Definition
According to The Complete Guide to Accelerating Sales Force Performance, “the incentive plan needs to align the salesperson’s activities with the firm’s objectives.” [1]
Sales force compensation may be based on the past (growth), the present (comparison with others), or the future (percentage of goal achieved). [2]
A bonus is made at the discretion of management for achieving or surpassing some set level of performance. Bonuses are usually additional incentives to motivate salespeople to reach high levels of performance rather than a part of the basic compensation plan. [3]
Commission is compensation based on a fixed formula related to the salesperson’s activity or performance. The basis for calculating a commission is frequently a fixed percentage of sales or gross margin generated. Salespeople may have to achieve a prespecified, threshold level of performance before they are eligible to receive a commission. [3]
A combination compensation plan is a type of sales force compensation plan that offers a base salary plus some proportion of incentive pay consisting of commissions, bonuses, or both. When salary plus commission is used, the commissions are typically tied to sales volume or profitability, just as with a straight commission plan. The only difference is that the commissions are smaller in a combination plan than when the salesperson is compensated solely by commission. [3]
Cost analysis is a sales management evaluation and control method for monitoring sales force performance. It involves monitoring the costs of various selling functions across individual salespeople, districts, products and customer types. When put together with the data from a sales analysis, this procedure allows a firm to judge the profitability of various products, customer types, and territories. [3]
Purpose
The purpose of the “sales force compensation” metric is to determine the mix of salary, bonus, and commission that will maximize sales generated by the sales force. When designing a compensation plan for a sales force, managers face four key considerations:
- level of pay,
- mix between salary and incentive,
- measures of performance, and
- performance-payout relationships.
The level of pay, or compensation, is the amount that a company plans to pay a salesperson over the course of a year. This can be viewed as a range, because its total will vary with bonuses or commissions.
Construction
Managers enjoy considerable freedom in designing compensation systems. The key is to start with a forecast for sales and a range within which each salesperson’s compensation should reside. After these elements are determined, there are many ways to motivate a salesperson. Key formulas in this area include the following:
Compensation ($) = Salary ($) + Bonus 1 ($) + Bonus 2 ($)
Compensation ($) = Salary ($) + [Sales ($) x Commission (%)]
After a sales compensation plan has been established, management may want to reevaluate the size of its sales force. Based on forecasts for the coming year, the firm may have room to hire more salespeople or it may need to reduce the size of the sales force. On the basis of a given value for projected sales, managers can determine the break-even number of employees for a firm.
References
- Zoltners, Andris.; Prabhakant Sinha; and Greggor Zoltners (2001). The Complete Guide to Accelerating Sales Force Performance. New York: AMACON.
- Farris, Paul W.; Neil T. Bendle; Phillip E. Pfeifer; and David J. Reibstein (2010). Marketing Metrics: The Definitive Guide to Measuring Marketing Performance (Second Edition). Upper Saddle River, New Jersey: Pearson Education, Inc.
- American Marketing Association, AMA Dictionary.