compensation

COMPENSATION FOR HIGH PERFORMANCE

Any type of sales organization can reward sales performance in three fundamental and interrelated ways:

1. Direct financial rewards.

2. Career advancement and personal development opportunities.

3. Non-financial compensation.

COMPENSATION IS MORE THAN

MONEY

A sales reward system is not the only means of motivating salespeople, but it is the most important.

Measuring sales performance but not properly rewarding it severely limits the achievement level for salespeople.

OBJECTIVES OF A COMPENSATION PLAN

Company’s point of view

1. To control individual’s activities (activities like selling, prospecting, payment collection, building customer relationship.

2. To be competitive, yet economical (try to setup balance between salespeople’s expenses and the economical compensation plan.

3. To be flexible ( to adapt to new products, volatile markets, and differing territory sales potential.)

Salesperson’s point of view

1. To have regular and incentive income.

2. To have a simple plan.

3. To have a fair payment plan.

DESIGNING AN EFFECTIVE SALES COMPENSAITON PLAN

determine job descriptions

establish specific objectives

Decide levels of pay/compensation

Develop the compensation mix

Decide indirect payment plan

Pretest, administer, & evaluate the plan

1. DETERMINE JOB DESCRIPTIONS

Company has to examine the job descriptions of various positions like sales trainee, senior salesperson,

and key account executive, with detailed job responsibilities and key performance standards, for

compensation purpose

2. ESTABLISH SPECIFIC OBJECTIVES

Compensation plans should have general and specific objectives:

Attaining yearly sales volume and gross margins (general).

Attaining monthly sales volume and sales on specificproducts (specific).

Market penetration and exploiting the territory’s potential (general).

Call management and development of potential in keyaccounts as well as development of new accounts (specific).

Introduction of new products (specific).

3. DECIDE LEVELS OF PAY OR COMPENSATION

A Level of pay means the average pay or money earned by the salespeople per year or per month.

Levels of pay is based on certain factors mention below:

• the levels of pay for similar sales positions in the industry.

• the levels of pay for comparable jobs in the company.

• education, experience, and skills required to do the sales job.

4. DEVELOPING THE COMPENSATION MIX

The most widely used elements of compensation mix are:

Salaries

Commissions,

Bonuses

Indirect monetary benefits (fringe) such as paid vacation, sickness, pensions, life insurance

5. DECIDE INDIRECT PAYMENT PLAN

Indirect payment plan such as fringe benefits, give a degree of security to salespeople and make them

loyal to the company.

Fringe benefits, range from 25 to 40 percent of the total sales compensation package.

Fringe benefits are in the form of medical reimbursements, group life insurance, travel insurance, accident insurance, pension plan,

provident fund, paid vacations etc.

6. PRETEST, ADMINISTER, & EVALUATE THE COMPENSATION PLAN

PRETEST THE PLAN

Before a new plan is introduced, it should be pre-tested with a computer using past sales, and possibly

forecasted sales, to determine what happens to company profit and to the top, median, and marginal

performers:

In boom times

During a recession

If old products are dropped or new ones added


ADMINSTERING

The company must carefully “sell the plan” to the sales force. If it introduces the plan at a national or regional sales meeting, it should explain the plan’s rationale and then show the sales force what the

average member would earn for a good job and for a superior job. Even more convincing managers should give each salesperson a chance to calculate what the incentive payments would be for the person’s salary,

territory, and various sales levels.

After it is in effect, the plan should be continually promoted or resold to the sales force.


EVALUATING

“Did the sales force reach its objectives?” is the main question to be answered when evaluating any pay plan. If the answer are positive, then they should

keep the plan or else they should find out why and determine if the reasons are related to pay. It could be that some minor adjustments need to be made in

one of the plan’s components.

Plans may be evaluated on quarterly, half-yearly or yearly basis.

(A) STRAIGHT SALARY

TYPES OF COMPENSATION PLANS

Of all the compensation plans, the straight salary plan is the simplest: The salesperson is paid a specific Rs/dollar amount at regular intervals.

Situations where straight-salary plans can be used:

• sales trainees, who are involved in learning about the job, until training is completed.

• missionary sales activities, involved in spreading information widely instead of asking for order.

(B) STRAIGHT COMMISSION PLANS

The straight commission plan is a complete incentive plan. If salespeople do not sell

anything, they do not earn anything.The sales manager has to decide on the following factors in developing a straight commission plan:

Commission base: the base (sales volume) on which the salesperson’s performance is measured

and commission will be paid.

• Commission rate : It is the rate to be paid per unit, usually expressed as a percentage of sales or gross profit.

• Commission start: the starting point for the commissions payment, that is, after

selling the first unit or after reaching a sales quota.

• Commission payout: commission to the salespeople is paid after the customer is

billed an payment received, and not after the order is obtained.

Situations where commission plans can be used:

• Little non-selling, missionary work involved.

• The company cannot afford to pay a salary and wants selling costs to be directly related to sales.

• The direct-sales industry, such as Amway, Tupperware etc. pays by straight-commission to a large number of salespeople also known by independent contractors.

(C) COMBINATION PLANS

Under a combination salary plan, a proportion of the salesperson’s total pay is guaranteed, and the rest is incentive pay. These are the key questions management must answer when designing a salary-plus-incentive plan:

1. What should be the split between the guaranteed salary and the average or maximum incentive payment?

2. On what basis should the incentive be calculated?

3. who should participate in the plan?

4. How is the salary administered?

5. When should incentives be paid?

The three different types of combination compensation plans used by most of the companies are:

Salary plus commission plan

this plan focus on the balance between the fixed (salary) and variable (commission) components of a

salesperson’s pay.

Salary plus bonus plan

The companies opting for salary plus bonus plan, want to control selling and non-selling activities of the sales force with a larger portion of fixed element of salary, and still present some incentive to achieve either a

short-term or a long-tem objective.

Long term objectives may be achieving a higher level of customer satisfaction and customer retention. While

short-term objectives could be introducing new products, or prospecting for new customers.

Salary plus commission plus bonus plan

This plan allows a company an adequate control of sales force activities, an incentive to increase sales to

the expected level, and a bonus to achieve specific goals like developing new customers and introducing

new products.

This plan is suitable for companies who sell seasonal products like fans and air conditioners.

When to Use a Combination Salary Plan

• To motivate the sales force.

• To attract and hold good people.

• To direct the sales force efforts in a profitable direction.

compensation

Documents