Chapter 9

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

McGraw-Hill/Irwin Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
 Fig. 9-1 What a Good Sales
Compensation Plan Should Do
Correlate efforts Control Ensure proper Attract and keep
and results with salespeoples treatment of competent
rewards activities customers salespeople

Motivate Be economical
Good sales compensation plan
salespeople yet competitive

Provide
choice Be flexible
Provide secure yet stable
Be fair Be simple and incentive
income

9-2
 Potential Conflicts in Compensation Plan Design

Characteristics of Plan 1 2 3 4 5 6 7 8 9 10 11 12
1. 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 directs C __ __ C C C __ __ __ __
11. Consistent w/ company objectives C C C C __ __ C __ __ __ __
12. Stable C C __ C C C __ C __ C C __

C = Potential for conflict

9-3
Fig 9-2 Steps in Designing a Sales
Compensation Plan

Review job Identify plans Establish level of

description objectives
compensation

Develop the method Decide on indirect Pretest and

of compensation monetary compensation install plan

9-4
Fig 9-4 Building Blocks for a Sales Compensation
Plan

Others

Profit sharing Others

Pension Entertainment

Profit Sharing Moving Expenses Lodging

Company Car

Bonus Insurance Lodging

Salary Commission Paid Vacation Travel

SECURITY INCENTIVES BENEFITS EXPENSES

9-5
Method Advantage Disadvantage Best Used
Straight Provides security and Direct incentive is easily For products that require a lot of
salary stability for reps lost if not administered presale and/or post-sale service
properly
Better for directing and For building long-term customer
controlling sales Represents a fixed cost relationships
activities
Requires supervision to When supervision is available for
Ensures proper direct, control, and evaluate new recruits
treatment of customers
For new territories
For missionary sales
Straight Provides a strong Difficult to direct and When a strong incentive is needed to
commission incentive supervise sales people attain sales
Sales people have Customers best interests For products that require little
more freedom may be ignored presale and/or post-sale service
Acts as a screening Sales peoples earnings The sale is a one-time sale
method may fluctuate widely
Adequate field supervision is not
available
Company is in a weak financial
position
Company uses part-time or
independent sales people
Bonus Added incentive Added cost To encourage above-normal
performance of specific activities
Can be used for specific May be seen as
activities - flexible inequitable if not
administered properly
9-6
 Possible Combination
Compensation Plans

COMMISSION

BONUS
SALARY

9-7
 Drawing Account Examples
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
February $1,800 $15,000 $1,500 $0 (rep owes $300)
March $1,800 $30,000 $3,000 $900 (computed as follows
Commission = $3,000
Less draw - 1,800
Less February debt - 300
Net $ 900

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 $0)
March $1,800 $30,000 $3,000 $1,200 ($3,000 - $1,800 = $1,200)

9-8
Compensating Cross-Functional Teams

Shared Reward
Role-reward congruence
Team-member input
Peer evaluations
9-9