Compensation Plans
17.6 Develop an understanding of selected compensation plans
Compensation plans for salespeople combine direct monetary payments (salary and commissions) and indirect monetary payments such as paid vacations, pensions, and insurance plans. Compensation practices vary greatly throughout the field of selling. Furthermore, sales managers are constantly searching for the “perfect” sales force compensation plan.40 Of course, the perfect plan does not exist. Each plan must be chosen to suit the specific type of selling job, the objectives of the firm’s marketing program, and the type of customer served.
As noted in Chapter 1, the highest amount of total compensation is earned by salespeople who are involved in value-added selling. Salespeople who use this approach realize that the solution to the customer’s buying problem is more important than price. They are frequently involved in team selling and in some cases they are rewarded with a team compensation plan.
A growing number of companies are abandoning compensation plans that are linked to a single target such as a sales quota. At Siebel Systems, an e-business software provider, 40 percent of each salesperson’s incentive compensation is based on the customers’ reported satisfaction with service and implementation of the products they have purchased. This plan encourages continuous customer follow-up, which generates repeat business.41
In the field of selling, there are five basic compensation plans. Here is a description of each:
Straight commission plan. The only direct monetary compensation comes from sales. No sales, no income. Salespeople under this plan are very conscious of their sales. Lack of job security can be a strong inducement to produce results. However, these people may also concentrate more on immediate sales than on long-term customer development.
Commission plan with a draw provision or guaranteed salary. This plan has about the same impact on salespeople as the straight commission plan. However, it gives them more financial security.
Commission with a draw or guaranteed salary plus a bonus. This plan offers more direct financial security than the first two plans. Therefore, salespeople may adhere more to the company’s objectives. The bonus may be based on sales or profits.
Fixed salary plus bonus. Salespeople functioning under this compensation plan tend to be more company centered and to have a fairly high degree of financial security if their salary is competitive. The bonus incentive helps motivate people under this plan.
Straight salary. Salespeople who work under this compensation plan are usually more company centered and have financial security.
According to the Sales & Marketing Management research study, most companies participating in the survey used some form of compensation plan that combined base salary and incentive.42 The salary-plus-bonus and salary-plus-commission plans are both quite popular, while determining the right proportion of these plans depends on many factors.43
Strategic Compensation Planning
Many sales managers admit that their current compensation plan does not drive behaviors needed to achieve specific sales objectives. The purpose of strategic compensation planning is to guide salespeople in the right direction. Compensation plans can be designed to achieve a variety of sales objectives:
Specific product movement. Bonus points can be given for the sale of certain items during specified “push” selling periods.
Percentage sales increase. Sales levels can be established with points that are given only when those levels are reached.
Establish new accounts. A block of points can be awarded for opening a new account or for introducing new products through the existing outlets.
Increase sales activity. For each salesperson, points can be awarded based on the number of calls.44
There is no easy way to develop an effective compensation plan. There are, however, some important guidelines for your efforts to develop an effective plan. First, be sure that your sales and marketing objectives are defined in detail. The plan should complement these objectives. If sales and marketing objectives are in conflict with the compensation plan, problems surely arise.
Second, the compensation plan should be field-tested before full implementation. Several questions should be answered: Is the new plan easy to administer? How does the proposed plan differ in terms of payout compared with the existing plan?
Third, explain the compensation plan carefully to the sales force. Misunderstanding may generate distrust of the plan. Keep in mind that some salespeople may see change as a threat.
Fourth, change the compensation plan when conditions in the marketplace warrant change. One reason for the poor showing of many plans is that firms fail to revise their plan as the business grows and market conditions change. Review the compensation plan at least annually to ensure that it’s aligned with conditions in the marketplace and the company’s overall marketing strategy.