Sales force compensation is the basis for paying salespeople for their efforts. Compensation is a critical component in SALES MANAGEMENT. An effective sales-compensation plan
• bases rewards on results and efforts
• provides equal rewards for equal results
• provides rewards that are competitive in the marketplace
• is easy to understand and implement
Most salespeople want to be rewarded for their effectiveness. Typically sales-compensation plans are one of three types: straight salary, straight commission, or a combination plan. Straight-salary compensation plans usually include performance quotas used to determine annual raises. Straight-salary plans are used when sales efforts are made as part of a team and when customer service (rather than selling) is the major function. Straight-commission plans pay no salary, only a fixed amount or percentage for each sale. Most salespeople on commission plans are paid a “draw”—a set amount per pay period against their sales commission. The draw is, in effect, a loan by the employer. Salespeople keep close track of their commissions and know when they have “made their draw” in a week or month. Repeatedly not making draw will lead to dismissal. Salespeople who excel are often paid bonuses above their standard commission or are awarded prizes, often electronic equipment and vacation trips. Most U.S. companies pay salespeople based on combination plans, which include salary plus bonus or salary plus commission. Typically retail-store employees are paid a base wage plus a small commission. For example, Julia Roberts in the film Pretty Woman returned to the store where she was treated poorly to show the sales clerk the commission she lost. Salary-plus-bonus plans are often difficult to administer. Bonuses are usually based on exceeding a target sales level, determined by a percentage above the previous year’s sales. During the booming U.S. economy in the 1990s, many salespeople easily met their target amounts, often well before the end of the year. Selling more would increase the base amount they had to achieve the following year. Since the next year’s bonus would be based on exceeding the previous year’s sales, once they had met their target level, salespeople then had an incentive not to sell more.
Salespeople tend to be competitive, and therefore salescompensation plans should reward equal results equally. Unequal reward plans create dissention within an organization. Sales managers often create special incentives for their staff known as “pearl-diving contests.”
Sales-compensation plans also have to be competitive. Sales is a skill that is often easily transferable from one firm or industry to another. Salespeople talk with each other and have a good idea how well they are being compensated relative to other opportunities.
Sales-compensation plans need to be easily understood and implemented. When personnel know the basis of compensation, they adjust their efforts to meet the goals. Salespeople often complain about complex and timewasting paperwork. They know if they are filling out reports, they are not selling.