Topic 8 Motivation and Reward Management System

 

·         Motivation and Reward System

·         Optimal Salesforce Reward System

·         Types of Salesforce Rewards

·         Financial Compensation

·         Non-financial Compensation

·         Sales Expenses

·         Additional Issues in Managing Salesforce Reward Systems

·         Guidelines for Motivating and Rewarding Salespeople

 The most commonly used definitions of motivation include three dimensions

1.      Intensity – Refers to the amount of mental and physical effort put forth by the salesperson.

2.      Persistence – Describes the salesperson’s choice to expand effort over time, especially when faced with adverse conditions.

3.      Direction - Implies that salespeople choose where their efforts will be spent among various job activities.

Because salespeople are often faced with a diverse set of selling and non-selling job responsibilities, their choice of which activities warrant action is just as important as how hard they work or how well they persist in their efforts.

The motivation task is incomplete unless salespeople’s efforts are channeled in directions consistent with the overall strategic role of the Salesforce within the firm.

Motivation is an unobservable phenomenon, and the terms intensity, persistence, and directions are concepts that help managers explain what they expect from their salespeople. Motivation can also be viewed as intrinsic or extrinsic. If salespeople find their job to be inherently rewarding, they are intrinsically motivated. If they are motivated by the rewards provided by others such as pay and formal recognition, they are extrinsically motivated.

Reward System Management involves the selection and use of organizational rewards to direct salespeople’s behavior toward the attainment of organizational objectives. An organizational reward could be anything from a $5,000 pay raise to a compliment for a job well done. Organizational rewards can be classified as compensation and non-compensation reward.

Compensation Rewards – Are those that are given in return for acceptable performance or effort. Compensation reward can include non-financial compensation, such as recognition and opportunities for growth and promotion.

Non-Compensation Rewards – Include factors related to the work situation and wellbeing of each salesperson. Sales jobs that are interesting and challenging can increase salespeople’s motivation, and allowing salespeople some control over their own activities.

Sales managers can also improve Salesforce motivation by providing performance-enhancing feedback to salespeople. Other examples of non-compensation rewards are:

1.      Providing adequate resources so that salespeople can accomplish their jobs

2.      Practicing a supportive sales management leadership style.  

Optimal Salesforce Reward System

The optimal reward system balances the needs of the organization, its salespeople, and its customers against one another. From the organization’s perspective, the reward system should help accomplish the following results;

·         Provide an acceptable ratio of costs and Salesforce output in volume, profit, or other objectives.

·         Encourage specific activities consistent with the firm’s overall, marketing, and Salesforce objectives and strategies. Example: Firms uses the reward system to encourage the selling of particular products or to promote teamwork in the Salesforce.

·         Attract and retain competent salespeople, thereby enhancing long-term customer relationship.

·         Allow the kind of adjustments that facilitate administration of the reward system. A clearly stated, reasonably flexible plan assists in the administration of the plan.

From the perspective of the salesperson, reward systems are expected to meet a somewhat different set of criteria than from the sales manager’s perspective. Most salespeople prefer some stability in the reward system, but they simultaneously want incentive rewards for superior performance.

In recent years, the needs of customer have become more important than the needs of the Salesforce in determining the structure of reward systems in sales organizations. Meeting the needs of customers, salespeople, and sales organization simultaneously is indeed a challenging task.

Remember a Salesforce is comprised of individual human beings with broadly varying needs, points of views, and psychological characteristics who cannot be infallibly categorized, measured, and punched out to a formula. 

Types of Salesforce Rewards

The countless number of specific rewards available to salespeople are classified into six categories;

1.      Pay

2.      Promotion

3.      Sense of Accomplishment

4.      Personal Growth Opportunities

5.      Recognition

6.      Job Security 

Financial Compensation

—  The financial compensation section focuses on pay while the non-financial compensation focuses on other rewards.

—  In many sales organization, financial compensation is composed of current spendable income, deferred income or retirement pay, and various insurance plans that may provide income when needed.

—  The most controllable is the spendable income and arguably the most important, dimension of a Salesforce reward system. 

Current Spendable Income:

—  Current spendable income includes money provided in the short term (weekly, monthly, and annually) that allows salespeople to pay for desired goods and services.

—  It includes salaries, commissions, and bonuses. Bonus compensation may include non-cash income equivalents, such as merchandise and free-travel awards.  

The three basic types of Salesforce financial compensation plans are:

1.      Straight salary

2.      Straight commission

3.      Salary plus incentive, with the incentive being a commission and/or a bonus. 

Straight salary – Paying salespeople a straight salary (exclusively by a salary) is uncommon. Such plans are suited for paying sales support personnel and sales trainee.   Salaries are also appropriate for sales trainees, who are involved in learning about job. In most cases, a firm cannot recruit sales trainees on a college campus without the lure of a salary to be paid at least until training is completed. 

Advantages of Salary Plans

One advantage of using salary plans is that they are simplest ones to administer, with adjustment usually occurring only once a year. Because salaries are fixed costs, planned earnings for the Salesforce are easy to project which facilitates the Salesforce budgeting process.

The fixed nature of planned earnings with salary plans may also facilitate recruitment and selection. Salary can provide control over salespeople’s activities and reassigning salespeople and changing sales territories.

Salary Plans also make it easier to encourage teamwork and customer services. 

Disadvantages of Salary Plans

The most serious short coming of straight-salary plans in that they offer little financial incentive to perform past a merely acceptable level. As a result the least productive members of the Salesforce are in effect, the most rewarded salespeople.

Conversely the most productive salespeople are likely to think salary plans are inequitable. As such, it may be difficult to attract high-performing salespeople.

Differences in salary levels among salespeople are often a function of seniority on the job instead of true merit. Even so, the constraints under which many salary plans operates may cause salary compression, or a narrow range of salaries in the Salesforce.

Salaries represent fixed overhead in a sales operation. 

Straight Commission

Unlike straight-salary plans, commission-only plans (or straight commission) offers strong financial incentives to maximize performances. However, they also limit control of the Salesforce.

The huge direct-sales industry, including such companies as Mary Kay Cosmetics, Tupperware, and Avon also pays by straight commission. The large number of salespeople working for these organizations makes salary payments impractical from an overhead and administrative standpoint. 

Commission Plan Variation

There are several factors to be considered in developing a commission-only plan:

1.      Commission base – volume or profitability.

2.      Commission rate – constant, progressive, regressive or a combination.

3.      Commission splits – Between two or more salespeople or between salespeople and the employer.

4.      Commission payout event – when the order is confirmed, shipped, billed, paid for or some combination of these events. 

Advantages of Commission Plans

·         One advantage of straight-commission plans is that salespeople’s income is linked directly to desired results and therefore may be perceived as more equitable than salary plans.

·         From a cost –control perspective, commissions offer further advantages. Because commissions are a variable cost. Operating costs are minimized during slack selling period. Also working capital requirements are lessened with commission-only pay plans.

·         Perhaps the most serious shortcoming of straight-commission plans is that they contribute little to company loyalty, which may mean other problems in controlling the activities of the Salesforce, particularly non-selling and administrative activities.

·         A lack of commitment may lead commission salespeople to leave the company if business conditions worsen or sales drop. 

·         Another potential problem can arise if commissions are not limited by an earning cap, in that salespeople may earn more than their managers. 

Performance Bonuses

The third dimension of current spendable income is the Performance Bonuses, either group or individual.

Both types are prevalent, and some bonus plans combine them. Bonuses are typically used to direct efforts toward relatively short-term objectives, such as introducing new products, adding new accounts, or reducing accounts receivable.

The Performance Bonuses maybe offered in the form of cash or income equivalents, such as merchandize or free travel.

Although commissions or salary may be the financial-compensation base, bonuses are used strictly in a supplementary fashion.  

Advantages of Performance Bonuses

·         One advantages of the Performance Bonuses is that the organization can direct emphasize to what it considers important in the sales area.  In addition sales emphasize can be changed from period to period.

·         Bonuses are particularly useful for tying rewards to accomplishment of objectives. 

Disadvantages of Performance Bonuses

·         One problem with the Performance Bonuses is that it may be difficult to determine a formula for calculating bonus achievement if the objective is expressed in subjective terms. E.g. Accounts servicing.

·         If salespeople do not fully support the established objectives, they may not exert additional effort to accomplish the goal. 

Combination Plans (Salary plus Incentives)

The limitation of straight-salary and straight-commission plans have led to increasing use of plans that feature some combination of salary, commission, and bonuses –in other words Salary plus incentives.

Combination pay plans usually features salary as the major source of salesperson income. Salary plus bonus and salary-plus-commission-plans-bonus plans are popular. 

Advantages of Combination Plans)

·         The primary advantage of combination pay plans is their flexibility. Sales behavior can be rewarded frequently, and specific behaviors can be reinforced or stimulated quickly.

·         Combination plans can also be used to advantage when the skill levels of the Salesforce vary, assuming that the sales manager can accurately place salespeople into various skill-level categories and then formulate the proper combination for each category

·         Combination pay plans are attractive to high-potential but unproven candidates for sales jobs. College students nearing graduation, for example, might be attracted by the security of a salary and the opportunity for additional earnings from incentive-pay components. 

Disadvantages of Combination Plans

·         As compared with straight-salary and straight commission plans, combination plans are more complex and difficult to administer.

·         Their flexibility sometimes leads to frequent changes in compensation practices to achieve short-term objectives.

·         Although flexibility is desirable, each change requires careful communication with the Salesforce and precise coordination with long term sales, marketing, and corporate objectives.                                

 Non-Financial Compensation

Compensation for efforts and performance may include non-financial rewards. Examples of non-financial compensation include career advancement through promotion, a sense of accomplishment on the job, opportunities for personal growth, recognition of achievement, and the job security.

Sometimes non-financial rewards are coupled with financial rewards e.g. promotion results in a pay increase.

Job Security

Job Security although valued highly by salespeople nearing retirement age, it is now difficult to offer job security with mergers, acquisitions and general downsizing of corporations. 

Sales Expenses

Most sales organizations provide full reimbursement to their salespeople for legitimate sales expenses incurred while on the job.

Typical Reimbursable Expense Items:

·         Motor Vehicle (Company-leased)/Motor Vehicle (Company-owned)

·         Mileage allowance, Other travel reimbursement, Lodging

·         Telephone, Entertainment, Product samples, local promotion

·         Office or clerical expenses, Car phone, Home photocopier/fax, Personal Computer

There are control measures that managers of sales organization can introduce on reimbursable expenses:

·         A definition of which expenses are reimbursable.

·         The establishment of expense budgets

·         The use of allowances for certain expenditures and

·         Documentation of expenses to be reimbursed

Covered expenses vary from company to company, so it is important for each company to designate which expense are reimbursable and which are not. Example: Use of personal motor vehicle on job at cost per mile or acquittal for the use of allowance for meal and lodging.

Because of more stringent tax laws, extensive documentation in the form of receipts and other information concerning the What, When, Who and Why of the expenditure has become standard procedures.

To make the job less burdensome especially tracking and reporting of sales expenses, a lot of organization are now using software programs to more their sales expenses.

Expense Account Padding: A salesperson seeks reimbursement for ineligible or fictional expenses. There are countless ways for an unscrupulous salesperson to misappropriate company funds.

Tight financial controls, requirements for documentation of expenditures, an anonymous tip program, and periodic visits by highly trained financial auditors help deter expenses account abuse.

Although it may sound extreme, many companies have a simple policy regarding misappropriation for company funds – the minimum sanction is termination of employment, and criminal charges are a distinct policy.

Additional Issues in Managing Reward Systems

Sales Contest:

Sales contest are temporary programs that offer financial and/ or non-financial rewards for accomplished specified, usually short-term objectives. Popular incentives include;

·         Merchandise

·         Gift certificates

·         Cash; Electronics

·         Travel etc.

Sales contest many involve group competition among salespeople, individual competition or the contest can be instituted without altering the basic financial compensation plans.

Little is known about the true effects of sales contests however, contests are held to correct bad planning and poor performances with the belief that the contest will have a positive effect.

There are some guidelines which organizations can use when putting up a sales contest;

·         Minimize potential motivation and moral problems by allowing multiple winners (competing against specific goals)

·         Contest concentrate on specific areas (to avoid neglecting other areas)

·         Look for positive effects of the contest

·         Use variety as a basic element (Timing, attainability, duration etc.

·         Clear Objective. 

Equal Pay:

—  In addition to the motivational aspects of equity in financial compensation systems, there is legal responsibility to ensure that salespeople are paid on an equitable basis.

—  The Equal Pay Act requires that equal pay be given for jobs requiring the same skills, efforts, responsibilities, and working conditions

Team Compensation:

—  Most salespeople are still paid based on their individual performance.

—  Teamwork in selling and team selling are growing in importance and as a result many sales organizations are adjusting their compensation plans to recognize team performance.

—  There are challenges faced given the fact that existing reward systems are mainly geared toward their individual performance and not team selling situation. 

—  Given the challenges it is important for organization to carry out experiments to find the right competition plan for sales teams.

—  It is a good idea and important to reward both individual and team performances.

 Global Consideration:

—  Global compensation issue are receiving more attention.

—  In many cases, sales representation in other countries is secured through a distributor or sales agent. These situations are not so complex from a compensation management point of view because commissions or discounts from list price provide the income basis for the sellers.

—  Political and Cultural practices also has a part to play in rewarding or pay practices of some countries.

—  Example: In the United States, they prize individualism, whereas in many other culture collectivism or team work is valued.

—  Problems are therefore different from country to country and managers have to understand those differences.

 Changing the Reward System.

—  The need to change the Salesforce reward system for a given company may arise periodically as companies strive for improved performance and productivity.

—  Changes in sales compensation are often made to bring the Salesforce more in line with a shift in strategy or to maximize corporate resources.

—  Minor changes in reward systems can be made without much pain and also it can be fun.

—  To implement a new or modified reward system, sales managers must in effect, sell the plan to the Salesforce with details clearly communicated well in advance of its implementation. Example: Three contest instead of two. A cash price instead of a trip.

Guidelines for Motivating and Rewarding Salespeople

Sales managers should realize that practically everything they do will influence Salesforce motivation one way or another.

The people they recruit, the plans and policies they institute, the training they provide, and the way they communicate with and supervise salespeople are among the more important factors.

Sales managers should also realized that environmental factors beyond their control may also influence Salesforce motivation.  Some guidelines for motivating salespeople are as follows:

1.      Recruit and select salespeople whose personal motives match the requirements and rewards of the job.

2.      Attempt to incorporate the individual needs of salespeople into motivational programs.

3.      Provide adequate job information and acquire proper skill development for the Salesforce

4.      Use job design as motivational tools

5.      Concentrate on building the self-esteem of salespeople

6.      Take a proactive approach to seeking out motivational problems and sources of frustration in the Salesforce.

 Recruitment and Selection:

—  The importance of matching the abilities and needs of sales recruits to the requirements and rewards of the job cannot be overstated.

—  Investing more time in recruitment and selection to ensure a good match is likely to pay off later in terms of fewer motivational and other managerial problems

Incorporation of Individual Needs:

—  At the heart of the complexity of motivation is the concept of individual needs.

—  Although there is considerable pressure and in many cases, sound economic rationale for supporting mass approaches to Salesforce motivation, there may also be opportunities to incorporate individual needs into motivational programs.

Information and Skills:

—  Salespeople must have high skill levels and be well equipped with the right information to do their job well.

—  If sales manager train their people properly and give them the right information, salespeople can see how their efforts produce results is consistent with that of the sales manager, reasonable goals can be set that allow performance worthy of rewards.

Job Design:

—  Given the nature of sales jobs, one would expect good opportunities to stimulate intrinsic motivation without major changes to the job.

—  Sales jobs allow the use of a wide range of skills and abilities, boredom is thus not a typical problem.

—  Most salespeople have considerable latitude in determining work priorities and thus experience more freedom on the job than do many other employees.

—  Finally feedback from sales managers or through self-monitoring is readily available. In many ways, the motivational task is easier for sales manager than for other managers. The sales job itself can be a powerful motivator.

 Building Self-Esteem:

—  Sales managers increase Salesforce motivation be building salespeople’s self-esteem.

—  Positive reinforcement for good performance should be standard procedures. This may be done with formal or informal communications or recognition programs designed to spotlight good performances.

—  When performance is less than satisfactory, it should not be overlooked but addressed in a constructive manner.

Proactive Approach:

·         Sales managers should be committed to uncovering potential problems in motivation and eliminating them before they develop. Example: If some members of the Salesforce perceive lack of opportunity for promotion into management and are demotivated as a result, the sales manager might take additional steps to clearly define the guidelines for promotion into management and review the performances of management hopeful in light of these guidelines.

 

Sources:

Sales Management Analysis and Decision Making by Pilai, Ingram, LaForge, Avila, Schwepker Jr Williams. 5^th Edition Thomson South-Western