Chapter 11

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Salesperson Compensation and

Incentives
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 Learning Objectives

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• Discuss the advantages and limitations of straight salary, straight commission, and
combination plans.
• Explain how and why a bonus component to compensation might be used as an
incentive.
• Understand the effective use of sales contests, as well as the potential pitfalls of their
use.
• Identify key non-financial rewards, and how and why they might be important.
• Recognize key issues surrounding expense accounts in relationship selling.
• Discuss making decisions on the mix and level of compensation.

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 Key Terms
• compensation plan
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• salary
• incentive payment

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• commission

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• bonus
• quota

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• sales contests
• benefits
• Non-financial incentives
• variable commission rate
• draw
• perquisites (perks)
• expense account
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 Key terms
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• Compensation plan (pg. 335)
– The method used to implement the reward structure in an organization.
• Salary (pg. 335)
– A fixed sum of money paid at regular intervals. The amount of salary paid us most often a
function of the individual’s experience, competence, tenure on the job as well as the
superior’s judgments about the quality of the salesperson’s performance.
• Incentive payment (pg. 335)
– Additional compensation to encourage good performance. These incentives may take the
form of commissions tied to sales volume or profitability, or bonuses for meeting or
exceeding specific performance targets.

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 Key terms
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•

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Commission (pg. 335)
– A payment based on short-term results, usually a salesperson’s dollar or unit sales volume.
• Bonus (pg. 335)
– Payment made at the discretion of management for achieving or surpassing some set level of
performance. They are usually additional incentive payments (above commissions) to motivate
salespeople to reach high levels of performance.
• Quota (pg. 336)
– The minimum requirement a salesperson must do to earn a bonuses.
– Can be based on goals for sales volume, profitability of sales, or various account servicing activities.
• Sales contests (pg. 336)
– Events designed to encourage extra effort aimed at specific short term objectives.
• Benefits (pg. 337)
• Are designed to satisfy the salesperson’s basic need for security and include medical and disability
insurance, life insurance, and a retirement plan

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 Key terms
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• Non-financial incentives (pg. 337)
– Are incentive in addition to financial compensation such as opportunities for promotion or
various types of recognition for performance like special awards and citations.
• Variable commission rate (pg. 339)
– Pays relatively high commission for sales of the most profitable products, sales to the most
profitable accounts, or sales of new products.
• Draw (pg. 340)
– An advance of money to a salesperson in months when commissions are low to ensure he
or she will always take home a specified minimum pay.
• Perquisites (perks) (pg. 346)
– Might include higher compensation, a better automobile, better office facilities, and the like
to provide incentives for top salespeople to move into more advanced sales positions.
• Expense account (pg. 347)
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– A formal reimbursement plan for travel, lodging, meals, entertainment, and other expenses
incurred by sales reps in the field.
 Key Compensation Questions
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• Which compensation method is most appropriate for motivating specific
activities in specific situations?
• How much of the total compensation should be earned through incentives?
• What is the best mix of financial and nonfinancial compensation and incentives?

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 Key Definitions
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• Salary – a fixed sum of money paid at regular intervals

• Commission – a payment based on short-term results, usually a dollar or unit

sales volume

• Bonus – a payment made at management’s discretion for achieving or

surpassing some set level of performance

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 Compensation Methods for Salespeople
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Compensation Especially Advantages Disadvantages
Method Useful For

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Straight Salary New sales reps Maximum No incentive
New sales security Requires close

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territories Control over supervision
Many required reps Selling
nonselling Easy to expenses
activities administer remain same
Predictable during sales
expenses declines

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 Compensation Methods for Salespeople

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Compensation Especially Advantages Disadvantages
Method Useful For

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Straight Highly Maximum Little security
Commission aggressive incentive Little control

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selling Managers can over reps
Minimal required encourage sales Reps may
nonselling tasks of certain items provide
When company Selling inadequate
can’t closely expenses relate service to
control sales directly to selling smaller
force resources accounts
Selling costs
less predictable
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 Compensation Methods for Salespeople
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Compensation Especially Advantages Disadvantages
Method Useful For

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Combination Similar sales Some security Selling

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potential across Some incentive expenses are
territories less predictable
Selling
When company expenses vary May be difficult
wants to offer with revenue to administer
incentive but Manager has
maintain some some control
control over nonselling
activities

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 Combination Plans
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Most popular form of compensation

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Offer a base salary plus some proportion of incentive pay

Well-suited for relationship selling by compensating for non-selling

activities while providing incentives to motivate sales

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 Design Questions for Combination Plans

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• What is the appropriate size of the incentive relative to the base salary?
• Should a ceiling be imposed on incentive earnings?
• When should the salesperson be credited with a sale?
• Should team incentives be used? If so, how should they be allocated
among team members?
• How often should the salesperson receive incentive payments?

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 Sales Contests
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• Short-term incentive programs designed to motivate to accomplish
specific sales objectives
• Contest winners receive prizes, recognition, and a sense of
accomplishment
• Successful contests require:
• Clearly defined, specific objectives
• An exciting theme
• Reasonable probability of rewards for all
• Attractive rewards
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• Promotion and follow-through
 Criticisms of Sales Contests
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• May not produce lasting improvements
• Salespeople may borrow sales from another period to increase sales
during the contest period
• Poorly administered contests can hurt cohesiveness and morale

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 Nonfinancial Rewards
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• Recognition is an attractive reward because it makes a salesperson’s
peers and superiors aware of outstanding performance
• Effective recognition programs:
• Offer everyone a reasonable chance of winning
• Recognize the best performers across several dimensions

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 Expense Account Types
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• Direct reimbursement – direct and unlimited reimbursement of all
“allowable and reasonable” expenses
• Limited reimbursement – either sets expense limits by-item or provides
predetermined lump sum
• No reimbursement – requires salespeople to cover all expenses;
usually combined with higher total financial compensation plan
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 Mix and Level of Compensation
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• An appropriate mix and level of compensation should
– Maximize compensation plan’s motivational value
– Be fair
– Remain consistent with firm’s resource capabilities

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 Summary
• To effectively manage the relationship selling
function, sales managers must be concerned with
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firm’s compensation system.
• In determining the most effective form of
financial compensation, the firm must decide

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whether it should use (1) straight salary, (2)

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straight commission, or (3) a combination of base
salary and incentive pay such as commissions,

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bonuses, or both. Most companies today use a
combination approach.
• The base salary provides the sales person with a
stable income while allowing the company to
reward its salespeople for performing tasks not
directly related to short-term sales.
• The incentive portion of combination plan has to
be large enough to generate the necessary
interest among salespeople.
• To be successful, a sales contest needs to have
(1) clearly defined, specific objectives, (2) an 22
exciting theme, (3) a reasonable probability of
 Summary
• Nonfinancial incentives can pay an important role in a
firm’s compensation system. Opportunities for
salesperson promotion and advancement, recognition
programs,
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can be effective sales motivators.
• For recognition programs to be effective, the sales
person’s peers and superiors must be made aware of

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his or her out standing performance. This can be done

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through recognition at a sales meeting, publicity in the
local press, announcements in the company’s internal

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newsletter, or other ways.
• Because all salespeople cannot possibly move into
sales management positions, some companies have
dual career paths to maintain the motivating potential
of promotion and advancement. One path leads to
positions in the sales management hierarch; the other
leads to greater responsibilities in sales position such
as a larger territory or key account position.
• Three common means of handling salesperson
expenses are direct reimbursement, limited
reimbursement, and no reimbursement. When 23
everything else is said and done, the sales manager