions tend to be expensive and very costly to administer average maximum wage paid with this plan is higher compared with salespeople on salary plus bonus plans commission ceilings (the incentive cap) was one aspect which mostly dissatisfied salespeople

41 Salary plus Commission plus Bonus: The most comprehensive payment plans combine the stability of salary, the incentives of a commission, and the special rewards of bonus. Around 18% of firms used this kind of plans. Salary plans provide salespeople with security and a steady, predictable monthly income

42 Salary plus Commission plus Bonus: Advantages The primary benefit of these plans is they allow the sales manager to reward virtually every activity performed by salespeople Managers are able rewarding more comprehensive set of behaviors, rather rewarding solely revenue (team work, customer satisfaction, customer loyalty etc.) These plans gives managers maximum flexibility for aligning compensation with these diverse activities Provide vide possibility of designing a variety of different plans to appeal to different salesperson needs Salespeople prefer these plan because they provide a variety of way to make money

43 Salary plus Commission plus Bonus: Disadvantages Main drawback of these plans are their complexity Administration becomes more expensive Sometimes plans are confusing to sales reps Different components of plan motivate different behavior (e.g. lack of concentration, and lost of managerial time for explanation) Salespeople may focus on activities that are less difficult to achieve (given their personal strengths) and ignore other important components of the plan

44 Commission plus Bonus: Commission plus bonus plan are particularly well suited to a company that uses brokers or independent sales reps. They are also widely employed for stockbrokers and bond traders e.g. Merrill Lynch used pay its brokers commissions plus cash bonuses and memberships in recognition circles.

45 Commission plus Bonus: Advantages are easy to understand and quite simple to administer plans provide huge cash flow benefits because commissions are paid at the time revenues are received, while the bonus is typically paid out at year end this plan provide some additional control over the salesperson s activities Disadvantages 100 % of compensation of person s pay is at risk (risk avoidance attitude) problem of perceived equity of the year-end-bonus problem of mercenary attitude toward year-end to achieve the bonus, which could affect customer relationships.

46 Compensation plan is Way to pay salespeople for their service Cutting-edge program Risk losing top performer to the competition

47 Use of Compensation Plans Type of Compensation Plan Percentage of Firms Using Straight Salary 18 Straight Commission 19 Combination Plans (63%) Salary plus bonus 24 Salary plus commission 20 Salary plus bonus plus commission 18 Commission plus bonus 1 Total 100%

48 Sales Contests: Are special sales programs offering salespeople incentive to achieve short-term work goals The incentives may include items that indicate achievement recognition (e.g. certificates, cash, merchandise or travel) However do not always rely on money for the incentive Occasionally, contests may run for as long as a year The incentives are given is addition to regular compensation S.C. are extra reward and are very popular among firms

49 Typical Mistakes in Developing Compensation Plan Trial & Error Method Developing Compensation Plans The Same Commission Rate for All Products Oversell the Salespeople

50 Main Tendencies & New Trends in Sales Force Compensation: Compensation and Customer Satisfaction The TQM focus on delivering high-quality products to clients and making sure customers are satisfied Firms have trouble measuring satisfaction and measurability is critical to the success of any incentive-based plan One common procedure in tying compensation to buyer satisfaction is ask buyers to complete customer satisfaction surveys typical questions are as follow: Salespeople responsiveness and integrity Problem solving After-service Communication skills

51 Other Important New Trends in Sales Force Compensation: Compensation and Salespeople s Responsibility for Profits Profit Based Commission Individualization of Salaries & Wages Negotiation of Commission

52 Key Words Compensation plan Straight Salary Straight Commission Bonus Fringe Benefits Wage Level Wage Structure

53 References Calvin R.J., Sales management Demystified, McGraw Hill, Churchill A.G.,jr. Sales Force Management, Irwin Mcgraw-Hill, International Edition Cron W.L., DeCarlo Th., Dalrymple s Sales Management, Wiley, 9 th. Ed., Stanton W.J., Spiro R., Management of a Sales Force, Irwin McGraw-Hill, 1999, 10th Edition.

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