Using the results of a survey of 380 companies in 34 industries, this author examines three basic types of compensation plans: salary, commission, and combination (salary plus commission). Most companies in the study favored a combination plan, but such plans have some disadvantages to offset their obvious attractiveness. The author sets out the possible reasons for choosing each type of plan according to the needs of the company. Any discussion with sales executives would bring forth a consensus that compensation is the most important element in a program for the management and motivation of a field sales force. It can also be the most complex. Consider the job of salespeople in the field. They face direct and aggressive competition daily. Rejection by customers and prospects is a constant negative force. Success in selling demands a high degree of self-discipline, persistence, and enthusiasm. As a result, salespeople need extraordinary encouragement, incentive, and motivation in order to function effectively. The average age of today’s industrial salesman is 36 years, and about 60% have some college training or are college graduates. Today’s salesman wants a challenging job with good prospects as well as payoffs now. A properly designed and implemented compensation plan must be geared both to the needs of the company and to the products or services the company sells. At the same time, it must attract good salesmen in the first place and then keep them producing at increasing rates. In this article, I will focus on the basic types of compensation plans, current levels of pay, and the compensation-related areas of expense practices, additional incentives, and fringe benefits. The main source of data used throughout is Dartnell’s 19th Biennial Survey of Salesmen.1 The data are based on studies of 380 companies in 34 Standard Industrial Classifications throughout the United States and Canada which employ a total of more than 15,000 salespeople. Basic Kinds of PlansThree basic compensation plans are available to sales management: salary, commission, and combination (salary plus incentive) plans. Exhibit I shows the use of the three basic plans in recent years. While the combination plan continues to be most favored, the commission plan has been declining in recent years. For example, 1971, a recession year, was a poor commission year, while the boom year of 1973 produced commission earnings that, in many cases, were totally out of proportion to the sales effort put forth. Exhibit II shows selective use of the three basic plans in 34 SIC industries.  Exhibit I Companies Using Various Compensation Plans Exhibit II Type of Compensation by Industry, 1977 Salary PlanThis kind of plan, in which salesmen are paid fixed rates of compensation, may also include occasional additional compensation in the form of discretionary bonuses, sales contest prizes, or other short-term incentives. The plan works well when the main objective is missionary work or requires a lot of time for prospecting, or if the salesman’s primary function is “account servicing.” Secondary objectives of increasing sales from existing accounts and opening new accounts require special incentive treatment. The salary plan is appropriate where it is difficult to evaluate who really makes the sale, where a salesman’s contribution cannot be accurately separated from the efforts of others in the company such as inside personnel and technical service persons. Sales of technical products commonly involve this form of team selling. When management finds it difficult to develop adequate measures of performance against which an equitable bonus or commission can be paid, a salary plan is desirable. The position description for a field engineer on salary with a West Coast industrial equipment manufacturer illustrates the difficulty of measuring sales performance for incentive reward. The field engineer calls on distributors. His duties include:
Many durable goods industries experience cyclical sales patterns, which makes a salary plan more compatible with the salesman’s efforts and avoids the sharp swings in income that can occur in a commission plan. After close examination of the salary plans of many companies, I have identified the following basic advantages and disadvantages of the salary plan approach. The salary plan has advantages for both salesmen and their companies because it:
However, the salary plan does have disadvantages, in that it:
The two lists do not necessarily cancel each other out. Every compensation plan is a compromise. Determination of marketing and sales objectives, which will in turn determine the role of the sales force, will indicate to the sales executive whether the salary plan is best for achieving his goals. Exhibit III shows that the average earnings of experienced salesmen on this plan have increased from $9,700 in 1964 to $20,950 in 1977. Exhibit III Average Earnings and Median Range of Experienced Salesmen, by Compensation Plan Commission PlanIn this type of plan, salesmen are paid in direct proportion to their sales. Such a plan includes straight commission and commission with draw. The plan works well at the start of a new business where the market possibilities are very broad and highly fragmented. In such situations, territory boundaries are usually rather fluid and difficult to define. Therefore, quota and customer assignments are difficult to determine, making other types of compensation plans too costly or too complex to administer. When management desires to maximize incentive, regardless of compensation levels in other company functions, or prefers a predictable sales cost in direct relationship with sales volume, the commission plan is appropriate. However, use of the straight commission approach has declined in popularity over the past several years and is not currently preferred, as the data in Exhibits I and II show. Following are the advantages of the straight commission plan:
The disadvantages of this plan are:
Commission plan salesmen have historically earned more than their counterparts in a salary or combination plan. However, this trend was reversed in 1977, with commission men earning an average of $1,650 less than combination plan salesmen, as shown in Exhibit III. We note in these data that from the eight-year period of 1964 to 1971 the average yearly gain was 7.5%. However, the unusual boom year of 1973 produced a 26% increase in earnings over 1971. Several sales executives cited examples of extraordinary commission earnings for that year which they felt were undeserved and totally disproportionate with sales effort expended. The swift economic swings from 1971 to 1973 forced sales executives to seek more stable compensation arrangements, as shown in the decrease in use of commission plans and the increase in combination plans previously referred to in Exhibit I. If a commission plan is desired, the disadvantages must be offset. To accomplish this, some elements of guarantee must be added to the compensation package, especially for new salesmen. These can include guaranteeing a monthly minimum income, generous draws, and starting new men on a salary-plus-commission plan until commissions reach a desired level. The effect of possible personal economic fluctuations should be balanced by strong, security-oriented fringe benefit packages including surgical and medical insurance, pensions, and educational assistance. These stabilizing elements should help in recruiting and keeping men. Combination PlanThis type of plan includes all variations of salary plus other monetary incentive plans. The variations include base salary plus commission on all sales, salary plus bonus. On sales over quota, salary plus commission plus bonus, and so on. There are many sound reasons for installing a salary-plus-incentive plan. It permits greater incentive than a salary or commission plan and provides better control of the incentive or variable income than is possible with the commission plan. Also the much greater degree of flexibility with a wide variation in incentives to work with allows management to develop practically tailor-made plans for each salesman. But these plans have liabilities, too. Salary-plus-incentive plans tend to be more complex than the other two methods. Thus they involve more paperwork, control, and administrative work. They need more frequent revision because of the interaction of the elements that comprise the total plan. In making individual adjustments over the years, one should be careful to avoid a gradual loss of uniformity in the plan. The most important determination in building a sound salary-plus-incentive plan is the split between the fixed portion (salary) and the variable portion (incentive). The split is usually determined on the basis of historical sales performance and compensation records. Competitive analysis of other company programs, the base salary needed to keep good men, and an estimate of incentive potential should also be considered. Ceilings on incentive payments are usually part of combination plans. The most frequent percentage split reported in the Dartnell study was 80% base salary and 20% incentive. A close second was a 70%/30% split, with a 60%/40% split being the third most frequently reported arrangement. As the rewards are closely tied into sales or gross margins, closer supervision and control of the plan are needed as the incentive portion of the plan increases. Structuring the salary portion of the plan requires establishing salary grades for the sales force. The three grades used in the Dartnell study are trainee, semiexperienced (one to three years), and experienced (more than three years). Each salary grade should be supported by a job description and each salesman assigned according to experience and ability. In the incentive portion of the combination plan, three basic forms of reward can be considered: a commission, a bonus, and a commission plus bonus. Commission incentives are the most popular. Companies pay by one or more of these typical methods: 1. A fixed commission on all sales. 2. At different rates by product category. 3. On sales above a determined goal. 4. On product gross margin. The rationale of paying commissions on gross margin dollars is the assumption that such an arrangement will motivate salesmen to improve both product and customer mix and therefore to improve territory gross margin. A good example of a sound compensation plan incorporating the elements of base salary and incentive pay of a percentage of gross profit and gross sales generated in a territory is one set up by the sales executive of an eastern electrical component manufacturer. In his plan, a base salary level is determined on a discretionary basis. Gross profit is defined as the difference between the selling price of an item and the cost to purchase the goods, freight to transport, labor and/or materials that must be added to make the goods salable as represented to the buyer, and other costs directly related to the transaction. Gross sales are those of new and/or used equipment invoiced to a buyer within a period of a calendar month. Each territory has a minimum requirement for gross profits and gross sales. The following three step formula is applied: Step 1: Sales volume up to $18,000 a month. Base salary plus 7% of gross profits plus 1/2% of gross sales. Step 2: Sales volume from $18,000 to $25,000 a month. Base salary plus 9% of gross profits plus 1/2% of gross sales. Step 3: Over $25,000 a month. Base salary plus 10% of gross profits plus 1/2% of gross sales. Base salary is paid every two weeks. The earned percentage of gross profits and gross sales is paid monthly. One great advantage of the commission incentive is the frequency and regularity of the reward, usually monthly. Salesmen are more quickly motivated to keep or exceed performance levels with the rapid tie-in between performance and reward. Bonus incentives are usually paid as a percentage of salary and vary by goal performance levels. Bonuses are paid on a variety of sales results, but gross margin goals are used most frequently. Other factors used as a measure for bonus goals are market share, product mix, new accounts, nonsales activities, higher unit sales, and increased sales from existing accounts. Some companies simply make bonus arrangements on a discretionary basis. Goals may be based on an analysis of the potential of the territory and expected performance against the potential. They may be developed from a moving average of historical sales or gross margin for two or three years plus a one-year forecast averaged into the moving base. Bonus payments should be structured to begin at the 70%– to 75%-of-goal level to motivate salesmen to achieve goals. A lower threshold level works against sustained sales effort. Conversely, by not receiving bonuses until sales effort of 100% goal is achieved, many persons become discouraged along the way. While payment rates may be uniform both under and over the 100% goal, increasing the rate beyond the 100% mark adds an additional incentive with a lower cost factor. Because bonus incentives are usually paid quarterly, it is not recommended that the full amount be paid when due. Withholding a small percentage due each quarter until the end of the year avoids a possible overpayment for the total year bonus. A proper adjustment is made with the final quarter payment. A bonus incentive plan is more difficult to establish and administer than a commission incentive. Also, rewards paid on a quarterly basis are not as effective motivators as weekly or monthly commission payments. Another variation of the combination plan is one which pays salary, commission, and bonus. While this approach offers more flexibility than the other two types, it is more complex and more difficult to administer than any other plan. Here are the elements of a good salary, commission, and bonus plan used by a midwest fabricated metal products company: 1. Base salary, company car, and all business expenses. 2. A 5% commission, based annually and paid quarterly, on all sales volume over predetermined sales base. 3. A bonus on attainment of quota. Annual quota is divided in two parts: first six calendar months and last six calendar months. If quota is attained for the first half, bonus of 1% of all sales during that period is paid in July. This is repeated for the second half with bonus paid in January. 4. If quotas for both halves of the calendar year are attained, an additional bonus of 1/2% of all sales for the year is paid. Thus a total of 1 1/2% of annual sales is paid as a bonus. 5. If quota for either of the six-month periods is not achieved but annual quota is achieved, 1/2% for the year is paid but not the 1% for period in which quota is not achieved. 6. “House” or “divisional manager” accounts are excluded from quota, commission, and bonus calculations. Take another look at Exhibit III to see how the experienced salesperson on a combination plan has fared historically. Survey data covering the period from 1964 to 1977 are shown. Two observations about these data are worth noting: average total earnings have increased 163% in the past 13 years; and total earnings in 1977 increased 20.6% over 1975, showing the highest increase of the three basic compensation plans for that period. Also, average earnings of the combination plan salesperson exceeded the average earnings of the salaried person by $5,150 and the average earnings of the commission man by $1,650. This trend should continue. This fact of earnings plus relative advantages of the combination compensation plan, which follow, reinforces the continuing popularity of this plan. Advantages are that the combination plan:
Disadvantages are that the plan:
To round out the basic compensation data, it is worth noting that in the past 25 years, average earnings of the experienced salesperson have more than tripled, rising from $7,200 in 1952 to $24,500 in 1977. Perhaps of more significance, earnings have doubled in the past 10 years. These data are shown in Exhibit IV. The average annual compensation broken down into the seven distinct varieties of compensation is shown in Exhibit V. Exhibit IV Average Earnings of Experienced Salesmen, All Plans, 1952 to 1977 Exhibit V Average Annual Compensation and Median Range, by Compensation Plan, 1977 Related AreasOther policies besides direct compensation have an impact on both the salesperson’s total pay package and the company’s financial position. These are sales expenses and extra incentive plans. Expense PracticesThe need for keeping a tight rein on sales-generated expenses, which have a direct effect on profits, was never more evident than in the recent turbulent economic years. With the cost of sales calls constantly rising and with increased traveling and lodging costs, companies must periodically examine their expense policies and procedures and make adjustments in order to draw that ideal fine line where expenses are kept under proper control and reimbursement to salesmen is fair and reasonable. Respondents to the Dartnell survey indicate that 92% of the companies paid all or some of their salesmen’s expenses—in addition to compensation payments. Eight major expense categories are covered in Exhibit VI, which shows the percentage of companies paying all or part of salesmen’s expenses by compensation plan. Exhibit VI Percentage of Companies Paying Expenses, by Compensation Plan, 1977 A few significant observations regarding expense practices should be noted:
Additional IncentivesNo matter how well a compensation plan is formulated and executed, another dimension is necessary to achieve best results. What I am talking about are the incentives that make a salesman work harder all around. And again, let us consider the unique aspects of the salesman’s job: limited personal contact with his manager; extended periods of travel which brings loneliness and inconvenience; decisions that require a high level of motivation (when to make the first call of the day, how many calls to make, objectives to be achieved on each call, when to quit for the day); and emotional swings between the elation of obtaining a large order and the frequent frustrations of orders lost to competitors and missed shipping dates. Motivation calls for creating a climate in which the salesman can motivate himself with the incentives provided by management. These incentives can be financial, nonfinancial, or a combination of the two. Financial IncentivesShort-term sales contests are popular. Costs are predictable, results are usually successful, and rewards are immediate. Contests usually run for one or two months, but some as short as a week can produce results. The awards that are most favored in contests are money, trips, merchandise, and personal recognition. A successful sales contest should include these basic elements: well-defined objectives, simple rules, short duration, goals attainable by most salesmen, inclusion of wives and families when possible, and follow-through program to sustain enthusiasm. Contests are like a double-bladed sword. Improperly used or used for the wrong reasons, they can create dissension and dissatisfaction within the ranks. Properly used, contests can create a competitive atmosphere that will stimulate sales and provide additional rewards. In addition to the usual contest objectives of increased sales volume, more sales calls, new accounts, and so forth, contests can serve to build offseason business, increase the use of displays, stimulate various dealer tie-ins, revive dead accounts, and reduce costs. Nonfinancial MethodsTechniques that principally provide salesmen recognition, status, and a sense of group belonging are generally referred to as “psychic income.” This is an area in which the industrial psychologists have made positive contributions. Though many of the successful techniques have been available for a long time, it has just been within the past 10 to 15 years that sales executives have begun to realize their importance. Over the years, as the role of the salesman has been redefined and enlarged, many companies have conferred more meaningful titles on members of their sales forces to improve their status with customers, to give them personal status symbols, and to more aptly describe their functions. Companies commonly use such titles as regional, area, or zone manager, field sales engineer, account executive, and staff associate. Other productive ways to recognize individual good performance or encourage effectiveness are: distinguished salesman awards, honorary job titles, publicity, personal letters or telephone calls of commendation, face-to-face encouragement, and individual help with responsibilities. Exhibit VII shows the percentage of companies (by compensation plan) using broad nonfinancial methods of motivation. The low percentages in most categories indicate that many companies are missing a good bet in not using these highly effective techniques. All these methods are inexpensive and convey a sense of personal communication that salesmen value highly. Exhibit VII Percentage of Companies Using Nonfinancial Methods of Compensation, by Compensation Plan, 1977 Fringe BenefitsThe cost of maintaining medical, accident, life, and dental insurance programs on a personal basis is significant, so fringe benefits constitute an important part of the “total income” of every company employee, including the sales force. Adding up the costs of personal use of the company or leased car, memberships, and educational expense assistance that many companies provide, the basic benefit package would cost a salesman a minimum of $1,500 a year. Currently, many companies in most industries are paying part or all of the costs of 12 major benefits: hospitalization-surgical insurance; life, accident, and dental insurance; educational assistance; profit sharing; pension plans; stock purchase; personal use of car; club or association memberships; moving expenses; and salary continuation program. Exhibit VIII shows the participation by companies broken down by the three basic compensation plans and for all companies responding to the survey, regardless of compensation plan used. Exhibit VIII Companies Paying All or Part of Benefits, by Compensation Plan, 1977 The salary plan and combination plan salesmen fared about equally in all benefit provisions. As was to be expected, commission plan salesmen lagged in all categories. However, in comparison with previous studies, the commission man has made dramatic gains. As I said earlier, many companies are seeking ways of increasing company loyalty and of providing competitive advantage to attract and retain the commission salesman on the payroll. To dramatize the significance of fringe benefits for salesmen in the total compensation package, I compared current data with that of 1958, 19 years ago. The percentage of companies providing hospital insurance increased by 16%, life insurance by 10%, educational assistance by 36%, and club or association memberships by 14%. Dental insurance, stock purchases, profit sharing, and salary continuation programs have been added to the benefit package since 1958 at an increasing rate. As general company benefits to all employees increase in scope, the salesman’s benefit package will likewise increase. Compensation plans have become more complex—the three basic methods of paying salesmen have stretched into at least seven kinds of plans, and possibly more will be designed tomorrow. Combination plans dominate the compensation package makeup despite the complexity of administration and control. The disadvantages are far overshadowed by the flexibility in providing meaningful incentive pay tied more directly to sales performance—that is, applying commission and bonus to single and/or multiple sales goals. In addition, a combination plan provides the salesman with a greater range of earnings possibilities based on a steady base income. The salesman expense policies I have examined over the last five years indicate that sales executives are exercising good judgment in controlling and administering field expenses. In the area of nonfinancial motivation, sales executives should be doing a better job with the available techniques. Personal contact, recognition, and encouragement are needed to sustain a positive attitude and a high level of morale. Increasing amounts of fringe benefits add to the total income package of a salesman. Employees, including salesmen, no longer regard such benefits as fringe offerings, but rather as a basic part of the terms of employment. Additionally, the salesman has been gaining special “perks” of his own, such as personal use of a company or leased car and club or association memberships. In my many discussions with sales executives over the past two years, the subject of “profitability of sales” kept coming up. While sales executives should never lose sight of their primary objectives—to increase sales—top management pressure for profitable sales increases. It demands new rules and definitions of the cost of doing business in a given sales territory. The trend toward obtaining profitable sales, as opposed to sheer sales volume, could well lead to defining a sales territory not only as such but also as a profit center with the salesman as the sales and profit producer in a given territory. This might be an awesome responsibility, but it would certainly be a new dimension in sales management and in the salesman’s job responsibility. The effect would be to increase the influence of a profit factor in the salesman’s compensation package. The sales executive will have to educate and reeducate himself in this expanding sphere of profit consciousness. This is his challenge in the years ahead, and he must meet it if he is to survive. Reference 1. Compensation of Salesmen: Dartnell’s 19th Biennial Survey (Chicago: Dartnell Institute of Financial Research, Dartnell Corporation, 1978). A version of this article appeared in the July 1978 issue of Harvard Business Review. What is a disadvantage of piecework incentive plans?A serious disadvantage of piecework pay for the employer is a danger that, in the pursuit of the quantity of production, workers will not pay attention to its quality. Costs for quality control of products (services) may negate the savings on the other forms of control. Losing the team spirit.
Which of the following represents the tightest link between pay and performance?linking pay to performance. This is a compensation system in which workers are paid per unit produced and represents the tightest link between pay and performance.
What is commission incentive?Incentive. Always in cash form, commission is an income payment. It's a percentage of a product or service sold. An amount of money or non-monetary of reward to motivate someone to achieve something. Commission and incentives have their unique roles in sales motivation, but not everyone thinks so.
Which of the following pays an employee based on the skills he or she has developed rather than the duties listed for his or her job?Competency-based pay is a pay structure that compensates employees based on their skill set, knowledge, and experience rather than their job title or position.
|
Which of the following is an advantage to offering sales people straight salary compensation instead of combining salary with commissions?
zusammenhängende Posts
Urheberrechte © © 2024 defrojeostern Inc.
