Chapter Summary

Compensation is the most widely used method for motivating a sales force. Most of our discussion in this chapter involved direct payments of financial compensation. When building a compensation plan, management must determine both the level of earnings and the method of paying the sales force. The sales force pay plan has a significant influence on the implementation of a company’s strategic marketing plan.

From the company’s perspective, the general goals of a good compensation plan are (1) to motivate salespeople, (2) to correlate a salesperson’s efforts and results with rewards, (3) to control salespeople’s activities, (4) to ensure proper treatment of customers, (5) to attract and keep competent salespeople, (6) to be economical yet competitive, and (7) to be flexible yet stable. From the salesperson’s perspective, a good compensation plan (1) provides both a steady income and an incentive income, (2) is easy for the sales rep to understand and simple for the company to administer, and (3) is fair.

When designing a pay plan, a company should first review its job descriptions to see what the reps are being paid to do. Then management should set specific goals for the pay plan. Compensation ideally should be based on items (1) that the sales force can control, and (2) that the company can measure objectively.

A major step in building a compensation plan is to establish the level of pay for the salespeople. Another major step in designing a compensation plan is to determine the method of compensation. Fundamentally, there are only three methods for compensating a sales force: (1) a straight salary, (2) a straight commission, and (3) some combination of compensation elements (salary, commission, bonus). Some form of a combination plan is used in about 68 percent of all sales forces.

A straight salary plan ensures a regular, stable income for the sales force. It enables management to direct the sales force into a variety of activities. The main drawback to a straight salary plan is that it does not provide any direct incentive to the sales force. It is also a fixed cost to the company. Generally speaking, a straight salary plan is best used (1) when management wants a fully balanced sales job, and (2) when management can supervise the salespeople so that they are properly motivated.

The main advantage of a straight commission plan is the tremendous incentive it gives the sales force to do what the commission is based on. To management, a straight commission plan is a variable expense. Under a straight commission plan, it may be difficult to direct the activities of the salespeople. There are several situations in which a straight commission plan is best. With a straight commission pay plan, management must decide on the base and rates for paying the commission. Also, policies are needed regarding split commissions and drawing accounts. Management must also decide whether it will limit its sales reps’ earnings.

Combination pay plans typically are a compromise designed to retain as much as possible the strong points and to overcome the weaknesses of straight salary or straight commission. Combination plans include some type of bonus paid for above normal performance. These bonuses are often tied to quotas, which are performance goals.

Most sales compensation plans also include indirect monetary benefits such as paid vacation time and company insurance plans. The final steps in designing a pay plan involve pretesting the plan, introducing it to the sales force, installing the plan, and evaluating it periodically.