Types of Salesforce Compensation Plan
Compensation is more than money. It is one of the crucial factors of salespeople’s motivation. There are basically three types of salesforce compensation plan that a selling firm can use as an alternative to compensate its salespersons.
If the selling firm is large, there found the use of all these types, but separate types of compensation plan for a separate group of salesforce. In fact, these are the salesforce compensation plans used by almost all selling firms.
Compensation plans are developed and implemented to motivate salespeople to work better. Here, we will discuss the most common, three types of salesforce/sales personnel compensation plans with their advantages and disadvantages in detail.
Straight Salary Plan
This plan allows salespersons to receive fixed sums at regular intervals, say each week, month, or every two weeks. This is the most simple compensation plan in which you will get paid e.g. monthly for your work in a firm.
Salary is fixed for weekly or monthly. Most salespeople feel free from salary payment tension since it provides a regular inflow of salary to them.
Suitability of the Plan:
- It is effectively used for routine selling jobs such as: selling milk, bread, beverages, etc.
- It also proves the best plan for extensive missionary and educational sales jobs such as Pharmaceutical selling and Selling of technically complex, products.
- It is commonly used for compensating salespeople who are heavily engaged in trade selling where consumers’ necessities are distributed directly by the manufacturers/wholesalers.
- Some insurance firms, sometimes, use this plan when a salesperson is in training. These firms pay a salary the first year, but after one year, they place salespeople on a straight commission.
- As compared to consumer goods companies, this plan is in common use for industrial goods selling companies.
Advantages of Straight Salary Plan:
The straight salary plan proves advantageous to both the salesperson and the management.
Advantages to Salesperson:
- The salesperson feels free from financial uncertainties because of stable income inflow.
- In case the salesperson shows high sales performance, the firm increases its salary.
- Since the salesperson’s activities are planned by the management and detailed instruction for doing is provided, the salesperson is relieved of much of the burden of planning activities.
- The salesperson can easily understand his/her income because the feature of the plan is simple.
- New recruits and younger salespeople with little experience often prefer it.
Advantages to the Management/Sales Firm:
- It is simple and economical to administer.
- The Management can easily direct salespeople toward tasks that the company believes are important.
- The management can project compensation expenses for several years to come because sales costs are relatively fixed.
- The management can easily bring flexibility in adjusting field sales work changing selling situations and increasing pay based on salesperson performance.
The straight salary plan has no exception for negativities. There are several potential undesired features. They are as follows.
- No doubt the salesperson receives an increase in salary if he/she achieves excellent job performance. However, this increment is not paid immediately after the performance result. It is given long after the goal is met.
- The increment in salary for all salespersons mostly remains the same amount difference is seen between the levels of higher and excellent performances. That is, performance evaluation is not done on scaling. This is done only during a meeting of setting sales goals for each salesperson.
- Because salaries are kept secret, it is difficult to know about the difference increase in the higher level and lower level salespeople salaries. This leads better salespeople to disappointment and frustration and ultimately to change jobs.
- Since salespeople perceive that they have to compete with only other salespeople, they do not want to show their higher/excellent performance than their competitors. This means a salary plan can lower work norms.
- A straight salary plan does not count proportionate sales made by salespeople. It only pays a fixed salary. In case of a sales decrease, the firm may have to discuss salespeople causing it because total costs for sales increase and the firm loses.
However, these problems can be minimized through good administration.
Straight Commission Plan
This plan assumes paying each salesperson on his/her productivity – the higher the productivity, the greater the payment to each salesperson. However different commission rates are determined for different types of salespersons.
The basic principle of this salesforce compensation plan is, ‘If you do not sell anything, you do not earn anything.”
In this salesforce compensation plan, there are two basic types of commission plan: Straight commission and draw against commission.
The first category allows straight commission but not sales expenses. It may or may not advance the earned commission. The second category, however, allows both the straight commission and sales expenses while compensating the salesforce. In this case, also, the company may or may not advance the earned commission.
Suitability of the Plan:
- It is mostly suited to the situation where non-selling duties are unimportant and management stresses order getting.
- It is common in the textile, cotton, and shoe industries and whole selling of drugs and hardware.
- With respect to selling intangibles, investment securities, insurance companies also use this compensation plan frequently.
- Manufacturers of furniture, office equipment, and business machines are also frequent users of this plan.
Advantages/Strengths of Straight Commission:
i. To the Salesforce
- It provides maximum direct monetary incentives and leads salespeople to strive for a high-level volume of sales.
- Since it considers payment based on units sold, the star salespersons are paid more than they would be under the straight salary plan.
- Because of the earning potential, some salespeople are attracted to part-time commission sales jobs.
- Salespeople feel they are in business for themselves. Even they are fired, they use the previous relations with customers for doing their best for another company.
- Even slow sales producing salespersons become more energetic to apply to get higher income when this plan is first installed for them.
ii. To the management
- The straight commission plan provides a means to the management for cost control (except exclusive of those included in the plan, such as traveling expenses and miscellaneous expenses). In fact, all direct selling expenses fluctuate directly with changes in sales volume and hence sales compensation virtually turns to viable costs.
- Because of the plan’s flexible nature, the management can easily revise commission rates for different products’ sales and affix with the highest gross margin.
- It is simple to administer and keep selling costs in proportion to sales.
- A firm with limited capital can hire as many salespeople as needed and have no salary costs until sales are made.
- It proves weak in financial control over salespersons’ activities when expenses are to be borne by themselves. As a result, the salespersons feel that they are discharging their full responsibility without earning the benefit of expenses.
- The salespersons, generally show their negligence in transmitting sales reports and following up on leads.
- They try to reduce the size of the territory and start using the individual account as th private property.
- They, many times, try to shade prices and use their own high-pressure sales tactics that may affect losing customer goodwill.
- They try to push the easiest plan to sell low-margin items and neglect harder-to-sell high-margin items.
- As compared to the straight salary plan, the cost of sales remains greater with a straight commission plan even though it produces greater volume. It is because salespeople are paid more (Straight commission plus expenses).
- Particularly, for the salesperson who has never made sales, the plan drawbacks uncertainty and insecurity.
However, the company can minimize the weaknesses of the straight commission plan by investing considerable time, effort, and money to fully consider salespersons’ spirits.
Salary Plus Commission Plan
In order to offset the disadvantages of both straight salary and straight commission incentives and thereafter capture their advantages, many companies, nowadays, have started to implement them not separately but in a combined form.
In other words, this is the combination of both straight salary and straight commission types of the salesforce compensation plan. In it, the most popular pay incentives include:
- Salary and commission
- Salary and bonus (both individual and group)
- Salary, commission, and bonus (both individual and group)
Suitability of the Plan:
- This compensation plan is best suited for ambitious salespersons because they want to gain security with the capability of earning more by greater effort and ability.
- It is also used by the management when they think easy tool to motivate salespeople and control sales costs due to two-in-one plans enforcement.
- It is highly dependent upon management’s skills in designing and administering the combined form of the plan because skillful adjustment of salary and commission is a vital issue for effective implementation of this form of the compensation plan.
Advantages/Strengths of Combination Plan:
An appropriately designed and administered combination plan provides significant advantages to both salespersons and the company.
i. Advantages to Salespersons:
- Salespersons gain both the security of stable incomes and the stimulated direct financial incentives.
- Because of the security of stable incomes and other direct incentives, salespersons’ morale boosts.
- A cooperative spirit develops in salespersons and the management when they realize that the company shares their financial risks.
ii. Advantages to the Management:
- The management has both financial control over sales activities and the opportunity to motivate sales efforts.
- When salesforce morale is boosted, greater sales are achieved.
- The management also enjoys the benefits of flexibility to adjustments in salary as well as in financial incentives.
Disadvantages/Weaknesses of Combination Plan:
- Clerical costs go up in this plan than for either a straight salary or straight commission system because in the communication compensation more records are maintained in greater detail.
- Since two systems are combined together, the risk of implementing the plan may occur because salespeople may not understand the combined form.
- Sometimes needed sale effort is not gained by the management when it thinks of providing adequate salaries to salespeople and keeping selling costs down by using a commission rate significantly low. It is because the incentive feature becomes insufficient.