Expert answer:Sales Management Discussion question
Expert answer:250 words, APA format, 2 references with in text citationsAssume you invented a new plastic-shaping technology that allows plastic products to be manufactured much more cheaply. When you talk to manufacturers, though, they are skeptical because the new method is so radically different from any technology they have ever used before.What do you think the sales cycle for the technology would look like? What would the most important step of the sales cycle be? Why?What type of sales force would you utilize and why?What marketing activities could help you shorten the sales cycle and how?
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13
chap te r
Salesperson Compensation
and Incentives
F
I
N
D
This chapter provides an overview of key issues relatedL
E
to compensating salespeople, including the types of compensation, especially incentive forms of compensation Y
available and when to offer each.
,
Learning Objectives
After reading this chapter, you should be able to
• Discuss the advantages and limitations of straight
salary, straight commission, and combination plans.
• Explain how and why a bonus component to
compensation might be used as an incentive.
S
A
R
A
• Understand the effective use of sales contests, as well
as the potential pitfalls of their use.
• Identify key nonfinancial rewards and how and why
they might be important.
• Recognize key issues surrounding expense accounts in
relationship selling.
• Describe how to make compensation and incentive
programs work.
• Discuss making decisions on the mix and level of
compensation.
5
3
1
9
B
U
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e x p e r t advice
Expert:
Company:
Business:
Education:
Debra Lacy
Fortune 125 firm offering a wide range of insurance products and
services including personal automobile, homeowners, workers
compensation, commercial multiple peril, commercial automobile,
general liability, global specialty, group disability, assumed reinsurance,
fire, and surety.
Sales Director for a sales organization of over 225 salespeople, leads,
supervisors, and managers.
F Graduate School of Business, Rollins College; BS,
MBA, Crummer
College of Technology, University of Houston–University Park.
What do you do to make sure a new salesperson in your
group understands the values and vision of your company
and your group right from the beginning?
Once we’ve made a commitment to hire a salesperson, it’s
critical they get off to a great start from day one. We have
a strong, employee-friendly culture and value giving each
person the opportunity to go as far as they want to go in
their career. To help acculturate them to our way of business as quickly as possible, I like to spend some time with
each newly hired salesperson. I hold “skip level” meetings
(so-called because it puts her as director in front of the
people, skipping over the sales manager and sales supervisor levels) with new hires early on. Think of these like
focus groups where I can directly connect with the salespeople. Important discussions in these meetings include:
• The value of a high level of employee engagement.
• Why I am drawn to the company myself—what
motivates me?
• No matter what impression a customer may hold about
us from elsewhere, the highest impact touchpoint is
with the salesperson.
I find that well-timed “skip level” meetings create a great
bond between the salespeople in my group and me and
that we connect on a level that tears down barriers of position and distance. These meetings are a great trust builder,
and trust is one of the strongest motivators.
That’s a great approach. Once a salesperson is onboard,
how do you get your managers and supervisors to carry on this
same leadership approach with the salespeople over time?
In my company, we have a strong ethic toward internal
customership. That is, our job in management is to treat
our salespeople as valued internal customers. My management team and I want to ensure that people feel good
about working for the company, and especially working
364
I
N our group. The more we work to ensure high saleswithin
person satisfaction, the more likely the salesperson is to
D
work toward achieving high customer satisfaction. We
hold
L quarterly business meetings with all salespeople and
openly discuss not only how the group is doing but also
Ethe company is doing—everyone needs to know why
how
their
Y part is important to the success of the whole.
I also want to emphasize that it’s just as important that
my, managers and supervisors motivate their top people to
continue to excel as it is to remediate underperformers.
Those top performers are likely the supervisors and managers
S of tomorrow—we can’t have them leaving because
we don’t nurture their desire to excel.
A
Give me a specific example of how the culture, vision,
R
and values of your group get translated into some actual
A
reward opportunity for your salespeople.
Here’s one example. Every salesperson fills out a card
indicating
preferences like favorite foods, “wish list” gifts,
5
preferences for receiving performance recognition (as in,
do3
they prefer to be recognized publicly or one-on-one),
and
1so on. Then, when we decide to run a sales contest
we can easily customize the rewards around the specific
9
likes/dislikes
of each participant.
B
How important do you believe nonfinancial rewards are
to U
motivating salespeople?
I see great value in nonfinancial rewards and use them a
lot—things like bringing professional development courses
right on-site, encouraging salespeople to shadow in other
departments, and generally giving people an opportunity to
become more valuable on the job. Two of my three current
sales managers started out as sales reps. Many of our salespeople have gone from inside sales to outside sales, as well
as to different jobs and units throughout the company. Nonfinancial rewards are potentially very powerful motivators.
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Overview of Compensation and Incentives
Chapter 10 introduced the concept of rewards. The way the reward structure is
implemented in a sales organization is through the compensation plan. Three
basic questions drive successful compensation plans.
1. Which compensation method is most appropriate for motivating specific kinds
of selling activities in specific selling situations?
2. How much of a salesperson’s total compensation should be earned through
incentives?
3. What is the best mix of financial and nonfinancial compensation and incentives for motivating the sales force?
In most firms, the total financial compensation paid to salespeople has several
components, each of which
F may be designed to achieve different objectives. The
core of sales compensation plans consists of a salary and incentive payments.
I money paid at regular intervals. The amount of salary
A salary is a fixed sum of
paid to a given salesperson
N is usually a function of that salesperson’s experience,
competence, and time on the job, as well as the sales manager’s judgments about
D
the quality of the individual’s
performance. Salary adjustments are useful to
reward salespeople for performing
customer relationship-building activities that
L
may not directly result in sales in the short term, such as prospecting for new cusE service. They can also help adjust for differences in
tomers or providing postsale
sales potential across territories.
Y
Many firms that pay their salespeople a salary also offer additional incentive
,
pay to encourage good performance. Incentives may take the form of commissions
tied to sales volume or profitability, or bonuses for meeting or exceeding specific
performance targets (e.g., meeting quotas for particular products or particular
S
types of customers). Such incentives direct salespeople’s efforts toward specific
A the year, as well as provide additional rewards for top
strategic objectives during
performers. A commission
R is a payment based on short-term results, usually a
salesperson’s dollar or unit sales volume. Since a direct link exists between sales
A commission received, commission payments are useful
volume and the amount of
for increasing reps’ selling efforts.
A bonus is a payment made at management’s discretion for achieving or surpassing some set level of5performance. Commissions are typically paid for each
sale; a bonus is typically3not paid until the salesperson surpasses some level of
total sales or other aspect of performance. The size of the bonus might be determined by the degree to1which the salesperson exceeds the minimum level of
performance required to9earn it. Thus, bonuses are usually additional incentives to
motivate salespeople to reach high levels of performance, rather than part of the
B
basic compensation plan. Bonuses are almost never the sole form of compensation. Rather, they are combined
with other compensation elements.
U
Attaining a quota is often the minimum requirement for a salesperson to earn
a bonus. Quotas can be based on goals for sales volume, profitability of sales, or
various account-servicing activities. To be effective, quotas (like goals) should
be specific, measurable, and realistically attainable. Therefore, bonuses can be a
reward for attaining or surpassing a predetermined level of performance on any
dimensions for which quotas are set.
In addition to these incentives, many firms conduct sales contests to encourage
extra effort aimed at specific short-term objectives. For example, a contest might
S A L E S P E R S O N C O M P E N S AT I O N A N D I N C E N T I V E S
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offer additional rewards for salespeople who obtain a specified volume of orders
from new customers or who exceed their quotas for a new product during a threemonth period. Contest winners might be given additional cash, merchandise, or
travel awards.
Finally, a foundation of most compensation plans is a package of benefits
designed to satisfy the salesperson’s basic needs for security. Benefits typically
include medical and disability insurance, life insurance, and a retirement plan,
among others. The types and amount of benefits in a compensation plan are usually a matter of company policy and apply to all employees. The benefit package
a firm offers its salespeople should be comparable to competitors’ plans to avoid
being at a disadvantage when recruiting new sales talent.
The key forms of financial compensation of salespeople are summarized in
Exhibit 13.1.
It is important to know that beyond financial compensation, a variety of nonfinancial incentives exist. These might
F take the form of opportunities for promotion
E X H I B I T 13.1
I
N of Financial Compensation Plans
Components and Objectives
D
L
Components
Objectives
E
Y
, • Motivate effort on
Salary
Commissions
Bonuses
Sales contests
Benefits
S
A
R
A
5
3
1
9
B
U
nonselling activities
• Adjust for differences in
territory potential
• Reward experience and
competence
• Motivate a high level of
selling effort
• Encourage sales success
• Direct effort toward
strategic objectives
• Provide additional rewards
for top performers
• Encourage sales success
• Stimulate additional effort
targeted at specific short-term
objectives
• Satisfy salespeople’s
security needs
• Match competitive offers
Source: Churchill/Ford/Walker’s Sales Force Management, 9th ed., by Mark W. Johnston and Greg W. Marshall
(New York: McGraw-Hill, 2009), p. 347. Reprinted by permission of the McGraw-Hill Companies.
366
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or various types of recognition for performance, such as special awards and mention in company newsletters. Nonfinancial incentives will be discussed in more
detail later in the chapter.
Straight Salary, Straight Commission,
and Combination Plans
The three primary methods of compensating salespeople are (1) straight salary,
(2) straight commission, and (3) a combination of base salary plus incentive pay
in the form of commissions, bonuses, or both. In recent years, the steady trend
has been away from both straight salary and straight commission plans toward
combination plans. Today, combination plans are by far the most common form of
compensation.
In essence, managers seek
F to create a “pay for performance” plan that uses both
salary and incentive programs to maximize salespeople’s performance. UnfortuI
nately, creating such programs
is very complex, and companies often choose a program based on convenience
N or cost effectiveness rather than actual benefits to the
company.1 There is much variety in preferences for rewards among salespeople.
D
The following sections highlight the three main compensation approaches, along
L
with advantages and disadvantages
of each. Exhibit 13.2 summarizes the discussion.
E X H I B I T 13.2
Compensation Method
(Frequency of Use)
Straight Salary
E
Y
, for Salespeople
Compensation Methods
S
Advantages
A
sales rep with maxiWhen compensating new
R Provides
mum security; gives sales mansales reps; when firm moves
into new sales territories thatA ager more control over sales
Especially Useful
require developmental work; reps; is easy to administer;
when sale reps must perform yields more predictable selling
many nonselling activities 5 expenses
Straight Commission
When highly aggressive
3
selling is required; when
1
nonselling tasks are
minimized; when company
9
cannot closely control sales
force activities
B
Combination
When sales territories have
relatively similar sales potential; when firm wishes to provide incentive but still control
sales force activities
Disadvantages
Provides no incentive; necessitates closer supervision of sale
reps’ activities; during sales
declines, selling expenses
remain at same level
Provides maximum incentive;
by increasing commission rate,
sales managers can encourage
reps to sell certain items; selling expenses relate directly to
selling resources
Sales reps have little financial
security; sales manager has
minimum control over sales
force; may cause reps to
provide inadequate service to
smaller accounts; selling costs
are less predictable
Provides certain level of financial security; provides some
incentive; selling expenses
fluctuate with sales revenue;
sales manager has some
control over reps’ nonselling
activities
Selling expenses are less
predictable; may be difficult to
administer
U
Source: Churchill/Ford/Walker’s Sales Force Management, 9th ed., by Mark W. Johnston and Greg W. Marshall (New York: McGraw-Hill, 2009),
p. 348. Reprinted by permission of the McGraw-Hill Companies.
S A L E S P E R S O N C O M P E N S AT I O N A N D I N C E N T I V E S
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Straight Salary
Two sets of conditions favor the straight salary compensation plan: (1) when management wishes to motivate salespeople to achieve objectives other than short-run
sales volume and (2) when the individual salesperson’s impact on sales volume is
difficult to measure in a reasonable time. Because relationship selling may involve
both of these conditions, it is not uncommon for sales jobs with heavy customer
care to be compensated by straight salary.
Advantages. The primary advantage of a straight salary is that management
can require salespeople to spend their time on activities that may not result in
immediate sales. A salary plan or a plan with a large proportion of fixed salary is
appropriate when the salesperson is expected to perform many customer service
or other nonselling activities. These may include market research, customer problem analysis, product stocking, customer education, or sales promotion. Straight
salary plans are also common inFindustries where many engineering and design
services are part of the selling function, such as in high technology industries.
I are also desirable when it is difficult for manStraight salary compensation plans
agement to measure the individual
N salesperson’s impact on sales volume or other
aspects of performance. Thus, firms tend to pay salaries to their sales force when
D
(1) their salespeople are engaged in missionary selling, as in the pharmaceutical
L
industry; (2) other parts of the marketing
program, such as advertising or dealer
promotions, are the primary determinants of sales success, as in some consumer
E
packaged-goods businesses; or (3) the selling process is complex and involves a
Y selling effort, as in the case of computers.
team, cross-functional, or multilevel
Career counselors often advise,college students seeking a first job in relationship
selling to try to make that first experience heavier in salary component than incentive pay. This gives the new salesperson some time to learn the ropes and hone his
or her skills while earning a steady
S income. Because straight salary plans provide
a steady, guaranteed income, they are often used when the salesperson’s ability to
A as with new recruits in a field training progenerate immediate sales is uncertain,
gram or when a firm is introducing
R a new product line or opening new territories.
Finally, straight salary plans are easy for management to compute and administer. They also give management A
more flexibility. It is easy to reassign salespeople
to new territories or product lines because such changes will not affect their compensation (unless the manager chooses to provide a salary increase). Also, since
5
salaries are fixed costs, the compensation cost per unit sold is lower at relatively
high sales volume.
3
1
Disadvantages. The major limitation
of straight salary compensation is that
financial rewards are not tied directly
to any specific aspect of job performance.
9
Management should attempt to give bigger salary increases each year to the good
B
performers than the poor ones. However,
the amount of those increases and the
way performance is evaluated areUsubject to the whims of the manager who makes
the decision. Also, salaries do not provide any direct financial incentive for improving sales-related aspects of performance. Consequently, over the long run salary
plans appeal more to security-oriented than achievement-oriented salespeople.
Straight Commission
A commission is payment for achieving a given level of performance. That is,
salespeople are paid for sales results. Usually, commission payments are based on
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the salesperson’s dollar or unit sales volume. However, it is becoming more popular for firms to base commissions on the profitability of sales to mo …
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