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Compensation of Salesmen A good compensation plan for salesmen is one of the most important elements in the smooth and

d efficient functioning of a sales organization. A good compensation plan increases loyalty, maintains high morale, attracts high quality men seeking a fair reward for their services and reduces turnover of salesmen. Apart from financial incentives provided by a good compensation plan, salesmen should also receive non-financial incentives like security, recognition, opportunities for growth and self respect in order to be completely happy. A compensation plan that overpays some men, underpays others, which is frequently changed arbitrarily, fails to provide an adequate income, offers no incentive to high performers and is highly complex that few salesmen can understand it, leads to dissatisfaction among salesmen, low morale and high turnover among salesmen Steps in Establishing a Sales Compensation Plan: Responsibility for designing the salesmens compensation plan is assigned to a sales compensation committee. The committee consists of members from with in and outside the company to ensure that the compensation plan is in tune with the plans in competing fields. Objectives of salesmens compensation plan: These can be divided into primary and secondary objectives.
The three general primary objectives of a sound compensation plan

are (1) selling a satisfactory volume (2) selling the most profitable goods/services and (3) selling at the lowest possible cost.

Most compensation plans pay salesmen for a satisfactory volume of sales. In such a case sales volume is often obtained by selling low priced, low profit, easily sold products which provide the smallest profit margins. Emphasis on sales volume often leads to price cutting and high selling costs. In view of the severe limitations of a compensation plan that only pays on sales volumes, many firms now are implementing a graduated compensation plan that pays more for sale of most profitable items and less for selling low profit goods. Off late extra compensation is being paid to salesmen who increase their sales volume or profit and at the same time reduce their selling expenses. Secondary objectives of sales compensation plan: It is necessary to establish secondary objectives to enable the salesmen to focus attention on some activities that lead to the successful attainment of the primary objectives. Secondary objectives which lead to attaining increased sales volume are (1) increasing the size of the order, (2) introducing new products (3) opening new accounts (4) reviving an inactive account (5) increasing the frequency of orders (6) locating new prospects (7) making demonstrations (8) reducing returns and (9) performing missionary work. Characteristics of a good compensation plan: A good compensation plan should have the following qualities.
Stability of Earnings: A salesmens income should not fluctuate

widely and it should ensure stability in earnings.

Regular earnings strengthen salesmens morale.

Control on salesmens activities: A compensation plan that primarily

rewards salesmen for volumes will not encourage missionary work.

Compensation plan should encourage salesmen to perform those tasks

that are most essential in serving customers, creating sales and increasing profits. A salesmens job requires missionary work like organizing displays, restocking shelves, organizing after sales campaign and helping dealers with better management methods.
Incentive to sell: A compensation plan should provide financial

reward for superior performance. Extra compensation should be paid for selling more profitable products, lowering travel expenses, getting new customers, increasing collections, increasing number of calls, etc.
Flexibility in adjusting earnings to selling conditions: A sales

compensation plan should be adaptable to differences in selling conditions, salesmen, products and sales territories. A payment plan that may be sound for experienced salesmen may be unfair for beginners in the organization.
Simplicity of administration and understanding: An effective

compensation plan should be designed in such a way that it can be implemented with out excessive expenditure. The compensation plan should also be easily understood by the salesmen. If the compensation plan is complicated to understand, salesmen become suspicious about the plan and assume that management is trying to take advantage of them.

4 Economical to the Employer: Sales compensation plan should be

economical, where it does not become cost prohibitive to the employer.

Fair and Equitable to both the firm and salesmen: A good

compensation plan should be fair to both employer and salesmen. It should not overpay some men and underpay others.
Some plans are entirely based on volumes and not profitability.

Some plans depend on length of service of salesmen and not his ability to produce high volume of sales, high profits or low expenses. The above two methods might not be considered to be fair from the salesmens point of view.
Competitive: A compensation plan should enable salesmen to earn as

much or more than salesmen employed by competitors in the same industry. Otherwise the salesmens turnover would be increasing.
A plan should enable a beginner to maintain a standard of living

comparable to that of salesmen of equal experience doing similar work in related lines. Factors affecting choice of compensation plan: Job to be done: The duties of salesmen affect features of a compensation plan. When a sales job involves considerable missionary work, salesmen should be compensated for this activity. Nature of Product: More training and ability is required to sell a complex, technical products than a simple, stable product.
A compensation plan should provide a financial reward in proportion

to the training and selling skill demanded by a product. Functional types of salesmen: Various functional salesmen like junior salesmen, senior salesmen, sales Engineers etc are being employed.

A compensation plan should provide for different methods of payment

based on the job to be done by each of these functional types of salesmen. Market for the product or service: Unfavorable markets that are low in purchasing power, poorly developed, or highly competitive create compensation problems. Salesmen working in these areas do not have the opportunity for earning comparable to those salesmen in good markets. Therefore, salesmen working in substandard markets should be given special consideration in fixing compensation plans. Method of Distribution: While selling direct to consumers, salesmen must create demand, demonstrate, sell in small amounts, deliver products and make collections, etc. This type of consumer selling calls for a liberal compensation plan, when compared to salesmen who sell in large quantities to wholesalers, large chain stores etc. Advertising and sales promotion: when extensive advertising and sales promotion make the salesmens job easy and reduces sales resistance, a lower order sales ability is needed and such salesmen can be paid lower levels of compensation. Conversely, when salesmen sell unadvertised products, they must be paid for the greater skill and effort needed. Financial resources of the employer: The financial resources of an employer are an obvious consideration in the selection of a payment method. Ability of the salesmen: Men of outstanding ability work best with a strong financial incentive and a minimum amount of control by management.

Compensation of competitive salesmen: In order to attract capable salesmen and retain them, a compensation plan must provide equal or greater income than competitors for the same type and quality of work. Economic conditions: Prevailing economic conditions should be taken into account while designing a payment method. Sales compensation methods: There are tow basic methods for compensating salesmen (1) a salary for time spent on the job and (2) commission for specific accomplishment. Salary method: This is the most common method used to pay salesmen. Advantages: It allows management to exercise full control over the time of salesmen. It encourages salesmen to do missionary work. It makes salesmen loyal to their company. Salary is easy to compute and little accounting is required Salesmen can be transferred more easily without adjustment in compensation Salesmen are more contended when they have an assured regular income. Disadvantages: Salaried salesmen become dissatisfied unless salaries are increased form time to time. Salaried salesmen usually become order takers, who secure just enough business to retain their jobs. Salesmen are not paid on the basis of their ability. A salary offers no incentive to salesmen to increase their sales.

Commission Method: The straight commission method is most commonly used for paying salesmen who sell specialties and intangibles directly to customers. The commission is paid as a percentage of the volume of net sales. Advantages: Salesmen work harder as they are paid only on results. Commission plan attracts able and hard working salesmen. There is minimum risk to the employer as he does not guarantee any thing and he has to pay only on the sales closed. Disadvantages: Firm has no control over the activities of the salesmen.
There is a danger of loss of good will to the firm as salesmen tend to

adopt aggressive selling techniques, due to greed for money. Salesmen tend to concentrate on those items that are easy to sell and often least profitable. The relationship between the salesmen and the firm are more distant. Modifications of the straight commission method: Sliding commission: In sliding commission a salesmen is paid a certain percentage of net sales up to a certain amount, after which figure the rate of commission increases as higher volumes are reached. In this method a salesmen is given an incentive to increase his sales volume. Group commission: Under this method, the various products sold by the salesmen are arranged into groups and a different rate of commission is paid on each group.

The commission rates are altered according to the profit value or desirability of selling the various groups of items. The advantage of this plan is it induces salesmen to concentrate on most profitable items by fixing higher rates of commission on these lines. Individual item Commission: Different rates of commission may be established for each of the individual items sold by salesmen. Salary plus Commission: This is a method used to overcome the disadvantages of pure salary and pure commission methods of compensation. Under this method a salesman is usually paid a small salary and a straight or other type of commission on net sales. This method has the advantage of control over the salesman with the stimulation to increase sales by commission. The disadvantages are salesmen are inclined to sell the items that are easy to sell. A salesman who is content with a small salary will not try to increase his efforts to earn the extra commission. Salary, Expenses and Commission Method: This is the same as salary and commission method and in addition the expenses of the salesmen are advanced by the management . Bonus Method: A bonus is paid as a reward for effort resulting in sales volume, profit or reduced expenses, beyond a certain predetermined amount or quota. Types of Bonuses: Bonuses are useful in stimulating salesmen to attain definite objectives in their work. Volume of Sales: This method has the advantage of securing volume for a plant with high overhead or excess production capacity.

The disadvantage with this method is it may cause salesman to ignore the high priced, high profit items and push the low priced, low profit, easily sold items. Individual Product Sales: The purpose of this method is to push slow moving or highly profitable products and introducing new items. Bonus is paid to a salesman who has exceeded a certain predetermined volume of sales established for the product to be pushed. Lower selling costs: A bonus is paid for reducing travel expenses below a certain predetermined percentage of expenses to sales volume. This method has the disadvantage of automatically reducing sales activities and frequently sales volume. Company profits: A firm gives an opportunity to its salesmen for a share in its profits; proportion to their ability as measured by their length of service, volume of sales, reduced selling costs, etc. Collection of overdue Accounts: To encourage salesmen to make collections promptly, a bonus of a fixed percentage of past due accounts may be paid half-yearly or annually. Cash with orders: A fixed percentage of bonuses are given to salesmen who sell products on cash purchase basis. Securing new Accounts: A percentage of bonus is given to salesmen who secure new accounts for the firm. Some firms pay a bonus to salesmen for renewal of contracts. Personal ratings: A bonus is paid to the salesman on the basis of their personal rating. Some of the items included for rating are (1) knowledge of company products, prices and advertising (2) ability to plan (3) thoroughness


and accuracy (4) relations with trade (5) initiative and creativeness (6) attitude towards job (7) reports of competition, etc. Other Methods include: (1) Group vs Individual bonus (2) salary and bonus (3) salary, commission and bonus (4) Point method.