Sales & Distribution Management

Chapter 13 : Compensating Sales Personnel

+Objectives of compensation plans

+Characteristics of compensation plans

+Types of compensation plans

+Designing compensation plans

 Implementing compensation plans

+Sales contests

+Sales force expenses

+Fringe benefits

Chapter Summary

There is no single sales compensation plan that is suitable for all organizations. Every organization has to design its own compensation plan that will enable it to fulfill sales objectives and to attract and retain sales personnel. A truly successful sales compensation plan must help achieve overall organizational goals and not just sales goals. The objectives of a compensation plan should be clearly stated, so that it becomes easier to determine whether the organization is able to achieve them. The compensation plan must fulfill the primary objective of balancing the needs of the sales personnel, and provide them income and security.

It should also be effective in all business conditions – good or bad. It should be fair, flexible, easy to administer, fulfill the needs of sales personnel and lead to the achievement of organizational objectives. Organizations compensate sales forces in many ways. The compensation plan may be a straight salary type, a commission-based type or a combination of salary, commissions and incentives. While deciding on the type, it is necessary to consider the differences in territory characteristics, sales activities and objectives of sales personnel.

Sales contests are widely used as a source of compensation, especially when an organization wants to emphasize certain activities with the primary aim of increasing profits. A sales manager must plan a sales contest well in advance and avoid indiscriminate usage. Otherwise, sales contests will lose their efficacy. Compensation plans have an impact on recruitment, training, evaluation and control functions too. While designing a compensation plan, its objectives must be stated. Next, the level of payment should be established. Different industries have different levels of payments.

The last step in designing the plan is deciding on the method of payment for the sales force. It may be in the form of a straight salary, commission or bonus or a combination. Drawing account, special cash and non-cash incentives and fringe benefits are also used as a form of payment to the sales force. The effectiveness and success of a compensation plan depend on its execution. The plan should be tested in a territory before it is implemented throughout the organization. To ensure success, periodic monitoring is also essential.

Sales force expenses make up a large portion of total organizational expenditure. To ensure profitability, a sales manager should control sales force expenses in the form of expense quotas. An expense plan must be easy to administer, beneficial to the organization and sales personnel and must be communicated clearly to the sales force. In most organizations, selling expenses are be reimbursed either completely, partially or in the form of an excess commission that sales personnel must use for meeting selling expenses.

Fringe benefits have become a common method of compensation in most organizations. This is also called indirect compensation. Fringe benefits may be in the form of retirement benefits, insurance schemes, employee stock options, medical benefits and paid holidays. With changes in the global environment, organizations have started formulating tailor-made sales compensation plans for individual sales personnel. Ultimately, the success or failure of a compensation plan is dependent on its ability to motivate sales personnel to fulfill organizational objectives and to retain the best talent in the organization.

Next Chapter>>