HRM textbook

CHAPTER 12 PAY FOR PERFORMANCE AND FINANCIAL INCENTIVES 401
same survey found that 30% of respondents believe their sales compensation
program rewarded the right behaviors not well or very poorly.
42 However, with
the recent recession, employers are moving to align the metrics they use to reward
their salespeople with the firms strategies. For instance they re factoring in more
growth-oriented metrics, and reviewing their sales pay plans more often. 43 In any
case, some salespeople do get straight salaries; most receive a combination of salary
and commissions.
Salary Plan
Some firms pay salespeople fixed salaries (perhaps with occasional incentives in the
form of bonuses, sales contest prizes, and the like). 44 Why do this? Straight salaries
particularly make sense when the main task involves prospecting (finding new
clients) or account servicing (such as participating in trade shows). Turnover is
another reason. Faced with the difficulty of attracting and keeping good salespeople,
a Buick-GMC dealership in Lincolnton, North Carolina, offers straight salary as an
option to salespeople who sell an average of at least eight vehicles a month (plus a
small retention bonus per car sold). 45
The straight salary approach also makes it easier to switch territories or to reassign
salespeople, and it can foster sales staff loyalty. The main disadvantage, of course,
is that straight salary can demotivate potentially high-performing salespeople. 46
Commission Plan
Straight commission plans pay salespeople for results, and only for results. Commission
plans tend to attract high-performing salespeople who see that effort clearly produces
rewards. Sales costs are proportionate to sales rather than fixed, and the company s fixed
sales costs are thus lower. It s a plan that s easy to understand and compute. Commission
plan alternatives include quota bonuses (for meeting particular quotas), straight
commissions, management by objectives programs (pay is based on specific metrics),
and ranking programs (these reward high achievers but pay little or no bonuses to the
lowest performing salespeople.) 47
However, problems abound. In poorly designed plans, salespeople may focus on
making the sale, and may neglect nonselling duties such as servicing small accounts,
cultivating dedicated customers, and pushing hard-to-sell items. Wide variations in
pay may occur; this can make some feel the plan is inequitable. Misjudging sales
potential can lead to excessively high commissions and to the need to cut commission
rates. In addition, salespersons pay may be excessive in boom times and low in recessions.
Furthermore, sales performance like any performance reflects not just
motivation, but ability, too. If the person hasn t the sales skills, commissions won t
produce sales. 48
Combination Plan
Most companies pay salespeople a combination of salary and commissions, usually
with a sizable salary component. An incentive mix of about 70% base salary/30%
incentive seems typical; this cushions the salesperson s downside risk (of earning
nothing), while limiting the risk that the commissions could get out of hand from the
firm s point of view. 49
Combination plans have pros and cons. 50 They give salespeople a floor to their
earnings, let the company specify what services the salary component is for (such as
servicing current accounts), and still provide an incentive for superior performance.
However, the salary component isn t tied to performance, so the employer is obviously
trading away some incentive value. Combination plans also tend to become
complicated, and misunderstandings can result.
The latter might not be a problem with a simple salary-plus-commission plan, but
most plans are not so simple. For example, in a commission-plus-drawing-account