Incentive as a Component of Salesman Compensation Structure

Incentives as a Component of Salesman Compensation Structure By Mohit Pandey 11DM-187 Sales Management-Section D What are Incentives? It is defined as a type of additional remuneration either in cash or kind given to an employee as a means of increasing output or as a motivational influence. Why do we need to give incentives? Firstly incentives work as psychological stimulant for a person to perform better. Incentives act like the pot of gold at the end of the rainbow. Secondly, the turnover rate of a salesperson is very high and also the cost of replacing a salesperson is also quite high, approximately around $40-50k.
Thus to retain the best talent in the company we need to provide adequate incentives to the sales force. The salesperson spends most of his time out in the field and this makes it quite difficult to monitor him. Incentives act as an automatic monitor to make sure that the salesperson is working towards achieving his sales targets. What are the types of Incentives given to a Salesman? The salesman compensation structure is divided into two parts: Fixed Salary and Variable Salary. In a totally risk-free situation there would be no fixed salary, the salesman compensation would consist only of 100% Commissions.
But since the market is never 100% risk-free and also because of longer order-cycles the compensation plan has some amount as Fixed Salary. The types of Incentives are: * Cash: This is most widely given type of incentive. Everyone knows that the major lure in a salesman’s job is the opportunity to earn a lot of money and cash incentives are a major component. Cash incentives can be segregated into two sub-types: * Commissions: It is directly to the sales volume. Example: 5% commission on every T. V sold. It can either be calculated on the profit margin or on the price of the product.

Commission are short-term incentives and lead to increase in the sales effort put in by the salesman. * Bonus: It is given if the salesman achieves a desired no. of sales known as sales target/quota. It is calculated on the base pay. It is a medium/long term incentive depending on whether it is given quarterly or annually. * Non-Cash: These are generally not counted as a part of the compensation plan. They are given to motivate the salesman and based on performance in the long term. Non-cash incentives include: * Gift Cards * Merchandise Travel What parameters are used to determine incentives? Generally the ratio of incentives as a percentage of the total compensation decreases as you go up the hierarchical structure. At a salesman level it can go up to 100% of his base pay while at the manager level it can vary from 40-60%. The parameters generally used to determine incentives are: * Total revenue * New revenue * Gross profit * Price realization * Units sold * Select product sales * New products * Outdated products * New accounts * Retained accounts * Account expansion Customer satisfaction * First order * Order volume * Contract commitment * Key sales objectives or milestones The parameters used should be aligned with the business strategy of the company. For e. g. If a company is launching a new product into the market through the existing sales force, then it doesn’t make sense for the company to not have the sales nos. of the new product sold as playing a part in deciding the incentive level of the salesman. Normally only few parameters should be selected so as to make the compensation plan clear to the salesman.
The compensation plan should be as clear to the salesman as possible so that he can easily calculate how much he can earn in that year. The sales target being set should be realistic and achievable. Ideally sales targets should be set after a discussion between the management and the salesperson both. Ideally incentives should not have an upper-cap, this deters the high performers. Even if a company has to set an upper-cap it should be higher than the maximum realistic possible of a salesperson.
A few key points that should be kept in mind while setting the parameters for deciding incentives are: * The current market situation (growth or recession). * The product type (B2C or B2B) * The sales order cycle (long or short) * The business strategy ( Increase market penetration or may increase sales of a high margin product or launch of a new product) How much incentive to offer and to whom? The percentage amount of incentive offered to the sales force should not be equal across the board. The high performers must be rewarded for their performance, while the low performers need to be encouraged to perform better.
The better the performance the higher should be the incentive level. Also in case of team selling the incentive has to be distributed proportionately amongst the team. It should not be the case wherein the laggards piggyback on the star performers and get the same level of incentive. Additionally a proper framework has to be devised on a company-to-company basis to decide the distribution of incentive for a product sold amongst the team members so as to control costs and avoid giving multiple incentives for the same product to multiple persons involved in the sale.
The incentives offered should be mix of both short and long term incentives i. e. commissions, bonus, non-cash rewards, etc. This is to ensure that the motivation level of the salesperson is up throughout the year and does not peak at certain periods. The level of incentive payout should be adequate neither too little so as to discourage the salesperson nor too much as it will increase costs and lower profits and also lower the morale of the non-sales staff. Conclusion:
Hence we can conclude that incentives as a component of a salesman compensation structure is highly important. Following is a generic framework which can be used to decide an incentive plan: * The plan should be clear and well understood by the sales force. * Decide the level of incentive i. e. the percentage to be given and how much and to whom, based on the performance level. * Determine criteria for giving incentives based on a proper analysis of the factors stated above in the report. Keep as less parameters as possible. Keep the sales target level competitive yet achievable. * The level of incentive should be adequate i. e. comparable to the competitor but neither too low nor too high. * Determine the periodicity of incentive payout. * The incentive payout should be based at proper intervals during the year. Sales contests and non-cash rewards are a good way to achieve this. * The plan should be flexible. Ideally make multiple plans and offer it to the sales person so that he can choose which one suits him best. Bibliography: Restoring Balance to Sales Compensation
Head, Robert G. Sales and Marketing Management144. 9 (Aug 1992): 48. Readers’ report: How we use incentives Donath, Bob. Sales and Marketing Management145. 6 (Jun 1993): 34. Talking money Anonymous. Sales and Marketing Management149. 12 (Nov 1997): 64-70. May the Sales Force Be with You Ladd, Scott. HRMagazine55. 9 (Sep 2010): 105-107. Reframing salesforce compensation systems: An agency theory-based performance management perspective Bartol, Kathryn M. The Journal of Personal Selling ; Sales Management19. 3 (Summer 1999): 1-16.