MAR 4418 UCF Chapter 8

Objectives of a Compensation Plan

To motivate reps, correlate effort with rewards, control activities (customer treatment), and attract/keep competent talent.

Level of Compensation

The average earnings of salespeople over a given period; essential for attracting and retaining talent.

Method of Compensation

How the reps are paid (e.g., salary, commission, bonus).

Straight Salary

A fixed direct monetary reward paid for performing duties over a period of time, regardless of sales volume.

Straight Salary Advantage

Provides maximum security, stability of earnings, and allows management to direct non-selling activities (like missionary work).

Straight Salary Disadvantage

Offers no direct financial incentive to excel and is a fixed cost even when sales are down.

Straight Commission

A variable reward based on a specific unit of work or accomplishment (e.g., a percentage of sales).

Straight Commission Advantage

Provides the highest possible incentive and relates selling costs directly to sales revenue.

Straight Commission Disadvantage

Makes it difficult to control non-selling activities; reps may neglect service or push easy-to-sell items.

Commission Base

The metric on which payment is measured (e.g., Sales Dollars, Units Sold, or Gross Margin).

Gross Margin Base

A commission base that incentivizes salespeople to sell high-profit items rather than just high-volume items.

Commission Rate

The amount or percentage paid for each unit of accomplishment.

Drawing Account (Draw)

A cash advance against future commissions; provides a steady income floor for commission-based reps.

Guaranteed Draw

A draw where the salesperson does not have to pay back the difference if their commissions fall short of the advance.

Nonguaranteed Draw

A "loan" against commissions where any shortfall must be paid back from future earnings.

Bonus

A lump-sum payment for reaching a specific performance target (e.g., hitting a quota or signing 10 new accounts).

Combination Plan

A compensation method that uses a base salary plus an incentive (commission and/or bonus); the most common plan today.

Progressive Rate

A commission rate that increases as sales volume increases (e.g., 5% on the first $20k, 10% on anything over).

Regressive Rate

A commission rate that decreases as volume increases; used when reorders are automatic or to prevent "windfall" earnings.

Split Commission

Dividing a commission between two or more reps who worked on the same sale or across different territories.

Indirect Monetary Compensation

Benefits such as paid vacation, health insurance, life insurance, and retirement plans.

Sales Force Expenses

Reimbursements for travel, lodging, and entertainment; should be kept separate from actual compensation.

Sales Contest

A short-term incentive program designed to motivate the sales force to achieve specific, immediate goals.

Tesla Compensation Example

Uses straight salary because their salespeople act as consultants rather than high-pressure closers.

RE/MAX Compensation Example

Uses straight commission because competition is high and specialized technical knowledge is less critical.

Verizon Compensation Example

Uses salary plus commission to provide security for service and incentive for new plans.

IBM Compensation Example

Uses salary plus bonus to focus on long-term customer retention while hitting quarterly targets.

Pulling Business Forward

A questionable behavior where reps withhold orders to turn them in at the start of a new period to hit higher commission tiers.

Windfall Sale

A large, unexpected sale that occurs through little or no effort by the salesperson.

Pretesting the Plan

The final step before installation; using historical data to calculate what reps would have earned under the new plan to ensure fairness.