Incentive as a Component of Salesman Compensation Structure

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Incentives as a Component of Salesman Compensation Structure By
Mohit Pandey
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...
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