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Sales Compensation - Is It Time For A Change?
Lancaster SME Pre-Seminar
INTRODUCTION:
Sales Compensation: Largest cost to your P&L statement. Sales force costs range about 25 – 35% of the gross profit. Is your sales force productive?
Just a couple of points change in your sales costs and it goes right to the bottom line. Improvements in productivity increase net profits.
Important Note: Does your sales compensation program encourage salespeople to do what is easiest (sell the easy items) versus what is in best interests of the company or the corporate strategic plan. Explain the following example - Economical horse feed vs. Premium lines.
Sales Compensation either encourages or discourages certain behavior in your sales reps. For example, Straight commission sales compensation encourages the quickest and easiest sales and discourages strategic behavior for long term customer relationships.
Your compensation plan for salespeople also requires different sales management. Straight Salary plans require management to spend more time reading call reports, expense reports, and managing political maneuvering on the part of your sales reps. The typical SM can handle 6-8 Straight Salaried reps versus 15-20 Straight Commissioned Reps.
Speaking of Sales Reps – Just what is the function of your sales force? 1.Make Sales 2.Generate orders 3.Identify Customers/Prospects 4.Introduce New Products 5.Service customers 6.Handle complaints 7.Develop Market Info
The real function of the sales force is to GENERATE PROFITS.
PRESENTATION: What ways do we reward our salespeople??
Salespeople Rewards – PREFERENCE
1. PAY
2. PROMOTION
3. SENSE OF ACCOMPLISHMENT
4. PERSONAL GROWTH OPTIONS
5. RECOGNITION
6. JOB SECURITY
Companies attract, motivate and retain good people through their compensation philosophy.
To accomplish these goals, company’s use a mixture of three main components of compensation to form their total package – What are they???
1. Base Pay – Salary
2. Benefits – non-financial rewards
3. Incentives – Non-cash, cash, or stock, etc.
Your company’s compensation philosophy is a blend of all three!!
Sales Force Base Pay Compensation- Three Basic Types-
1. Straight Salary
2. Straight Commission
3. Combination – Salary plus Incentive
Straight Salary: In general is well suited for support personnel and sales trainees. Helps in hiring the first year since income is fixed.
Advantages:
1. Planned earnings easy to project – assures regular income
2. Control of salespeople’s activities better – reassigning territories, changing goals/product mix, etc.
3. Sales force is more loyal. Why?
4. Less high-pressure sales.
5.Ensures non-selling activities will be performed
6. Simple to administer
7. Easier to develop a new sales territory
Any Others?
Disadvantages:
1. Provides little financial incentive
2. Offers few reasons for putting forth extra effort
3. Favors the least productive people
4. Tends to increase direct selling costs over other plans
5. Fails to give balanced sales mix between profitable products and those, which are not.
6. Creates sales compensation compression with experienced sales people and new hires.
Any Others?
Straight Commission: In general works best in the start up of new businesses. Territories may be fluid, market possibilities broad and highly fragmented or when management desires a direct relationship of sales cost with sales volume. Businesses with limited working capital traditionally pay full commission.
Advantages:
1. Pay relates to performance and results achieved
2. Easy to understand and compute
3. Maximize performance because of incentives
4. Unit costs proportional to net sales
5. Company’s selling investment reduced
6. Primary responsibility of sales people is close sales NOT do non-selling activities
Any Others?
Disadvantages:
1. Emphasis will be on volume not profits
2. No loyalty
3. Wide variances in sales people pay
4. Sales people will neglect non selling duties
5. Customer Service usually bypassed
6. Sales people tend to “Skim” their territories
7. Problems shifting territories / accounts
8. Pay excessive in boom times and very low in recession
9. Sales people sell themselves not the company
10. Reluctance of high paid sales people to move into management
11. During recession turnover high.
Any Others???
Combination – Salary plus Incentive: In general you get the best of both worlds. Allows sales management to tailor incentives to the sales people. Provides better control of incentives or variable income than possible with commission plans. The most frequent split between salary and incentive is 80/20 followed by 70/30.
Advantages:
1. Offers advantages of both salary & commission plans
2. Greater flexibility and control of salespeople
3. Provides some security for sales people
4. Bonus/Commissions can be added quickly (seasonal)
5. Greater latitude in motivating sales people for achieving goals and objectives
6. High potential candidates will be attracted to the salary plus the ability to get additional earnings
Any Others?
Disadvantages:
1. Sometimes complex and difficult to understand
2. More complex to administer
3. Leads to frequent changes – usually too many objectives created
4. Requires excellent communications about the program
5. If program is not properly constructed “Windfall Commissions” might result and cause problems and then the opposite is true
Any Others??
In Closing – Is your Sales Compensation program in need of a change?? Remember the advantages and disadvantages of each type – SS, SC, Combination and choose which is best for your organization base on your businesses current needs and future! Good Luck !
[PRINTER FRIENDLY VERSION]
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