Compensation plans for sales personnel generally consist of a straight salary plan, a straight commission plan or a combination salary and commission plan.
Salary plan
Some firms pay sales people only a salary. Such a plan is useful when serving and retaining existing accounts is being emphasised more than generating new sales and accounts. This approach is generally used to protect the income of new sales representatives at the beginning of their career, trying to build their rapport with customers. It can also be put to use when both new and existing sales reps are supposed to spend a lot of time learning about and selling customers new products and services.
Commission plan
In this plan, a sales representative receives a percentage of the value of the sales made. He receives no compensation, if no sales are made. The sales representative must inevitably sell in order to earn. High-performing sales people could earn record commissions if they are able to deliver results. Sales costs, thus, are directly proportional to the sales made (rather than remaining fixed) and as such companies would be more than willing to pay commissions based on sales. The plan is quite easy to understand and compute. However, it is not without drawbacks. The emphasis here is always on sales volume rather than on profits. Sales representatives tend to concentrate more on generating sales volumes and on high-value items neglecting other important duties like serving small accounts, cultivating dedicated customers, and pushing hard-to-sell items. Earnings tend to fluctuate widely between good and poor periods of business. Wide variations in income would occur as sales people compete with other and this could ultimately lead to negative feelings of bitterness, jealousy and anguish among themselves. Again, sales
people may be tempted to grant price concessions (against company policy) to push up sales.
Combination plan
The most frequently used form of sales compensation is the salary plus commission, which combines the stability of a salary with the performance aspect of a commission. Many companies also pay sales representatives salaries and then offer bonuses as a percentage of base pay tied to meeting various levels of sales targets or other criteria. A common split is 70% salary to 30% commission, although the split varies by industry and with other factors. Combination plans have many plus points. They offer sales people a floor to their earnings as they get a fixed salary for servicing current accounts and earn extra incentives for superior performance. Combination plans offer greater design flexibility as they can be set up to help maximise company profits. They can develop the most favourable ratio of sales expenses to sales.
Organisation wide incentive plans reward employees on the basis of the success of the organisation over a specified time period. These plans seek to promote a ‘culture of ownership’ by developing a sense of belongingness, cooperation and teamwork among
all employees. There are three basic types of organisation-wide incentive plans: profit
sharing, gain sharing and employee stock ownership plans.
Profit Sharing
Profit sharing is a scheme whereby employers undertake to pay a particular portion of net profits to their employees on compliance with certain service conditions and qualifications. The purpose of introducing profit sharing schemes has been mainly to strengthen the loyalty of employees to the firm by offering them an annual bonus (over and above normal wages) provided they are on the service rolls of the firm for a definite period. The share of profit of the worker may be given in cash or in the form of shares in the company. These shares are called bonus shares. In India, the share of the worker is governed by the Payment of Bonus Act.]
Gain Sharing
A gain sharing plan aims at increasing productivity or decreasing labour costs and sharing
the resultant gains (usually a lumpsum payment) with employees. It is based on a mathematical formula that compares a baseline of performance with actual productivity during a given period. When productivity exceeds the base line an agreed-upon savings is shared with employees. Gainsharing is built around the idea that involved employees will improve productivity through more effective use of organisational resources. Three major types of gainsharing plans are currently in use: Scanlon Plan, Rucker, Plan, and Improshare. Improshare stands for improved productivity through sharing. This plan is similar to a piece rate except that it rewards all employees in an organisation. Input is measured in hours and output in physical units. A standard is calculated and weekly bonuses are paid based on the extent to which the standard is exceeded. The employees and the organisation each receive payment for 50 per cent of the improvement. Unlike profit sharing plans which have deferred payments, gainsharing plans are current distribution plans. They are directly related to individual behaviour and are distributed on a monthly or quarterly basis. Gainsharing plans tend to increase the level of cooperation across workers and teams by giving them a common goal. Managers are not required to base their calculations on complex mathematical formulae, nor they are required to closely look into the specific contributions of individuals or independent teams. It is easier for
both, to formulate bonus calculations and to achieve employee acceptance of those plans. Gainsharing plans, however, protect low performers. Where rewards are spread across a large number of employees, poor performers may get rewards for non performance at the cost of the bright performers. Gainsharing plans may fail due to other reasons as well: poorly designed bonus formulae, lack of management support for employees' participation, increasing cost factors that undermine the bonus formula, poor communication, lack of trust, and apathy on the part of employees. To develop an organisation-wide incentive plan that has a chance to survive, let alone succeed careful, in depth planning must precede implementation. A climate of trustworthy labourmanagement in also absolutely essential. The financial formula should be simple and
should measure and reward performance with a specific set of measurable goals and a
clear allocation method.

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