CHAPTER 13

COMPENSATION FOR HIGH

PERFORMANCE
Copyright 2001 by Harcourt, Inc. All rights reserved.

LEARNING OBJECTIVES
Suitable compensation is a must for companies striving
for a satisfied and high-quality sales force. This chapter
should help you understand:
Why compensation is so important for establishing an effective
sales force.
How to design, implement, and evaluate a compensation program.
The advantages and disadvantages involved in the three types of
compensation plans: straight salary, straight commission, and
combination salary.
The different types of sales force expenses and transportation.
The total compensation package and how to develop a proper
compensation mix.
What is involved in designing a new compensation plan.
Copyright 2001 by Harcourt, Inc. All rights reserved.

Sales is one of the few jobs where you

earn your money every day.

Copyright 2001 by Harcourt, Inc. All rights reserved.

COMPENSATION IS MORE
THAN MONEY
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. Nonfinancial compensation.
Copyright 2001 by Harcourt, Inc. All rights reserved.

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.

Copyright 2001 by Harcourt, Inc. All rights reserved.

PURPOSES OF COMPENSATION
Connect individual with organization.
Influence work behavior.
Organizational choice.
Influence satisfaction.
Feedback.
Reinforcement.

Copyright 2001 by Harcourt, Inc. All rights reserved.

FIGURE 13.1 EFFECTS OF PAY DISSATISFACTION

Performance
Pay
D i s s a t i s fa ct i o n

D es i r e fo r
M ore P a y

Absenteeism

Grievances
Job
Job
Dissatisfa
ction

Turnover

Copyright 2001 by Harcourt, Inc. All rights reserved.

P s y ch o l o g i ca l
W ith d ra w a l
S tr ess,
A n x i et y
P o o r M en ta l
H ea l t h

Individuals are satisfied with the rewards

they receive in the following terms:
How much reward is actually received in
relation to how much was expected to be
received.
How the rewards received compare with
what others received.
Whether the rewards lead to other rewards.
The level of extrinsic and intrinsic
satisfaction from the rewards.
The value of different rewards.
Copyright 2001 by Harcourt, Inc. All rights reserved.

FIGURE 13.2 FORMAL COMPENSATION PROCESS

E s t a b li s h S a le s F o r c e
O b je c t iv e s a n d P l a n s

D e te r m in e C o m p e n s a tio n
O b je c t iv e s , S t r a t e g i e s ,
a n d T a c tic s

A p p ra is a l
and
R e c y c lin g

M e a s u r e I n d i v i d u a l,
G ro u p , a n d O rg a n iz a tio n a l
P e rfo r m a n c e

D e t e r m i n e M a jo r
C o m p e n s a tio n
F a c to rs
I m p le m e n t
L o n g - a n d S h o rtR a n g e P ro g ra m s

R e la t e R e w a r d s
to P e rfo r m a n c e

Copyright 2001 by Harcourt, Inc. All rights reserved.

C o m m u n ic a te
C o m p e n s a tio n
P o li c y

DESIGNING A COMPENSATION
PROGRAM
Compensation plans should have general
and specific objectives:
Attaining yearly sales volume and gross
margins (general).
Attaining monthly sales volume and sales on
specific products (specific).
Market penetration and exploiting the
territorys potential (general).
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Compensation plans should have general

and specific objectives:
continued
Call management and development of
potential in key accounts as well as
development of new accounts (specific).
Introduction of new products (specific).

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DETERMINE MAJOR COMPENSATION

FACTORS
Wage level.
Wage structure.
Individual wage.
Administration procedures.

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IMPLEMENT LONG AND SHORT-RANGE

COMPENSATION PROGRAMS
Communicate compensation policy.

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The compensation message should contain

several elements:
1. The salesperson needs to know what part the
sales force is expected to take in attaining
the organizations goals.
2. The salespersons role in achieving sales
objectives should be thoroughly discussed.
3. The limitations and weaknesses of the
compensation program should not be hidden
from the salesperson.
Copyright 2001 by Harcourt, Inc. All rights reserved.

RELATE REWARDS TO PERFORMANCE

Rewards and promotions should be tied directly to
the salespersons individual contributions to sales
force objectives.

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MEASUREMENT OF PERFORMANCE
Companies need to regularly measure individual,
sales group, and organizational performance to
determine whether the compensation programs
objectives are being met.

Copyright 2001 by Harcourt, Inc. All rights reserved.

APPRAISAL AND RECYCLING

Key questions in terms of the success of a plan:
Are the compensation objectives being met?
Is the firm able to attract new salespeople
with this plan?
What is the relationship of compensation to
turnover?

Copyright 2001 by Harcourt, Inc. All rights reserved.

PERFORMANCE-BASED PAY:
PREREQUISITES AND
OBSTACLES
If pay is going to influence salespeoples
performance, the following factors are
important:
The salesperson must perceive a close
relationship between performance and pay.
Pay must be important to the salesperson.
Copyright 2001 by Harcourt, Inc. All rights reserved.

If pay is going to influence salespeoples

performance, the following factors are
important:
continued
The salesperson must be able to perform what
is necessary to achieve the pay.
The salesperson must know what is expected.
Performance must be measurable, and its
evaluation must be fair.

Copyright 2001 by Harcourt, Inc. All rights reserved.

For these conditions to exist, the organization

must do its part, which means:
Sales territories must have equal potential.
The salesperson must know and understand
how the pay program works.
The performance appraisal system must be
free from potential bias.
Managers must be trained in giving feedback.

Copyright 2001 by Harcourt, Inc. All rights reserved.

For these conditions to exist, the organization

must do its part, which means:
continued
The amount of money set aside for merit or
incentive pay must be sufficiently large to
make extra effort worthwhile.
The job evaluation must be valid so the
overall salary relationships are equitable.
The sales culture must be such that the high
performers are encouraged rather than
discouraged by their peers.
Copyright 2001 by Harcourt, Inc. All rights reserved.

FIGURE 13.3 TYPICAL COMPENSATION PLANS

Copyright 2001 by Harcourt, Inc. All rights reserved.

TYPES OF COMPENSATION
PLANS
STRAIGHT SALARY
Of all the compensation plans, the straight salary
plan is the simplest: The salesperson is paid a
specific dollar amount at regular intervals.

Copyright 2001 by Harcourt, Inc. All rights reserved.

TABLE 13.1 PROFILE OF A STRAIGHT SALARY COMPANY

Dominant market share in mature, stable industry

Highly defined and stable customer base
Strongly centralized and closely managed selling effort
Significant number of house accounts
Highly team-oriented sales effort
Service versus selling emphasis

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STRAIGHT COMMISSION PLANS

The straight commission plan is a complete
incentive plan. If salespeople do not sell
anything, they do not earn anything.
Two basic types of commission plans exist:
1. Straight commission.
2. Draw against commission.

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Drawing Accounts
Drawing accounts combine the incentive of a
commission plan with the security of a fixed
income.

Copyright 2001 by Harcourt, Inc. All rights reserved.

Situations where commission plans can be

used:
Little nonselling, missionary work
involved.
The company cannot afford to pay a salary
and wants selling costs to be directly related
to sales.
The company uses independent contractors
and part-timers.

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TABLE 13.2 PROFILE OF A COMMISSION PLAN COMPANY

Low barriers to entry into the job

Limited corporate cash resources
Small entrant into an emerging market or market segment
High risk reward sales force culture
Undefined market opportunity or customer base
Inability to set quotas or other performance criteria
Volume-oriented business strategy

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HOW TO CALCULATE INCENTIVES

Factors on which to base quotas:
The past years sales.
The sales forces forecast of the coming
years sales.
Corporate marketing targets.
A specific net profit target.
Geographic market potentials.

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Consider Profitable Products

The profitable products can carry a higher
commission or incentive reward.
The more profitable products can be weighted
so one of them counts as much as two or three
of the routine products.
Separate quotas can be set for each product
line.
Salespeople can be paid on the basis of their
individual contributions to profit.
Copyright 2001 by Harcourt, Inc. All rights reserved.

Who Should Participate?

The question of who gets incentive
payments has two aspects:
Split credit
Support people

Copyright 2001 by Harcourt, Inc. All rights reserved.

Numerous types of combination salary

plans exist. The more popular plans are:
Salary and commission
Salary and bonus: individual or group bonus
Salary, commission, and bonus: individual or
group bonus

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Bonus: Individual or Group

1. Nonproductivity bonus
2. Productivity bonus

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Sales contests are special sales programs

offering salespeople incentives to achieve
short-term work goals.

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TABLE 13.3 PROFILE OF A COMBINATION-PAY PLAN COMPANY

Established company with growth potential, many

products, and active competition
Need to direct a complex set of behaviors
Need for a variable pay component that will ensure top
performers are rewarded commensurately

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When to Use a Combination Salary Plan

1. To motivate the sales force.
2. To attract and hold good people.
3. To direct the sales force efforts in a
profitable direction.

Copyright 2001 by Harcourt, Inc. All rights reserved.

SALES FORCE EXPENSES

Expense plans have the same basic objectives as a
compensation system, that is, to motivate the
salespersons behavior in terms of membership,
performance, and attendance.

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Several criteria for an effective expense

plan:
1. Fair for the salesperson.
2. Fair for the company.
3. Cost effective.
4. Understandable.
5. Convenient.
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Types of Expense Plans:

The company pays all expenses.
The salesperson pays all expenses.
The company partially pays expenses.

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FRINGE BENEFITS
Five basic classifications of salespeoples benefits
and services are:
1. Benefits that are required legally
2. Pension and retirement programs
3. Nonworking time
4. Insurance
5. Miscellaneous services
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FACTORS TO CONSIDER WHEN

DEVELOPING A NEW PLAN
1. Companies with a sales force on a straight
salary may find it highly advantageous to
move to a salary-plus-incentive plan.
2. Companies with a sales force on straight
commission may sometimes adopt a salaryplus-incentive plan to gain more control
over the sales force.
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Information to Collect
Competitors plans
Product profitability
Sales force activities

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TABLE 13.5 KEY INDICATORS FOR POSSIBLE SALES COMPENSATION

PROBLEMS

1. Declining revenues
2. Declining market share
3. Declining profitability
4. Insufficient premier accounts
5. High sales force turnover
6. Uneven sales force performance
7. Inadequate servicing of customers
8. Concentrating on easy-to-sell and unprofitable products
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Pretest the Plan

In boom times.
During a recession.
If a runaway market occurs for one product.
If old products are dropped or new ones added.

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THE BOTTOM LINE

Compensation given for certain behaviors have major
influences on a sales forces culture.
Compensation is one part of the salespersons behavioral
model.
Money can be an extremely powerful performance
motivator if used with the right compensation program.
Under a combination salary plan, a proportion of the
salespersons total pay is guaranteed, and the rest is
incentive pay.
Daily expenses of field salespeople are a major part of the
sales force budget.
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THE BOTTOM LINE

When developing a new pay plan, managers must consider
the nature of the job, the market, channels of distribution,
the caliber of the salespeople, a companys financial
condition, and suggestions made by sales personnel.
The sales manager can better sell the job to prospective
salespeople by determining the dollar value of fringe
benefits and presenting pay and benefits as a total
compensation package.

Copyright 2001 by Harcourt, Inc. All rights reserved.