SALES COMPENSATION AND INCENTIVES

The compensation paid to employees involved with sales and marketing is partly or entirely tied to sales performance. Better-performing salespeople receive more total compensation than those selling less.

1. SALES PERFORMANCE MEASUREMENT

Successfully using variable sales compensation requires establishing clear performance criteria and measures. Generally, no more than three sales performance measures should be used in a sales compensation plan. Consultants criticize many sales commission plans as being too complex to motivate sales representatives. Other plans may be too simple, focusing only on the salesperson’s pay, not on organizational objectives. Although many companies use an individual’s sales revenue compared to established quotas as the primary performance measure, performance would be much better if these organizations used a variety of criteria, including obtaining new accounts and selling high-value versus low-value items that reflect marketing plans. Figure shows the results of one study identifying the criteria used to determine incentive payments for salespeople.

2. SALES COMPENSATION PLANS

Sales compensation plans are generally of several different types. The types are based on the degree to which total compensation includes some variable pay tied to sales performance. A survey of over 260 firms found that plans providing salary with bonus (37%) and salary with commission and bonus (35%) were the most used types. Less used were plans providing commission only (24%) and salary only (5%).19 A look at each type of sales compensation follows next.

SALARY ONLY Some firms pay salespeople only a salary. The salary-only approach is useful when serving and retaining existing accounts is being emphasized more than generating new sales and accounts. This approach is frequently used to protect the income of new sales representatives for a period of time while they are building up their sales clientele. It is also used when both new and existing sales reps have to spend considerable time learning about and selling customers new products and service lines. Generally, the salary-only approach may extend no more than six months, at which point sales plus commission or bonuses are implemented. However, one study found that salespeople who wanted extrinsic rewards were less effective in salary-only plans. They were less motivated to sell without additional performance-related compensation.

STRAIGHT COMMISSION An individual incentive system widely used in sales jobs is the commission, which is compensation computed as a percentage of sales in units or dollars. Commissions are integrated into the pay given to sales workers in three common ways: straight commission, salary plus commission, and bonuses.

In the straight commission system, a sales representative receives a percentage of the value of the sales made. Consider a sales representative working for a consumer products company. She receives no compensation if no sales are made, but for all sales made in her territory, she receives a percentage of the total amount. The advantage of this system is that the sales representative must sell to earn. The disadvantage is that it offers no security for the sales staff. This disadvantage can be especially pronounced when the product or service sold is one that requires a long lead time before purchasing decisions are made. Also, as the HR Perspective on the previous page indicates, commission-only plans may lead to unethical behavior of sales employees. For these reasons just mentioned, some employers use a draw system, in which the sales representative can draw advance payments against future commissions.

The amount drawn then is deducted from future commission checks. From the employer’s side, one of the risks in a draw system is that future commissions may not be large enough to repay the draw, especially for a new or marginally successful salesperson. In addition, arrangements must be made for repayment of drawn amounts if an individual leaves the organization before earning the draw in commission.

SALARY PLUS COMMISSION OR BONUSES The most frequently used form of sales compensation is the salary plus commission, which combines the stability of a salary with the performance aspect of a commission. Many organizations also pay salespeople salaries and then offer bonuses as a percentage of base pay tied to meeting various levels of sales targets or other criteria. A common split is 70% salary to 30% commission, although the split varies by industry and with other factors. Some sales organizations combine both individual and group sales bonus programs. In these programs, a portion of the sales incentive is linked to the attainment of group sales goals. This approach encourages cooperation and teamwork for the salespersons to work together. Team incentives in situations other than

sales jobs are discussed next.