Sales Management. Who was Ovid? Sales Force Compensation 10/4/2010. Chapter Nine Sales Force Compensation

Transcription

1 Sales Management Chapter Nine 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 Who was Ovid? Ovid was a Latin poet who flourished in Rome in the late1st century BC and early 1st century AD, during the reign of the Emperor Augustus. His works include the Fasti, an incomplete poem in six books describing the first six months of the Roman calendar, richly illustrated with Greco-Roman myths and legends. His two other myth-themed works were the Metamorphoses and the Heroides. Source: Ovid. Fasti. Translated by Frazer, James George. Loeb Classical Library Volume. Cambridge, MA, Harvard University Press; London, William Heinemann Ltd Sales Force Compensation Financial Compensation Direct payment of money Indirect payment (fringe benefits) Nonfinancial Compensation Opportunity to advance Recognition Enjoyment of job Level of earnings 1

2 Sales Force Compensation and Strategic Planning Objectives Company perspective Motivate salespeople Correlate performance with rewards Control Salespersons activities Ensure proper treatment of customers Attract and keep competent s/p Economy and competitiveness, fairness Sales Force Compensation and Strategic Planning Objectives Salesperson's perspective Provide steady and incentive income Flexible and stable Simplicity Economy and competitiveness, fairness What a Good Sales Compensation Plan Should Do, Fig. 9-1, p. 258 Correlate efforts and results with rewards Control salespeople s activities Ensure proper treatment of customers Attract and keep competent salespeople Motivate salespeople Good sales compensation plan Be economical yet competitive Provide choice Be fair Be simple Provide secure and incentive income Be flexible yet stable 2

3 Considerations preceding designing of plan Generalizations Inherent conflicts One size does not fit all While compensation should be related to the general compensation structure of company. More important to achieve external parity for sales people Management should solicit sales force input on compensation Potential Conflicts in Compensation Plan Design Characteristics of Plan Reward results 2. Reward efforts C 3. Provide steady income C 4. Provide incentive C C 5. Fair C C C C 6. Flexible C C 7. Simple C C C C 8. Economical C C C C 9. Competitive C C C C 10. Controls and C C C C directs 11. Consistent w/ company C C C C C objectives 12. Stable C C C C C C C C C = Potential for conflict Steps in Designing a Sales Compensation Plan, Fig 9-2 Review Job Description Identify plan s objectives Establish level of compensation Develop the method of compensation Decide on indirect monetary compensation Pretest and install plan 3

4 Designing a Sales Compensation Plan Review Job Description ID Specific Objectives of Plan Include job elements controllable by s/f and objectively measurable Establish level of compensation Factors affecting level Size of company Age of s/p Placing limits on earnings Develop Keep reimbursement for expenses separate from compensation Three basic types of compensation Straight Salary Direct monetary reward paid for performing certain duties over a period of time Straight commission Regular payment for the performance of a unit of work Combination 4

5 Develop Combination Salary plus commissions Salary plus bonus Salary plus commission and bonus Emphasis shifting to solutions selling, customer satisfaction, and developing long-term relationships with customers Building Blocks for a Sales Compensation Plan, Fig 9-4, p. 264 Others Profit sharing Others Pension Entertainment Profit Sharing Moving Expenses Company Lodging Car Bonus Insurance Lodging Salary Commission Paid Vacation Travel SECURITY INCENTIVES BENEFITS EXPENSES Straight Salary Fixed (expense) element in pay plan Strengths Provides security Encourages loyalty Management has more control over s/p activities Customers may react more favorably knowing that salesperson is not trying to sell to make a commission 5

6 Straight Salary Limitations Direct incentive is easily lost if not administered properly Represents a fixed cost Requires supervision to direct, control, and evaluate When straight salary is best 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 Strengths Provides a strong incentive Sales people have more freedom Acts as a screening method Limitations Difficult to direct and supervise sales people Customers best interests may be ignored Sales people s earnings may fluctuate widely Straight Commission When straight commission is best 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 6

7 Straight Commission Commission Bases Sales volume Gross margin Choice of Rates of Commission affected by: Level of income desired Profitability of given products Difficulty in selling a product Classes of customers Straight Commission Other Considerations Constant, Progressive, and Regressive Rates Drawing Accounts Split Commissions Limits on Earnings Drawing Accounts 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) Guaranteed Plan Commission = $3,000 Less draw - 1,800 Less February debt Net $ 900 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 $0) March $1,800 $30,000 $3,000 $1,200 ($3,000 - $1,800 = $1,200) 7

8 Link Method to the Objective Examples p. 273 Increase profits by 10% - [incentive] Increase sales volume of a certain class of products by 10% - [increase rate on higher margin products] Increase volume at existing accounts - [bonus or commissions tied to repeat business] Improve customer satisfaction - [bonus or salary] Stimulate missionary work - [bonus for specifically measurable, salary increase for hard to measure] Develop a new territory [Salary, esp. in beginning] Bonus Lump Sum payment for above-normal performance Strengths Added incentive Can be used for specific activities flexible Limitations Added cost May be seen as inequitable if not administered properly When bonus is best To encourage above-normal performance of specific activities 100% Salary Combination Fixed Salary Security 30 Sal./70 Comm. 50/50 70 Sal./30 Comm. Variable Commission/Bonus Incentive Salary plus Commission Salary plus Bonus Salary plus Commission and Bonus Emphasis shifting to solutions selling, customer satisfaction, and developing longterm relationships with customers 100% Comm. 8

9 Indirect Monetary compensation Nonfinancial Honors, recognition, opportunities for promotion Fringe benefits Insurance, retirement, stock/profit sharing Final Steps in develop plan Pretest plan Introduce plan to sales force Install plan and evaluate it periodically 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 Straight Provides a strong commission incentive Bonus Sales people have more freedom Acts as a screening method Added incentive Can be used for specific activities - flexible 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 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 To encourage above-normal performance of specific activities 9

10 Possible Combination Compensation Plans COMMISSION SALARY BONUS 10