Traditionally, the plans were geared to generate ‘sales volume’. Today, the shift is towards profitable sales volume. Many companies now include in their compensation plans a component that measures customer satisfaction.
Over the past years, there has been significant growth in plans that combine salary with an incentive feature. This trend has been primarily at the expense of straight salary and straight Commission plans.
Today about 78% of all companies use some form of combination plan to pay their Salesforce.
Types of Sales Compensation Plans
Basically, there are eleven widely used methods of compensating a Salesforce:
The various types of sales compensation plans are described below:
1. Straight Salary Plan
A salary is a direct monetary reward paid for performing certain duties over a period of time.
The amount of payment is related to the unit of time rather than to the work accomplished.
A salary is a fixed element in a payment plan. That is, in each play period, the same amount of money is paid to a salesman regardless of the person’s sales, missionary efforts, or other measures of productivity.
This plan may be of three types:
1. Fixed Salary Plan
Here, the salesmen receive a fixed amount at regular intervals. It is a total amount.
2. Salary and Increments Plan
Under this plan, a salary grade is given at the time of appointment. For example, a salesman may be appointed on a grade of $500-$300-$2000.
3. Salary and Allowance Plan
Under this plan, in addition to a fixed monthly salary, a salesman will be paid some other allowances like traveling, meals or medical allowance for his expenses incurred by him.
Benefits or Advantages
- A regular income gives the salesman a good degree of security.
- It provides stability of earnings without wide fluctuations.
- A regular and stable income can do much to develop a loyal and well-satisfied salesman.
- It has lower turnover rates.
- Management can direct Salesforce into various activities more easily.
- Salesman gives proper consideration to the customers’ interest because they are less concerned with immediate sales volume.
- It provides strong financial control over a salesman.
- It is economical to the administrator, because of its basic simplicity.
- It provides freedom from financial uncertainties inherent in other plans.
- The salesman is relieved of much of the burden of planning their own activities.
- It is simple to understand. It provides a predictable monthly income.
- This plan is preferred by customers since they know a salesman is there to help rather than to load them with the inventory.
Disadvantages or Limitations
- It does not offer a strong, direct incentive to the Salesforce.
- Salaries are not revised in relation to salesman performance.
- It is a fixed cost. There is no direct relationship between salary expenses and sales volume.
- Salaried salespeople usually require much closer supervision by sales managers.
- A salary plan often overpays the least productive members of a sales team.
- These cause morale problems when new trainees earn almost as much as experienced salespeople.
- These plans may create a problem of increasing the turnover of the salesman.
- These encourage excessive selling expenses during business downswings.
When a Straight Salary Plan is Best?
Generally speaking, a salary plan is best used when management 1. wants a well-balanced sales job, and 2. can supervise and motivate the salesman properly.
Specific situations suited to a straight salary include the following:
- Sales recruits are in training or are still so new on the job that they cannot sell enough under a commission to earn a decent income.
- The company wants to enter a new geographical Territory or sell a new line of products.
- The job entails only missionary sales activities.
- Salesman services the product or gives technical or engineering advice to users.
- The salesman does considerable sales promotion work.
2. Straight Commission Plan
A commission is a regular payment for the performance of a unit of work.
A Commission is related to the unit of accomplishment, in contrast to the salary method, which is a fixed payment for a unit of time.
Salespeople usually receive commissions according to the factors that are largely under their control.
Commission plans generally consists of three items:
- A base on which performance is measured and payment are made.
- A rate, which is the amount paid for each unit of accomplishment.
- A starting point for the commission payments.
The straight commission plan can be executed in two ways:
1. Commission at a Fixed or Flat Rate
In this method, the commission is fixed irrespective of the total sales. The commission is paid at the flat rate without considering that it achieves the sales quota or not.
2. Commission at Progressive or Regressive Rate
In this method, Commission rates are varied with total sales volume. The salesman who secures the highest volume of sales will get the highest rate of commission. It is calculated for each salesman.
Advantages or Benefits
- This plan gives a terrific incentive to benefit to Salesforce.
- It provides a strong motivating factor. If firms have no selling on Commission, servicemen may have unlimited income opportunities.
- It weeds out the ineffective salesman.
- The commission is a direct expense that is, an expense is incurred only when a sale is made or some other activities are performed.
- It pays according to productivity.
- It provides a means for cost control.
- It has greater flexibility.
- It fosters independence of action.
- It is easy to understand, and it is fairly simple to calculate wages and administrator the plan.
- Because the selling cost is entirely variable, the firm does not pay as much when sales decline or fail to meet growth objectives.
- When commissions are paid at the time revenues are received, there are definite cash flow benefits.
- It is possible to direct the salesforces efforts towards new strategic objectives, such as introducing a new product line.
- It is difficult to supervise and direct the activities of salesmen because they try to sell more without regard for the interests of the company or the customers.
- Salesmen concentrate on easy to sell items and slow-moving ones.
- Customers may be sold more items or more expensive items. then necessary.
- Management cannot expect a salesman to do missionary work.
- It provides little financial control over salespeople’s activities.
- The costs of checking and auditing salespeople’s reports and calculating payrolls are higher.
- Salespeople, on straight commission often feel that they are discharging their full responsibilities by continuing to send in customers’ orders. They are careless about training transmitting reports, neglect to follow up leads, resist a reduction in the size of sales territories, consider individual accounts private property, shade prices to make sales, and main use high-pressure tactics and consequent loss of customer goodwill.
- Some salespeople’s efficiency may decline because of income uncertainties.
- If a company has many financially worried salespeople, management may have to invest considerable time, effort, and money to raise their morale and spirits up.
- Salespeople often have little company loyalty.
- Wide variations in remuneration may lead to poor morale among lower-paid personal.
- Highly-paid salespeople may be reluctant to move into the supervisory of managerial positions.
When A Straight Commission Plan is Best?
Conditions under which the straight Commission method is to best choice include the following:
- A company is in a weak financial position and therefore selling cost must be related directly to sales.
- Salespeople need great incentive to achieve adequate sales.
- Very little missionary work is needed.
- Developing long-term relationships with customers is not required.
- A firm uses part-time salespeople or independent contractors such as manufacturers agents. 18 Major Factors Affecting Capital Structure (Complete List).
A bonus is an amount paid for accomplishing a specific task.
Bonuses are paid for reaching a sales quota, performing promotional activities, obtaining new accounts, following up leads, setting up displays, or carrying out other assigned tasks.
The bonus, in other words, is an additional financial reward to the salesperson for achieving results beyond a predetermined minimum.
Bonuses are never used alone they always appear with the main sales compensation plan.
4. Salary Plus Commission
Salary plus Commission plan is used more than any type of compensation plan method.
Although there is no generally agreed on percentage split between the fixed and the variable elements, on average the incentive portion remains 40% of the total compensation.
The company may have a base salary plus Commissions. This plan provides incentive and flexibility elements.
This plan offsets the disadvantages of both the salary and commission Systems. By combining two basic plans, management seeks both control and motivation.
This plan can be used to promote the sale of individual products or to intensify efforts among specific market segments.
Commissions are usually paid monthly, providing almost immediate reinforcement for the salespersons’ efforts. Such plans, however, are costly to operate.
Also, the addition of incentive features at the expense of the salary can reduce managerial control over the Salesforce.
In the final analysis, the success of a salary plus Commission plan depends largely on the balance achieved among the elements. Actual results depend upon management’s skills in designing and administrating the plan.
5. Salary Plus Bonus
A bonus is a lump sum payment for an above-normal performance.
A bonus is an amount paid for accomplishing a specific sales task.
It is never used alone but instead must always be combined with another element such as a salary or Commission.
The salary plus bonus arrangement is excellent for encouraging some activity for a short time.
For example, a company may want to generate new accounts, encourage repeat business, or push missionary work for one product line.
Some companies are using bonuses to help the Salesforce focus on long-term objectives such as improving customer satisfaction.
This plan controls salesforce at all times and still offers some incentive. many companies give bonuses to reward team performance.
6. Salary Plus Commission and Bonus
A number of companies use all three components – salary, commissions, and bonus – in their compensation plans.
This allows them to have a certain degree of control and to provide an incentive as well as offer a bonus for the accomplishment of a specific goal.
Advantages or Benefits of Combination Plans
A well Designed administered combination plan provides the following benefits:
- Sales personnel have both the security of stable incomes and the stimulate of direct financial incentives.
- Management has both financial control over sales activities and the means to motivate sales efforts.
- These plans have greater flexibility for adjustment to changing conditions.
- Disagreements on pay increases and territorial changes are less violent.
- If salesmen realize that the company shares its financial risks a cooperative spirit develops between them and the company.
Disadvantages of Combination Plans
- Clerical costs are higher. More records are maintained and in Greater detail.
- The plan may become complicated and sales personnel may not understand it.
- To keep selling costs down, the company may use Commission rates so low that the incentive feature insufficient. This will be discouraged from selling efforts.
- There is a loss of profits during downswings.
How Much Incentive and Salary in Combination Plans?
Some forms of combination pay plan may be used to remunerate salespeople.
Broadly speaking, the purpose of any combination class is to overcome the weakness of a single method while at the same time Keeping Its strong points.
In any combination pay plan, what portion should be an incentive and what partition salary? The answer depends on the nature of the selling tasks and the company’s marketing goals.
The incentive portion should be larger when a company is trying to increase its sales or gross margin, especially in the short run.
The salary element should be larger when management wants to emphasize customer servicing, a fully balanced selling effort, or team selling.
The incentive portion in combination plans is most often in the 40% range.
It has been increasing over the past two decades and will probably continue to increase slightly in the next decade.
7. Drawing Account Plan
It is an improved method of the straight Commission plan.
Under this method, a drawing account of every salesman is opened. The company credits the Commission accrued in favor of each Salesman, in his account, every month.
The salesman withdraws a certain permitted amount from this drawing account. The money so drawn is debited in his account.
The limit prescribed for withdrawal during the month shall be deemed to be his total compensation for the month.
The purpose of this plan is to allow the salesman to draw up to the permitted limit from his drawing account even when a salesman is not able to get a reasonable sell during a month and his commission comes to a relatively small amount.
At the end of the month, if any credit balance is left out in his account, the salesman is entitled to withdraw the same amount, and in case of Debit balance in the drawing account, the same will be with written off.
The money overdrawn is not adjusted against the commission of any other months.
If salesperson becomes greatly overdrawn, they may lose the incentive to produce, because earned commissions are used to reduce the Indebtedness.
More important, some sales personal become discouraged with the prospects of paying back overdrawn accounts and quite the company.
To forestall quitting by overdrawn salespeople, some firms use “guaranteed” drawing account plans.
Advantages or Benefits
- The drawing account has an automatic check on the performance of a salesman.
- The company cannot suffer a loss due to an inefficient salesman.
- It reduces the expenses on supervision and control.
- It facilitates to forecast future expenses on sales.
- It provides regular income to the salesman.
- It links efforts and rewards.
- The commission plan can be changed conveniently.
- To maintain efficient salesmen, Commission rates are required to be increased.
- It increases administrative expenses.
- The salesmen cannot be compelled for increasing sales.
- The salesman may concentrate on easy to sell items.
- Salesmen do not pay attention to non-selling activities.
- There remains a problem to control sales.
In fact, this is the Supplementary plan, used along with other compensation plans.
It involves paying a certain percentage of profits to the salesman.
The company can adopt a policy under which all salesmen receive a fixed percentage of profit made in their territories.
Profit-sharing can be either discretionary or fixed.
Advantages or Benefits
- It improves the relationship between the salesman and the organization.
- It helps in exercising control over the salesman.
- It builds a good image and Goodwill of the firm.
- It helps in facing competition.
- It builds a democratic atmosphere. Transportation: Importance, Functions, Types, Management (Explained).
- When the sales decline, the profits will also decline.
- In the case of continuous loss, the salesman will leave the firm or they will be demotivated.
9. Expenses Allowance
Under this plan, allowances to meet the expenses involved in travel, lodging, dining, and entertaining are paid to the salesman.
10. Quota Based Plan
Under this plan, each salesman is assigned with a certain fixed quota to be achieved during a specific period of time.
On achieving the given quota, Commission at the fixed rate is paid to each.
This incentive is used along with any other main compensation plan.
No commission is paid if the salesman fails to achieve the assigned quota.
11. Fringe Benefits Plan
Fringe benefits, which do not bear direct relationships to job performance, range from 20 to 30% of the total sales compensation package.
Fringe benefits, like monetary compensation, are not motivating factors. In the Maslow hierarchy theory, fringe benefits contribute to the fulfillment of safety and security needs.
Fringe benefits help to prevent job dissatisfaction these include benefits such as holidays, vacations, social security facilities, pension plans, insurance, and medical facilities, organization dues, automobile, parking, lunches, credit facilities, payment of moving expenses, discounts for the purchase of company products, etc.
Thus, now you know all types of sales compensation plans in sales management.