Part V SALES FORCE LEADERSHIP

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Part VSALES FORCE LEADERSHIP

• Chapter 12
• Compensating Salespeople

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Goals of a Sales ForceReward System

• Acceptable ratio of costs to sales force output
  in volume, profit, or other objectives
• Encourage activities consistent with firms
  overall, marketing, and sales force objectives
  and strategies
• Attract and retain competent salespeople,
  thereby enhancing long-term customer
  relationships
• Be clear and be flexible enough to allow
  adjustments that facilitate administration

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The Customer-Product Matrix
New Business Development
Convergence Selling
New
CUSTOMERS
Account Management
Leverage Selling
Current
Current
New
PRODUCTS
Figure 14-1 The Customer-Product Matrix
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Compensating Salespeople
Components Needs
SALARY Motivate effort on non-selling activities Adjust for differences in territory potential Reward experience and competence
COMMISSIONS Motivate a high level of selling effort Encourage sales success
INCENTIVE PAYMENTS Direct effort toward strategic objectives Provide additional rewards for top (Bonus) performers Encourage sales success
SALES CONTESTS Stimulate additional effort targeted at specific short-term objectives
PERSONAL BENEFITS Satisfy salespeoples security needs Match competitive offers
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Aligning Pay With Strategy

• Government Computer Sales, Inc.s compensation
  plan ties a portion of reps' pay to the
  information they obtain from their clients.
• Mandates reps to dig deeper and put GCS in the
  minds of the government agencies and educational
  institutions that use its products.
• If a rep has 15,000 of available commission for
  the first ½ of the year the plan would work as
  follows
• 40 (6,000) is tied to account management (i.e.,
  customer information)
• 60 (9,000) is tied to a profit dollar quota
• Reps who meet the documentation requirements
  receive all
• 6,000 those who meet less than 85 do not
  receive the 6,000.

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Use of Compensation Plans
Percentage of Companies Using Percentage of Companies Using
Straight Salary 18
Straight Commission 19
Combinations Plans (63)
Salary Plus Bonus 24
Salary Plus Commission 20
Salary Plus Bonus Plus Commission 18
Commission Plus Bonus 1
TOTAL 100
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Compensating Salespeople
Compensation Plan Advantage Disadvantage
Salary No motivation Favors unproductive sales people High costs when sales are low
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Compensating Salespeople
Compensation Plan Advantage Disadvantage
Salary Reduced turnover Simple Easy to administer Good when difficult to determine who made the sale Good when service is required Promotes long-term goals Good during drastic business swings Easier to transfer salespeople No motivation Favors unproductive sales people High costs when sales are low
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Compensating Salespeople
Compensation Plan Advantage Disadvantage
Commissions Motivational Relates directly to performance Unlimited income (assuming no cap) Good for saving money on unproductive salespeople Perceived fair
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Compensating Salespeople
Compensation Plan Advantage Disadvantage
Commissions Motivational Relates directly to performance Unlimited income (assuming no cap) Good for saving money on unproductive salespeople Perceived fair No loyalty Little security Short range view High turnover Management hasless control
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Comparing Salary and Commission Plans Use of
Compensation Plans
50,000
Straight Salary
40,000
Total cost per person (thousands )
30,000
10 Commission
20,000
10,000
0 100 200 300
400 500
Sales Per Person in Thousands
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Advantages of Frequent vs. Infrequent Incentive
Payments
Frequent Payment Advantages (Monthly/Quarterly) Infrequent Payment Advantages (Semiannually/Annually)
Salespeople receive frequent feedback and rewards when selling cycle is short. Rewards are close in time proximity to the successes that provided the reward. Strong link between successful behavior and reward motivation increased. Payments at bonus time are larger and have greater impact. Performance is more stable because short-term sales variations are smoothed over the longer time horizon. Incentives are not paid till end of year smoother cash flow.
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Customer Satisfaction and Compensation

• IBM places significant resources toward
  monitoring customer satisfaction.
• All customers are surveyed annually on
• Overall customer satisfaction
• The reps knowledge of the customer
• The transaction or solution itself
• How satisfied the customer is with the solution
• The installation process (smooth or disruptive),
  including how long it took
• The extent and clarity of the education provided
• The time needed to get the application(s) up and
  running
• The capability and speed of technical support
• Results are benchmarked against prior IBM
  performance, as well as the competition
• Results are used for compensating sales reps and
  managers.

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Gross MarginCommission Problem
Marketing Plan Discounted Price Decline
Selling Price 100 92 8

• Assume the following
• The salesperson makes 20 commission on the gross
  margin
• It costs 80 to make the product.
• Overhead is 10.

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Gross MarginCommission Problem
Marketing Plan Discounted Price Decline
Selling Price 100 8
Cost of Goods Sold (80)
Gross Margin 20
GM Commission x 20
Commission 4.00
Contribution 16.00
Overhead Costs (10.00)
Net Profit (Loss) 6.00
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Gross MarginCommission Problem
Marketing Plan Discounted Price Decline
Selling Price 100.00 92.00 8
Cost of Goods Sold 80.00 80.00
Gross Margin 20.00 12.00
GM Commission x 20 x 20
Commission 4.00 2.40 40
Contribution 16.00 9.60
Overhead Costs 10.00 10.00
Net Profit (Loss) 6.00 (0.40) 106
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Research on Pricing and Profits
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Compensation Levels for Firms Using Salary Plus
Incentives
161,500
147,800
119,600
94,800
71,000
Average Sales Rep Poorly Performing Rep Midlevel Performing Rep Top Performing Rep Sales Executive
Base Salary
Bonus Commission
Base Salary
Bonus Commission
Base Salary
Bonus Commission
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Selecting Benefits

• Salespeople expect cars
• Insurance and travel are very common
• Some plans offer a choice of alternatives