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Chapter 11
Salesperson Compensation and Incentives

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Learning Objectives
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 nonfinancial 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 Compensation
Questions
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
Salary a fixed sum of money paid at
regular intervals
Commission a payment based on shortterm results, usually a dollar or unit sales
volume
Bonus a payment made at
managements discretion for achieving or
surpassing some set level of performance

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Compensation Methods for

Salespeople
Compensation
Method

Especially
Useful For

Advantages

Disadvantages

Straight Salary

New sales reps

New sales
territories
Many required
nonselling
activities

Maximum
security
Control over
reps
Easy to
administer
Predictable
expenses

No incentive
Requires close
supervision
Selling
expenses
remain same
during sales
declines

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Compensation Methods for

Salespeople
Compensation
Method

Especially
Useful For

Advantages

Disadvantages

Straight
Commission

Highly
aggressive
selling
Minimal required
nonselling tasks
When company
cant closely
control sales
force

Maximum
incentive
Managers can
encourage sales
of certain items
Selling
expenses relate
directly to selling
resources

Little security
Little control
over reps
Reps may
provide
inadequate
service to
smaller
accounts
Selling costs
less predictable

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Compensation Methods for

Salespeople
Compensation
Method

Especially
Useful For

Advantages

Disadvantages

Combination

Similar sales
potential across
territories
When company
wants to offer
incentive but
maintain some
control

Some security
Some incentive
Selling
expenses vary
with revenue
Manager has
some control
over nonselling
activities

Selling
expenses are
less predictable
May be difficult
to administer

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Combination Plans
Offer a base salary plus some proportion
of incentive pay
Most popular form of compensation
Well-suited for relationship selling by
compensating for nonselling activities
while providing incentives to motivate
sales

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Design Questions for

Combination Plans
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
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
Promotion and follow-through
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Criticisms of Sales
Contests
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
Recognition is an attractive reward
because it makes a salespersons 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

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
An appropriate mix and level of
compensation should
Maximize compensation plans motivational
value
Be fair
Remain consistent with firms resource
capabilities

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Key Terms

compensation plan
salary
incentive payment
commission
bonus
quota
sales contests
benefits
nonfinancial incentives
variable commission rate
draw
perquisites (perks)
expense account

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Mark W. Johnston
Rollins College
McGraw-Hill/Irwin

Greg W. Marshall
Rollins College
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