A sale compensation plan refers to the determination of the right compensation schemes and application of it to the sales force to bring a balance between compensation and the sales force performance.
Sale Compensation is an integral part of an employee’s sustenance and survival which has a motivational element also. An organization always wants to draw an effective compensation plan to make their employees content and motivated.
In a broad sense, compensation is a kind of employee reward. An organization lays an effective reward system management that works for the selection of rewards and its distribution to the employees.
Learn about:- 1. Introduction to Sales Compensation Plan 2. Definition of Sale Compensation Plan 3. Characteristics 4. Methods 5. Steps 6. Factors 7. Schemes 8. Strategic Compensation System 9. Trends.
Sales Compensation Plan: Introduction, Definition, Characteristics, Methods, Steps, Factors, Schemes and Other Details
Sales Compensation Plan – Introduction
Money, as we know by now, is not the only motivator. It has relevance till our physiological needs are satisfied and some of the security and safety needs. In satisfying our higher needs like self-esteem and self-actualisation, it declines in importance. According to Herzberg, money is a hygiene factor, the presence of which avoids job dissatisfaction. However, it has no motivational force otherwise.
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Sales compensation plan (SCP) is, however, integrated to the motivational aspects. Any compensation plan has to provide a fair living wage, should be related to performance and should reward the efficiency. It also provides a mechanism to integrate our personal goals and the organisational goals.
Appropriately designed compensation plan is beneficial both to the company and its sales employees. It optimises the cost of reaching the sales goals and profit objectives. When efficiency and effectiveness are rewarded, the morale is high.
Sales Compensation plans are catalysts for motivation. They do not replace the proper motivational plans. As we know, man does not live by bread alone. Each individual likes to achieve something, likes to excel and likes to belong. It is necessary to design the compensation plans properly, and then administer them properly.
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In established companies, compensation plans are already installed, and it is then only a question of review and revision of the already existing plan. Most changes are minor in nature, e.g., paying more bonus, putting more incentives and so on. Major changes are not affected as there is a tendency to resist them.
Far reaching changes are to be introduced in phased manner by taking everyone into confidence. When morale of the sales force is very low, it calls for an overhaul of the entire sales plan. While new markets are being tapped, we may require drastic changes in the compensation plan.
Sales Compensation Plan – Definition (Defined by Some Eminent Authors)
A sale compensation plan refers to the determination of the right compensation schemes and application of it to the sales force to bring a balance between compensation and the sales force performance. The basic purpose of the plan is to establish an equitable and fair distribution of salaries or wages, and other incentives amongst working personnel in a way that maintains equity between proportionate performance contribution of an employee and compensation received. So, a well-laid out compensation plan keeps away dissonance in compensation structure and policies.
It should be judiciously devised so that no single employee feels deprived and thinks compensation packages as unjustified. Otherwise, an experienced or skilled salesperson can feel under-compensated. The compensation plan, at the same time does not make room for overcompensation for young or rookie salespeople. Compensation is part of the organization’s cost. So, one precondition for a sound compensation plan is that the total compensation should be decided at a level to be consistent with the total earnings of the firm and it does not violate the sales and profit objectives of the firm.
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Motivation of employees is the central objective of compensation. In the selling context, it stimulates salespeople to work with more vigour and spirit. Cost is the guiding component of motivation. As compensation itself is a cost, it must be within the manageable level of the total profit and sales volumes of the firm. It regards the prevailing compensation level of the industry and is very much in congruence with the compensations offered by the competing firm.
A leading firm may even offer compensation above that of the average industry level to the sales force. It is flexible to meet the future changes in the compensation level. Future changes may imply company growth, sales turnover, increase of market share, etc. Secondly, it is flexible to accommodate the individual employee’s increase of compensation. The compensation is impartial in all senses so that the right compensation for the right employee is decided. Here lies the fairness of compensation. It is commensurate with the financial capacity of the firm if it meets its requirements.
A compensation scheme is manageable in cases where its various elements such as – salary, commission, fringe benefits, etc., are controllable and differences of it amongst employees are well-maintained to the satisfaction of both – the employees and the employer. Moreover, the coordination of compensation and financial power of the firm needs to be managed effectively as well.
Compensation is defined as the money received by employees from the organization on account of the performance they render. When the employee receives the money in terms of salary or wage, it is known as direct compensation. When the employee receives benefits such as – health insurance, medical benefits, travel allowances, etc., these are known as indirect compensations.
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Sale Compensation is an integral part of an employee’s sustenance and survival which has a motivational element also. An organization always wants to draw an sales effective compensation plan to make their employees content and motivated. An effective compensation plan fulfils the expectations of the employees and satisfies them. At the same time, it works towards the overall fulfilment of an organization’s objectives.
Flippo (1984) defined compensation as the adequate and equitable remuneration of personnel for their contributions to the organizational objectives.
Foulkes and Livernash (1989) defined compensation as the payment of wages and salaries including incentive, bonus payments, and benefits to employees in exchange of work.
Agarwala (2007) defined compensation as the sum total of all forms of payments and rewards provided to the employees for performing tasks to achieve organizational objectives.
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In a broad sense, compensation is a kind of employee reward. An organization lays an effective reward system management that works for the selection of rewards and its distribution to the employees.
Sales Compensation Plan – Aims and Characteristics of SCP
Sale Compensation plan (SCP) is a part of strategic marketing plan. It is the line managers and their subordinates who are ultimately responsible for the implementation of these plans. A sound compensation plan should be consistent with the strategic marketing plan because it is linked to sales force motivation, coordination, and control. Satisfaction with the compensation schemes stimulates the salespeople to exert more selling efforts and achieve better results. Managers, too, can lead and supervise salespeople easily.
A good compensation plan is crucial for the financial health of the firm. It consolidates the position of the firm on both the financial and human resources.
Moreover, it establishes an image of the firm in the broad societal environment and employees, being happy, carry the image to everywhere in the society.
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The important characteristics of the compensation plan are summarized as follows:
Characteristics of a Good Compensation Plan:
Following are the characteristics of a good compensation plan:
1. It is consistent with the position held by a salesperson and the job description laid down for such a position.
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2. It decides the right salary and other benefits befitting the position and is at least in conformity with the prevalent salary structure for such a position in the industry.
3. It acts as a catalyst to improve the productivity of the organization.
4. Money is a great motivator. It acts in this direction. It provides satisfaction and security to the sales force.
5. It helps to improve the financial health of the employees, organization, and the society at large.
6. It does not distract the team spirit and the group cohesion within the sales force.
7. It helps to generate a hearty and a cordial relation between the salespeople and the sales managers.
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8. It is simple and very easy for the salespeople to understand. The sales managers find no difficulty to apprise them on the plan.
9. It is flexible so that future changes in the compensation structure can easily be accommodated.
10. One of its components (particularly variable part such as – commissions, bonuses, etc.,) has a direct relationship with the sales force performance.
11. It helps to retain the existing sales force particularly those who perform satisfactorily for the firm. Alternatively, it keeps the competing firms away to pull out the efficient salespeople.
12. It is in sync with the sales and profit objectives of the firm.
13. It is acceptable to both the salespeople and the employers.
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14. It generates a positive correlation between compensation and motivation, and motivation and performance.
15. It provides salespeople with a direction for individual goal-fulfilment.
16. It enhances the job involvement and the commitment to the job.
17. It increases the sense of belongingness of the salespeople to the company.
18. It acts within the contours of the strategic marketing plans of the company.
Characteristics of a Good Compensation Plan
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1. A compensation plan must provide a living and fair wage. It should ideally give a secure income; as monetary difficulties prevent the employees to put in their best.
2. It should be integrated to the motivational programme.
3. It should be fair and should ensure equal pay for equal work.
4. It should be easy to understand. Each employee should be in a position to compute his own salary.
5. It should be flexible enough to accommodate changes in salary as per performance.
6. It should be economical to administer.
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7. It should further the objectives of the sales organisation.
How Compensation Plans are Designed?
First of all, the nature of the job is understood. Sales job descriptions are systematically developed and constantly revised. How other functions affect the sales job is also examined. Sales objectives are also examined. Sales related marketing policies are studied.
Sales Compensation Plan – 4 Main Methods of SCP
Basically, the remuneration that is given to salesmen is justified on two factors, viz. – (1) the amount of sales made and (2) the amount of time spent on this job of selling. Based on these two factors, different plans are designed. There are three fundamental methods of sales compensation plan – , viz. – (1) Straight-salary method, (2) Straight-commission method, (3) Mixed method. Apart from these three, we have two more incentive plans, viz. – (1) Bonus and (2) Profit-sharing.
This method is based on the time-spent on the job. Under this method, salesman is paid a predetermined amount by way of his salary at the close of every month. Salary paid to him is irrespective of sales performance during the month. Increments are given in the salary- scale he is appointed, in and, after experience and required length of service, is promoted to the higher salaries of scale.
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The salary package consist of basic salary that goes on increasing with annual increment, wherein D.A. is added that represents the payment made as per cost- of-living index. It also has other allowances to be added; they are HRA, CCA. In the case of travelling salesmen, T.A. is given.
(1) It is very simple:
Salary schemes are very easy to calculate and simple to understand. The selling house is having definite idea as to how much each salesman is to be paid. Proper and precise estimate of the salary can be calculated. Even the salesmen are having exact idea as to how much they earn at a given moment of time.
(2) No Temptation of Overdoing:
In case compensation is hinged on the performance, salesman is tempted to multiply his earnings. To multiply the sales, credit-selling has got to be accepted in this world of keen competition. There is no fun in increasing the bad debt.
(3) It Affords Better Control:
The sales manager can exercise better control under this type of payment. If the performance is not good, there is a danger that the increments can be cut, transfer to unwanted places, threat of dismissal, etc. A little undoing, cheating, negligence, fraudulent acts, absence on the part of salesmen will lead to the disciplinary action. Thus, the Sales Manager finds it relatively easier to control the army of salesmen.
(4) It Keeps the Salesman Contended:
The salesman is assured of minimum earnings irrespective of the sales turned or not. This salary scheme is of special importance, in the case of novices who begin their career as salesmen where there is no experience.
There is no direct incentive for hard work. Salesmen with longer service are paid for more per rupee of sales than those with shorter service. Some salesmen are paid too much and others not enough. This may kill initiative to increase sales. As such, the experienced and talented salesman may not stay longer in such firms.
Suitability of the Straight-Salary Method:
Straight-salary scheme as method of remuneration is advisable under following circumstances, in view of the above merits and demerits:
(1) Where the individual contributions cannot be measured.
(2) When the market for products is seasonal.
(3) When the salesman sells the commodities to different classes of customers at varying time intervals.
2. Straight-Commission Method:
The salesman is paid on the basis of performance of a job. Productivity is given top priority than the time consumed. Commission is the remuneration worked out as a percentage of sales volume. The percentage of commission varies from concern to concern, and case to case. It may be differential rate, i.e., a lower percentage up to the standard work and higher percentage over and above the standard performance in terms of value or volume as accepted.
1. There is direct relation between the direct selling costs and sales made. Therefore, it is very important for new firms, which cannot take risks of salary method.
2. Cost of sales can be budgeted in advance.
3. It provides incentive for both hard work and skilful selling.
4. It is suitable for a firm using salesmen selling a manufacturer’s agent selling goods of many manufacturing firms.
5. It helps in securing the services of such salesmen who cannot be had as permanent staff of the firm.
6. Cost of administration is low.
7. No problems of personnel management.
(1) No Security Ensured to Salesmen:
This system works on commission and no sales means no commission. This factor makes the employees uncertain about their earnings. There are cases where a salesman may fall ill, might go on leave to meet personal tasks, or even the selling house might be closed due to certain factors, beyond the control of employers. In such cases, his earnings receive a severe set-back. Regular earnings of income is a great psychological factor that has deep impact on the efficiency of a salesman.
(2) Danger of Bad Debts:
In order to earn more amount as commission the salesmen try to increase the credit sales. Credit sales are the source of bad debts.
(3) It Poses the Problem of Control:
The supervision is not a problem, as there is spontaneous urge to do well. However, controlling the activities is the problem. Salary system affords the maximum scope for having effective control over the sales force, by means of transfers, threat of dismissal, withholding the increments, etc.
In the case of commission scheme, the relation between the salesman and superiors or even the employees becomes just nominal. To control such persons no threat can be given; if done, the salesman moves away the next day, as he believes in and depends on his ability.
(4) Financial Ups and Downs:
The financial position of salesmen is closely linked with the operations of business. They usually live up to their incomes. Maintain a high standard of living in good time and in the period of depression they become discontented and try to seek new connections. Therefore, commission scale is advisable where,
1. The salesman is settled in his line,
2. The selling house is small, so that it is not possible to pay salaries regularly, and
3. If the product does not justify a full-time salesman.
3. Mixed Method (Combination of Salary and Commission Methods):
The fundamental objective of the use of combination of salary and commission scheme is to do away with limitations of both straight-salary and straight-commission methods, while retaining the chief advantages of each of the two methods. Under this method, each salesman is guaranteed a minimum salary at the end of each month. Over and above the guaranteed amount, he receives certain commission on his sales. Thus, a salesman has the security of income to the extent of the guaranteed amount of monthly payment.
The combination of salary and commission may take any of the following forms:
(A) Salary Plus Commission on All Sales:
This is most widely used method. Under this method, a salesman is paid certain predetermined amount as salary. In addition to this amount of salary, he is paid commission on all the sales made by him.
(B) Salary Plus Commission over Quota:
Under this, a predetermined fixed amount is paid every month, as under the first method. Over and above this amount, salesmen receive commission on sales made. But the commission becomes payable only after the quota of sales fixed for each salesman is reached.
Some firms disperse a portion of the divisible profits among the salesmen. Profit-sharing as a basic plan of remunerating salesmen cannot be recommended because profit or loss depends upon the firms’ policies. As salesmen have no voice in determining these policies, their basic earnings should not be tied with the existence of profit or loss.
Sales Compensation Plan – Steps Involved in the Development of Compensation Plan
Steps in developing a compensation plan have been explained in detail as follows:
Step # 1. Review Job Description:
Analysing job description is the starting point of developing a compensation plan. Careful analysis of the features of job description helps a company decide the pay level of the salespeople holding the job title mentioned in the job description. A job description gives a clear picture of the characteristics of the primary and secondary job responsibilities.
The company should decide the compensation level for the salespeople considering the importance and volume of the jobs listed in the job description. Education and experience are two important qualities of the salespeople and the company should not hesitate to value these factors while formulating the compensation level. Suitable adjustments in this regard should be incorporated in the job description and the compensation levels. So, accurate job evaluation from the job description ensures fairness of compensation.
Job evaluation is a method of precise adjustment of compensation with the jobs prescribed in the job description. Job evaluation is the assessment of the relative worth of the components of job responsibilities and duties so that the formal appraisal of expected and enacted job performance of salespeople can easily be made.
The objective is to ascertain the level of knowledge, skill, experience needed to perform the tasks in the desired and actual manner. A comparison can also be made to decide on the promotion and subsequent increment of remunerations. Merits should get a special emphasis in fixing the compensation level.
Management should see that a meritorious salesperson should not be undervalued in the scheme of the compensation plan. The types of products to be dealt and the markets to be served have a significant connotation with the remunerations offered.
A slow selling but high-unit cost item (e.g., turbine) demands extremely deft and laborious selling efforts and deserve attractive compensation for the salespeople. Again, a highly competitive market where a salesperson needs to push more persuasive selling efforts to cut competition should draw special allowance or commissions for the salespeople.
Step # 2. Establish Compensation Objectives:
The basic objective of compensation is to bring equity in the apportionment of remunerations amongst salespeople. Compensation objectives are, in fact, the outcomes of the sales compensation plans. Objectives need to be categorically stated to make the compensation scheme comprehensible to both the salespeople and the management. While setting compensation objectives, the company should include the provisions for experience, skill, merit, seniority, etc., in it.
These objectives are to be goal-directed and should be able to tackle any complications that may arise in the present or future circumstances. For example, a sudden decline in the sales volume needs additional time and effort from the senior sales personnel to overcome the situation or an unexpected rise in sales due to the hard and painstaking efforts from the salespeople can expect additional disbursement of indirect compensations to encourage sales employees and boost their morale.
As a result salespeople can put in more diligence for economic advancement of the firm. Objectives should not be some rigid and conventional statements. Instead, they should include variability factors in the market such as new product-market situations, competition, new-market development, etc., and relate it to the performance of salespeople and their compensation levels.
Compensation objectives, again should aim to fulfill the personal goals of the salespeople which can be understood by the satisfaction of the sales force within and outside the organization. The job involvement, achievement, and affiliation motives, etc., are the indexes of a salesperson’s satisfaction within the organization. A salesperson’s quality of life (say, personal life, family life, social life, etc.,) is an index of his satisfaction outside the organization. Bhattacharya (2007) reported that Cognizant Technology Solutions design their compensation packages to help their employees grow and develop in every sphere of life.
Three pivotal aspects of compensation objectives are operations, control, and measurability. Objectives should not be non-practical so that these cannot be implemented. Suppose, the management attaches a hefty market-share level as a yardstick to allow commissions to the salespeople that are absolutely unattainable. This will mar the basic spirit of the salespeople and adversely affect their performances.
Second, these objectives should have inherent controlling features that the management can use to steer the compensation scheme on the right path. For example, the sales performance is definitely an index of compensation but at the same time selling expenses should not be ignored. Performance-expense ratios give a definite projection of the actual performances of the salespeople.
Third, performances should be measurable for them to be operational in nature. For example, order-call ratio, sales-selling expenses ration, sales-gross profit ratio, etc., are estimated to appraise the performances of the salespeople, which obviously act as an important decider of the compensation levels, particularly the variable components of it.
Step # 3. Establish Compensation Levels:
Establishing the compensation level is the third step in the compensation plan. The objective of this is to establish a right compensation level for a group of salespeople belonging to a common rank. Rank and compensation level, therefore, have a strong association. The management should be careful to fix an appropriate compensation level for senior and junior salespeople, sales trainees and salespeople, sales executives and sales representatives, etc. But at the same time, one should also review the plan so that a wide discrimination, between the seniors and the juniors, does not intrude the compensation plan.
Before setting the level, salespeople should be made aware of the different components of the compensation i.e., the fixed part (e.g., salaries), variable part (e.g., commissions and bonuses), deferred part (e.g., provident fund, gratuity, etc.). In general, a company follows the present average industry trend of compensation level for a rank because it is safe and tested. However, if the company wants to exceed the average limit, it must take precautions to examine the fit between the compensation and company’s sales or profit goals.
For a stable market where the company has secured returns on investment, slightly higher compensation level does not affect the company’s financial strength. But, a company might feel unsteady in settling a compensation plan for highly unpredictable or threatening market situations. This may happen due to competitive aggression, fall in market demands, etc. This is why strategic compensation plan is thought out.
It basically takes into account future environmental situations and draws a long-term compensation plan that can safeguard against any odd situation in the market. For example, under inflationary condition, with the rise in price level, a certain percentage increase of dearness allowance benefits the salespeople without disturbing the sales or profit targets. In this regard, a slight modification of price level of the company’s products or services can be made because inflation triggers a general rise in the price level of all commodities in the market.
Step # 4. Methods of Compensation:
Direct compensation is a major part of the compensation plan.
A company can choose from the following compensation plans to match compensation levels for salespeople:
i. Straight salary.
ii. Straight commission.
iii. A number of combination plans such as – salary and commission, salary and bonus, and commission and bonus.
Salary is the fixed sum of money paid to the salespeople generally on a monthly basis. Under commission, salespeople are paid a percentage of the sales or gross profits they generate for the firm. Commission is given on the basis of the total volume of work done irrespective of the time spent for the completion of the job.
Bonus is a payment paid to the salespeople for achieving desired results that fulfil the organization’s goals. Bonus is a kind of reward that the management pays to the salespeople over salaries or commissions or both due to some achievement that the company feels rewarding. So, it is a subject matter of the management’s discretion. Management decides the basis for bonus payment (say, a certain percentage of salary). It also decides the mode of payment (say, annually).
Combination plans, at present are very popular. It ensures a stable income for the salespeople provided that salary is one component of the plan. It provides a variable income to the salespeople also in terms of commissions and/or bonuses. The variable part depends on the salesperson’s performance level. Combination plans motivate salespeople because of multiple compensation elements. However, it demands more management time and effort to run the combination plan.
Step # 5. Deciding Indirect Monetary Compensation:
The indirect monetary compensation is a monetary reward that is not direct such as -salary or commission. It includes retirement pension, gratuity, payment from insurance plans (e.g., medical insurance, group life insurance, disability compensations, thrift savings plan, paid holiday, paid vacations). These together are called fringe benefits. Indirect compensation is a great source of attraction for efficient salespeople.
It helps the company to hold the existing salespeople and attract new salespeople of competing firms offering fewer benefits. A company’s salespeople bear a sense of security and satisfaction from the fringe benefits. They do not hesitate to perform with huge motivation and the company at the end excels.
Step # 6. Review the Compensation Plan:
Drawing out a plan is one part of the plan and implementation is the other. In between the two, an important requirement is the viability of the plan. So, a compensation plan should be thoroughly checked before its implementation. The basic requirement of a plan is its aim to fulfil the compensation objectives.
This is the first and the foremost decision in the compensation plan. Second, financial resource of the firm must facilitate plan implementation and its continuation for a long time. Third, the plan can absorb shocks such as – sudden spurt of inflation or recession, tough market competition, change in the regulatory mechanisms (say, change in the indirect tax structure stipulated by the central or state government), etc.
So, the company should make provision for a contingency plan along with the main plan to counter adverse consequences in the business environment. Fourthly, the company should make budgetary allocation to meet the annual increment of salaries, commission or bonus payments.
Before the announcement of commission or bonus rates, they must ensure that these will not negatively affect a company’s financial health. The rates must be commensurate with the sales volume achieved or profits earned. In this regard, previous experience of the company with the similar product or service or marketing research on industry situations on rate structure or annual increment of salaries, etc., can help a company to pre-test the entire plan before it is introduced.
So, before execution, the plan should be verified to see that it meets an organization’s sales and profit goals. Also, it is important to note that it covers all compensatory expenses adequately. Last but not the least it must act within the budgetary estimates of the company for a financial year.
Step # 7. Implementation of the Plan:
Here, the crucial decision that the company has to take is whether it will implement it for all salespeople such as – executives, juniors, seniors, trainees, commission agents, etc. or for a selected group as a test case. The company takes a decision to implement it for salespeople working in two/three territories and if successful makes it operational for all salespeople. Once introduced, it must continue for a long term and effectively use contingency plans in case of urgency.
Starting from conception to the development and implementation, a compensation plan is designed to serve employees for their all-round welfare. In turn, it pays back to the organization in multiples of what the organization spends. But, what is important is stretching the compensation cost in a calculated manner, so that it never exceeds a company’s sales budget.
The success of the company on productivity or performance depends a lot on the right selection of compensation method that motivates as well as satisfies the sales force. Otherwise, the company might have to face failure.
There are a number of compensation methods, which are broadly classified. Every method has its own advantage and disadvantage. Each has its application in specific selling situations and is applicable to a particular category of sales force as well. Hence, a manager needs to consider all variables before choosing a salary method.
Some other steps are:
Companies are found to either develop new compensation plans or are often found to revise existing compensation plans to generate greater employee acceptance.
There are certain tangible steps involved in the development of compensation plans:
1. Examining job descriptions
2. Setting specific objectives for sales people
3. Deciding upon levels of pay/compensation
4. Developing a suitable compensation mix
5. Deciding on indirect payment plan or fringe benefits
6. Pretesting, administering and evaluating compensation plans
Different sales positions in an organization have different job description. For example the job description of a front line sales person will be quite different from the sales position that is related to middle managerial level. Each and every job responsibility includes responsibilities and key performance standards.
Certain specific objectives are set for sales people for better and controlled performance. It is also to be seen while setting objectives that the sales people do have some amount of control on the objectives. Each and every objective set for the sales people should be measurable.
The sales volume to be generated or the selling expenses when kept as objectives are such elements that are measurable. In the context of deciding upon levels of pay, one first needs to understand that what average pay is. It basically refers to the money earned per month or per year. As a person in charge of deciding upon levels of pay for various sales positions, it is important to decide the levels of pay for all sales positions.
There are however certain criteria based on which the levels of pay are decided upon:
1. Levels of pay for similar positions in the industry
2. Levels of pay for comparable jobs in the company
3. Education, experience and skills required to do sales job
4. Cost of living of a sales person at a place
The average pay levels has been found to vary between industries, within the same industry and also sometimes within the company. Companies have been found to decide on a range of average pay and the compensation of the sales people depends on their individual and company performance.
The next important step of designing compensation plan is to develop the compensation mix. There are certain elements of compensation mix that are widely used for example salaries, commissions, bonuses, fringe benefits etc.
However expense allowances or reimbursements like travel and lodging are not included in compensation mix. Some of the basic types of compensations plans are straight salary, straight commission and combination of salary, commission and bonus.
There are various factors influencing the design of compensation plans. Financial ability of the company to pay its employees on a continuous basis presently or in future is one important factor. Organizations with higher profits margins are found to dole out higher salaries to their sales people.
In case of companies following pull marketing strategy, more emphasis is given to advertising and the sales people are basically found to play the role of order takers. If the size of the market to be served by a company is limited, sales people are found to put in more efforts and this is found to make him ask for higher pay.
Companies with push based selling model are found to pay higher amounts of compensation to their sales people. The nature of products also has a bearing on the remuneration pattern. In case of industrial products since sales people are often required to put in more efforts in closing sales, they are paid higher compensation.
In general salaries of sales people are found to be higher in case of B2B markets compared to B2C markets. Some of the other factors influencing the designing of compensation plans are the education of the sales person, his work experience, his ability to work towards sales of a product etc.
Sales compensation plans are found to motivate two types of sales people basically- money sensitive sales people and leisure sensitive sales people. Sales people are motivated to work harder by an increase in. compensation as far as money sensitive sales people are concerned while in case of leisure sensitive sales people, sales people are motivated by different types of perks and benefits offered to him apart from basic pay.
Let’s look at some of the fringe benefits available to sales people:
1. Profit sharing- When company’s profits rise beyond a certain level, employees receive a cash bonus.
2. Stock purchase plan- Employees are found to acquire a share in the business by purchasing a stock at discount price.
3. Credit union- Company sponsored credit union allow their employee members to save regularly through payroll deductions or offer them opportunities to borrow at low interest rates.
4. Employee services- It involves miscellaneous benefits like free parking, recreational facilities etc.
5. Cafeteria plan- It is a tax favored plan that allows employees to choose their desired benefits.
As far as pretesting, administering and evaluating compensation plans is concerned, companies are found to pretest a new plan before adoption. Pretesting is either simulated on a computer and involves all concerned people.
Administering new compensation plans involves announcing the plan in advance, explaining the new plan and reasons for changing the previous plan and outsourcing administration if plans are changed frequently. Evaluating new compensation plans involve finding if objectives of the plan are achieved and there are certain companies that often go for auditing compensation plans.
A compensation plan should be well thought out and balanced. This means it aims to satisfy both the employees and the employers justifiably. Moreover, it is formulated keeping in mind the broad organizational objectives. It fits well with the strategic initiatives of the company.
Sales Compensation Plan – Factors Influencing Compensation Level (Internal and External Factors)
Compensation level is influenced by a host of factors. Some factors are internal in nature and others are external. Internal factors are company-specific that relate to the company’s resources, abilities, policies, etc. External factors are those that operate outside the organization, i.e., the external environment that have an effect on the sale compensation plans.
1. Internal Factors:
The internal factors are discussed in brief as follows:
i. Financial Ability:
A firm’s liquidity position, returns on investment, financial outlay, etc., indicate the long-term financial capacity of a firm. A company’s financial strength should be such that even in uncertain situations, it can adhere to the compensation policies and pay uniformly to all its employees.
ii. Compensation Policies:
A company’s compensation policies are determined by the number of employees working, number of permanent employees, number of casual staff, etc. Moreover, whatever policies the company follow (say, only salary schemes or performance-based incentive schemes) should have a relationship with the total remuneration volumes of the company.
iii. Recruitment and Selection Policy:
This influences the number of people that are on the payroll. The compensation policies should take into account the number of new employees inducted and the number of employees that are retired or have left.
iv. Promotional Policy:
Compensation plans should be consistent with various managerial or non-managerial ranks and promotion from one rank to the next should be coupled with reasonable rise in salaries and other benefits.
v. Job Descriptions:
The volume of job (sales volume), its importance, and characteristics are related to the compensation level assigned to a job position.
vi. Job Evaluation:
The worth of the job in terms of contributions in financial terms to an organization is related to the compensation level. For example, the contribution of a salesperson in selling a high unit value item such as – a turbine or furnace to the firm is immense and therefore, the concerned employee needs to be suitably compensated.
vii. An Employer’s Designation and Position:
An executive or managerial position definitely deserves higher pay level. Secondly, a senior in position demands a higher remuneration package than that of the junior employee.
viii. An Employee’s Relative Contribution:
Here, merit of the employee is a decisive factor in finalizing his pay package. A high performing salesperson in a rank can deserve special attention in terms of incentives or rewards.
The external factors including a compensation plan are discussed as follows:
i. Prevailing Compensation Policies in the Industry:
Every industry has a trend to offer compensation to its salespeople and it is safe for a firm to follow the industry trend. This is especially true for medium and small companies with limited financial strength. But efficient salespeople, once they prove their worthiness, can bargain for better salaries or commissions. There is no difficulty in putting them on premium compensation packages in large companies.
ii. Legal Conditions:
As companies operate within the legal frame of governments, they need to strictly observe the legal policies and regulations of the governments. The government has legal stipulations on the minimum wages act or provisions for fringe benefits. But, many companies often violate these norms and engage salespeople on a meagre pay package and exploit them.
iii. Economic Conditions:
These are important pay level determinants. It is a customary practice in the industry circuit that with the rise in inflationary conditions, the companies escalate the level of the dearness allowance so that the employees can cope up with the rising price level. Similarly, under recessionary condition, the company itself remains in a depressed condition and percolate down the same to the employees. Therefore, employees are forced to remain with their existing pay package for a long time unless the gloom is over. Sometimes, one can see a reduction in the compensation as well and this is not an uncommon practice.
iv. Market Competition:
It is a great trigger to manage employees tactically on the compensation packages. Under highly competitive situations, the companies deploy strategies to sustain or survive in the chaotic situation and here, skilled employees become valued resources of the organization. The company wants to retain them desperately by giving them attractive pay levels to prevent sudden attritions. The efficient employees also can play their cards to compel reluctant companies to augment their pay levels.
v. Trade Unions:
It often plays a mediating role in the company’s decision to fix up different pay levels for employees along various positions. This is true in public sectors and large private sector firms. In small- or medium-sized firms, trade unions are generally non-existent and employees are forced to swallow the salary or wage levels as determined by the company.
vi. Global Considerations:
These are important when the company establishes any subsidiary units in foreign nations or send their employees abroad to work on international projects or businesses. It is essential, therefore, for the company to understand the cost of living, tax structure, social or cultural norms, etc., of a nation that has strong relationships with compensation levels.
Ingram et al. (2007) noted that individualism is a prized practice than collectivism in work operations in the industry of some nations. Some other nations believe working in a team. So, the compensation for salespeople working as a team (e.g., salespeople engaged in team selling) is expected to be different than individual employees who are solely entrusted to perform a piece of job. Unites States is a follower of individualism whereas; Japan is a strong votary of collectivism.
vii. Criteria for Sound Compensation Scheme:
A compensation scheme needs to follow some basic criteria or requirements. These are important for both the organization and salespeople for peaceful coexistence under one roof. It should serve the interests of both the parties equitably.
Compensation of sales force is a vital aspect of sales force management. It not only meets the basic needs of salespeople but also fulfils social and esteem needs, according to Maslow’s need hierarchy.
Sales Compensation Plan – Non-Financial Compensation Schemes
Non-financial compensation follows the financial one to motivate salespeople. In fact, usually salespeople do not bother much about the financial compensation because they eventually obtain it after a fixed time period. Non-financial compensation appears to be more interesting than their counterpart. So, from the motivational point of view, non-financial compensation aggrandizes the interest and enthusiasm of salespeople.
Some common non-financial compensation schemes are described as follows:
1. Career Advancement through Promotion:
It is regarded as a valued and awaited reward for salespeople working in a company for substantive periods and expecting promotions to the next higher positions. Many companies have career advancement schemes as policy decisions that promote salespeople regardless of vacancies as a consequence of working in a particular position for a particular period of time.
But claimants for promotions in some cases are many because salespeople working in the same positions for more or less the same time periods and aspiring for promotions are sometimes many. In such situations, the company takes promotional interviews to lift the deserving candidates to higher positions.
But, given the limited opportunity in higher ranks, the management should formulate more objective-based promotional policies where performance records, important customer reports, punctuality, integrity, etc., to the company are thoroughly scrutinized to offer promotions to the candidates. The suitability of a candidate to higher positions is an important decision question.
Generally, all-round ability in selling of the candidates is observed closely to take decisions on promotions. Promotion means putting additional responsibilities on the candidates. Here, job enrichment is crucial. Through job enrichment, the company adds more tasks, activities, and responsibilities to the salespeople. At the same time, salespeople get more independence to accomplish their tasks.
Salespeople aspire eagerly for this non-financial reward too to get solid footings within the company. Praise from management, peers, customers, other departmental staff provides a huge sense of satisfaction to the salespeople. Salespeople, when receive accolades or kudos from the management, consider it as a great recognition in their hard fought career. A salesperson may even be rewarded with a gift or other kinds in a banquet party get together platform or annual cultural programmes of the company.
Recognition may be formal or informal. An affectionate pat on the back from a senior or a management staff or a hug from seniors is informal recognitions that motivate salespeople. Formal recognition employs offering prizes, medals, performance certificates in a banquet party or company socials, sending successful salespeople to national or international conferences, etc.
These are reimbursements made to the salespeople for the expenses they incur legitimately on the job. Typical reimbursement expenses are travelling, lodging, telephones, customer entertainments, etc. The salesperson submits the expense accounts to the finance department of the company after being duly verified and countersigned by the sales managers. In many situations, salespeople submit exaggerated expense accounts to gain unethically more than the actual expenses. This is why salespeople are asked to submit bills, receipts, vouchers, and expense statements to show the legitimacy of their expenses.
Overcharging by fictitious expenses heads and amounts (called padding) simply drains out redundant funds from the company’s coffer. The company takes every step to prevent padding and for this reason the company fixes an expense quota or expense budget ceiling to control undue expenses by salespeople.
Fringe benefits are a type of compensation made in addition to normal financial compensations such as – salary, commission, etc.
A list of fringe benefits is presented as follows:
i. Medical benefits – Payments for medical reimbursement policies, running medical expenses for sales employees and their close and dependent family members, annual health checkups, hospitalization benefits, etc.
ii. Retirement benefits – Pensions, provident funds, gratuities, group insurance, etc.
iii. Company stock options – Ability to buy the company’s shares at reduced prices.
iv. Leave travel concessions.
v. Paid vacations, etc.
Some companies pay their executives and managers special privileges as a mark of their position, power, prestige, and social affiliations they enjoy within and outside the company. These privileges are termed as perks. For example, free cars, fuel charges, car parking facilities, personal secretaries, drivers, bungalow at moderate rentals, room furnishings, etc.
Sales contests are temporary incentives programmes designed by the management to offer some attractive incentives such as – prizes or other monetary or non-monetary rewards for achieving some short-term goals or objectives in both selling and non-selling activities by the salespeople. The main objective of it is to motivate strongly the salespeople to serve the interests of both – the company and the individual.
The company wants to influence salespeople to work towards sales goals and for this sake; the company organizes contests amongst salespeople. This can happen within the sales team to incite group competition or among salespeople for showing individual performance.
The organization also runs sales contests on performance-related to non-selling activities. For example, a salesperson is rewarded for showing high customer relationship skills. In this regard, customer viewpoints can be collected in confidence on their satisfaction levels with the dealings of salespeople. Again, contests can take place based on how many customer calls are received for order after the salespeople visit them. The total volume of orders in monetary terms or quantity can be a point of contest amongst salespeople.
Sales contests are high stimulators for salespeople to work harder and smarter. Winning a sales contest provides a high confidence level and a sense of accomplishment amongst salespeople.
Sales Compensation Plan – Goals of SCS
Strategic compensation system (SCS) is yet another innovative system that has become a part and parcel of human resource management of an organization. In fact, employee motivation and control, the two essential components of human resource management are highly influenced by SCS. SCS has been defined as the right selection of compensation tool, developing it in line with the compensation objectives and application of it with an aim to attain broad strategic pursuits of the compensation. The essential condition for SCS is that it must fit well with the resource capabilities of the firm.
The major goals the SCS are as follows:
1. To distribute compensations equitably amongst employees so that reasonable differences in pay levels exist between the junior and senior employees, skilled and unskilled workforce.
2. To design and develop the compensation packages in a manner that fulfils the objectives of the firm and the employee’s personal goals.
3. Compensation is a motivational tool. Therefore, SCS aims to correlate the employee performance and compensation in a way that it acts as an engine to boost motivation and the morale of the employees.
4. The controlling aspect of compensation is important in the sense that an organization needs to evaluate the performance of the employees and put control whenever the performance deviates from the benchmarks.
5. To reward employees who perform according to the set standards established by the company.
Compensation is a reason for obligation the employees to serve the company. It enables the management to send direction to the workforce and awakens its sense of accountability for the work done. SCS acts as a facilitator to shape compensation plans. This is applicable to the sales organization as well. Salespeople are, to some extent, characteristically different from employees working in production or other departments.
The specific features of SCS for salespeople are as follows:
1. Salespeople can work not only on straight salary system but also on different combination plans such as – salary plus commission, or salary plus bonus, etc. Production employees may earn wages and bonuses but the basic difference is the yardstick to judge the incentives for salespeople that is more rigorous.
How much sales volume they will attain or profits they ensure for the company determines their incentive levels.
2. The percentage of commissions offered to salespeople is an important decision area. SCS should suggest a balanced commission percentage and other incentives that motivate salespeople to work hard and cause high sales productivity.
3. Compensation is a product of multiple units. Basically, it has a fixed basic component. It has a variable component also. A sound SCS makes the components flexible. It means these can be changed or adjusted over time. This is relevant to sales force because they are asked to move from one sales territory to the other and are required to face varied market conditions, different customer bases and competitive situations. So, they expect suitable modifications of their compensation levels when they cover difficult sales territories. SCS should have provisions for it.
4. SCS should bestow competitive advantage to the firm. This can be better understood when the company is able to retain skilled salespeople and trigger self-motivation and social esteem within them.
5. SCS should have provisions for team-based incentives when the salespeople work as a team. Here, team performance is a deciding factor to adjudge the compensation levels. But, the striking point is that a team consists of both the efficient and moderately efficient salespeople. An efficient salesperson may not work to the potential or show individual performance in a team.
But when a company requires a team effort for sales operation (e.g., selling, commissioning and servicing furnace or turbine to the industrial customers) team dynamics is an important behavioural issue. A skilled salesperson joins the team. This may cause disappointment for the salesperson to work with mediocre salespeople.
So, management must work up the task to oversee equitable opportunities for performance and distributing compensations proportional to the performances. So, a salesperson’s earnings while working in a team should be consistent with the relative contribution to team’s overall performance. This should be done without disturbing the team harmony or morale.
IT and ITES (IT enabled sectors) offering a wide range of services such as business process outsourcing, knowledge process outsourcing (KPO), software and hardware consultancy projects are worth mentioning for their lucrative compensation packages and high incentives.
Top-notched companies such as – Microsoft, Oracle, Satyam, Infosys, IBM, etc., are quite successful in attracting and retaining talented employees including sales and service personnel. The same is happening with the telecommunication sector.
Bigwigs such as – Bharati Airtel, Reliance Communications, Nokia, Siemens, LG, etc., offer competitive packages to attract and hold talented human resources.
What is more important in those sectors is performance. It is the key to determine the stability of workforce. Companies are whole hearted in offering bounties of incentives, paid vacations, housing allowances, vehicles and other attractive perks but what it expects from employees are performances at par expectations of the organizations.
These companies are quite successful in their compensation systems. Their proven track records and employee contributions speak volumes for it. In fact, the mystery of success, to some extent, is giving major importance in strategic compensation system. SCS is deemed to be an adjunct of strategic human resource management (SHRM).
Sales Compensation Plan – Trends in Managing Sales Compensation Plans
As new types of organizations are emerging, we find that there is an emergence of compensation plans that are aimed at satisfying the internal customers of a company and motivating them to stick with a particular company. One needs to understand that sales people are not compensated just on the basis of sales volume but more on the basis of how much a compensation can bring about satisfaction among employees.
There are many companies that are attempting to relate sales compensation to specific management objectives. There has also been a shift to combination plans in recent times like salary plus commission or salary plus bonus. There has also been a change in sales strategies and tactics.
Team based compensation is in vogue and team selling requires a compensation program that rewards all members of a team in a fair manner. Team compensation plans offers incentives to non-sales members as well as to sales people.
Technological advancements have also played major role in the emergence of new methods of compensation. With the internet, emails, broadband, videoconferencing a new world is being presented to sales people and in response to which they are being found to devise innovative ways of selling.