Compensation and motivation of Sales force

Successful sales managers have three primary concerns in managing the sales
force- attracting outstanding salespeople, motivating them to work both
effectively and efficiently, and holding on to good sales people. Among the most
important tools for accomplishing these three Objectives is the organisation’s
compensation plan. A sales force is the representative of the company’s
philosophy and business principles. The building and maintenance of sales
force is possible through proper compensation plan.
Motivation is derived from the Latin term ‘movere’ meaning ‘to move’.
Motivation stimulates the movement of an individual. It can be defined as a
dynamic process set in motion by creating or arousing internal needs that
activate goal-directed efforts and determine their
intensity and persistence. In simple words motivation is goal-directed
behaviour, underlying which are certain needs or desires. It is generally
regarded as the process of getting people to work towards the achievement of
an objective. Sales force cannot be controlled, administered in the way factory
workers can be monitored. The salesforce is required to be self starters, highly
ambitions, result oriented and go-getters. Thus, the salesforce has to be kept
highly motivated and committed.

DEVISING A SALES COMPENSATION PLAN

Whether contemplating major or minor changes or drafting a completely new

sales compensation plan, the sales executive approaches the project
systematically. Good compensation plans are built on solid foundations. A
systematic approach assures that no essential step is
overlooked.
compensation levels for sales personnel are related to external supply-and-
demand factors, it is important to consider prevailing compensation patterns in
the community and industry.
Management needs answers to four questions-
(1) What compensation systems are being used?
(2) What is the average compensation for similar positions?
(3) How are other companies doing with their plans?
(4) What are the pros and cons of departing from industry or community
patterns?

A sales compensation plan has as many as four basic elements:

(1) A fixed element, either a salary or a drawing account, to provide some
stability of income;
(2) A variable element (for example, a commission, bonus, or profit-sharing
arrangement), to serve as an incentive;
(3) An element covering the fringe or “plus factor”, such as paid vacations,
sickness and accident benefits, life insurance, pensions, and the like; and
(4) an element providing for reimbursement of expenses or payment of expense
allowances.

TYPES OF COMPENSATION

Direct: The direct compensation package for a salesman is more or less the
same in all companies. However, as you must have also seen in your
experience, a company employing technical person as salesman for selling, say,
industrial or electronic products may offer a high basic salary.
Indirect: It consists of financial as well as non-financial incentives.
Financial incentives
(i) Salary plus commission on sales above a certain amount-
Herein, the salesman receives direct salary and a commission in addition to it.
Every salesman is assigned a fixed quota. The commission is awarded on
achievement of the targeted quota. A fixed percentage of sales achieved over
and above the target is also set. This type of compensation scheme ensures a
direct salary as well as an in-built motivation system through incentives.
(ii) Salary plus share in profits- This is not a very prevalent method. It is generally
suggested for a company selling high value items with high profit margins. The
incentive here is based on profits earned. The selling expenses to sell a product
may also be large and this is incorporated in the profit sharing scheme as it
acts as a control mechanism. Also salespeople working to obtain contracts are
generally given a share in profits rather than awarded on direct sales.

Non-financial incentives
(a) Training programme- Most companies offer training programmes for their
salesmen. On an average a salesman has to undergo a training course every
one or two years. These programmes enable interaction between salesmen of
different territories as well as provide them with latest
developments in the field. These training programmes are viewed as an indirect
benefit by the salesmen.

(b) Awards, recognitions and prizes- In addition to training programmes the award
ceremonies for outstanding achievements in sales are held in exotic locations
like hill stations or five-star hotels. The awards are presented through foreign
dignitaries or important people in the field,
thus providing the salesman with the much needed recognition.

DIMENSIONS OF SALES MOTIVATION

Motivational effort is generally thought to include three dimensions- intensity,

persistence, and choice. Intensity refers to the amount of effort the salesperson
expends on a given task; persistence refers to how long the salesperson will
continue to put forth effort; and
choice refers to the salesperson’s choice of specific actions to accomplish job-
related tasks.

The sales job consists of a large variety of complex and diverse tasks. Because
of this, it is important that the sales person’s efforts be channeled in a
direction consistent with the company’s strategic plan. Therefore, the direction
of the salesperson’s effort is as important as the intensity and persistence of
that effort.

IMPORTANCE OF MOTIVATION

Unique nature of the sales job- Salespeople experience a wonderful sense of

exhilaration when they make a sale. But they must also frequently deal with
the frustration and rejection of not making the sale. Even very good sales
person does not make every sale.
Individuality of salespeople- Sales people have their own personal goals, problems,
strengths, and weaknesses. Each sales person may respond differently to a
given motivating force.
Diversity in company goals- A company usually has many diverse sales goals, and
these goals may even conflict with each other. One goal may be to correct an
imbalanced inventory and another may be to have the sales force to missionary
selling to strengthen long-term customer
relations.

Changes in market environment- Changes in the market environment can make it

difficult for management to develop the right mix of sales force motivational
methods. What motivates sales people today may not work next month because
of changes in market conditions.

MOTIVATIONAL TOOLS
Meeting between manager and sales force- These are highly regarded by sales
managers in the motivation of their sales teams. This provides opportunity to
managers to meet their sales force in the field, at head office and at the sales
meetings/conventions.
Clarity of job- Clarity of job and what is expected from the salesperson is a great
motivator. The objectives when duly quantified and well defined properly
connected and linked with the reward and recognition serve as source of
motivation to the salesperson.
Sales targets or quotas- If a sales target or quota is to be effective in motivating a
salesperson, it must be regarded as fair and attainable and yet offer a
challenge to him. Because the salesperson should regard the quota as fair, it is
usually sensible to allow him to participate in the setting of the quota.
Sales contest- The sales contest is an important tool to motivate salesperson. The
purpose of the sales contest varies widely. It may encourage a higher level of
sales in general, to increase the sales of a slow-moving product or to reward
the generation of new customers. It provides an incentive to show better
performance and secure more satisfactory results.

Sales conventions and conferences- These are the devices of group motivation. They
provide opportunities for salesperson to participate, gain social satisfaction and
express their views on matters directly affecting their work. They promote team
work, dissolve social barriers, inspire and raise salesperson’s morale. Most of
the companies in India are now-a-days adopting this method to motivate their
sales force.
Leadership style of the manager- Leadership style of the manager plays an
important role in motivating the salesperson. Inspirational leadership, which
refers to influence through referent power. Identification or charismatic charm
is an important tool in the motivational strategy of the management.
Reward and recognition- Although sales quotas, sales contests, conventions and
conferences have positive carry over effects, these are short lived techniques of
motivating salesmen. On the other hand reward and recognition on
salesperson accomplishments are more enduring and
relatively economic methods of motivation.
Persuasion- One of the more common and recommended forms of inducing high
levels of motivation is through persuasion. In this situation, managers use
rational arguments to convince salesperson that it is in their own best interests
to act in preferred way.

Sales Forecasting
Sales forecasting, though crucial, is one of the grey areas of marketing management. It is crucial because
without a proper sales forecast the marketing executive cannot determine the type of marketing
programme to use in order to attain the desired sales and marketing objectives. It is a grey area of
marketing management in the sense that it is based on a number of assumptions regarding customer
and competitor behaviour as well as the market environment, and therefore, its reliability depends upon
the extent of culmination of the uncertainty as predicted. Before understanding the various aspects of
sales forecasting let us look at the sales forecasting practices followed by two large size companies.

A sales forecast predicts the value of sales over a period of time. It becomes the basis of marketing mix
and sales planning.
A short-term sales forecast (say for a period of one year) when linked to the sales budget helps in the
preparation of an overall budget for the firm as a whole. The short-term sales forecast in effect also
provides the essential financial dimension to sales in terms of expected sales revenue and expenses
required. Also, it helps in assessing the cash inflow and outflow needs and their sources.
A long-term sales forecast (say for a period of 5 years or so) on the other hand, focuses on capital
budgeting needs and process of the firm. It provides for changing the marketing strategy of the firm, if
needed, and includes reference to emerging product market needs, new market segments to be
catered, review of distribution network and promotional programmes, organisation of salesforce, and
marketing set up. The long-term sales forecast triggers the task of aligning the production, procurement,
financial and other functional needs of the firm with the finalized sales forecast.

Information Needs for a Sales Forecast

Use of reliable, up-to-date and relevant information is me most critical aspect of sales forecasting. The
information required for a sales forecast should cover:
1. An assessment of the total market size
2. An appreciation of the market trends
3. Innovations which may have an impact on the market
4. Market trends in foreign countries where the market pattern is in advance of the domestic market
5. An evaluation of the market share obtained
6. An evaluation of competitive strengths
7. The criteria on which purchase decisions are likely to be made
8. Assessment of elements at work in the market which will influence sales
9. The influence in the market of competitors
10. The level of sales needed by the company to obtain optimum use of resources
11. The image of the Company in the market
12. The marketing strategy of the company to capitalise on its strengths and overcome its weaknesses
13. An evaluation of the market share which can be obtained
14. Assessment of factors within the company which will influence sales levels 15. Planned distribution
and sales promotion activities by the company

APPROACHES TO SALES FORECASTING

There are two general approaches to sales forecasting at the level of the firm-the breakdown approach
(also called top-down approach), and the market build-up approach.
Breakdown Approach Under this approach, the head of the marketing function initially develops a
general economic and market sales potential for a specific period. The firm' s sales potential is then
derived from it. The example of a colour television receiver company developing its sales forecast given
in the beginning of this unit relates to the use of the breakdown approach.
Market Build-up Approach In this approach the task of sales forecasting begins by first estimating the
sales at the product, product lines, customer groups or geographical area level. The estimates of the
different product, product lines, customer groups or geographical areas are then aggregated and
reviewed in the light of the firm's objectives, available resources, as well as competitors activities before
the sales forecast is finalised. The example of a leading automobile engine manufacturing company
given in the beginning of this lesson relates to the use of both a breakdown approach and a market
build-up approach.

METHODS OF FORECASTING
These methods are commonly grouped into 5 categories: executive judgement, surveys, time series
analysis, 'correlation anti regression methods and market tests.

Executive Judgement
It is an efficient method of sales forecasting. Based on the past performance, insights gained and
intuition of the executive(s), this method of sales forecasting works out fairly well particularly when the
market is stable. However, this method generally suffers from difficulty in realistically reflecting changes
in the market. Sales force composite method and jury of executive opinion are the two popular forms of
this method of sales forecasting.
Surveys
A second way of sales forecasting is by surveying the customers, salesforce, experts, etc. and
ascertaining their predictions. Customer surveys can provide information relating to type and quantity of
products which customers intend purchasing. Salesforce surveys can provide estimates of overall
territory off-take, company's share and the share of the major competitors. Dealers survey may also
form part of the salesforce survey if a firm so desires. Expert surveys provide sales forecast as the
experts and industry consultants look at it. They bring in an outsider's view to the company's internal
forecast and help many a times by adding new dimensions for consideration of management.
Time Series Analysis
Using the historical sales data, this method tries to discover a pattern or patterns in the firm's sales
volume over time. The identification of the patterns helps in sales forecasting. Time series analysis helps
locate the trend, seasonal, cyclical and random factor changes associated with the past sales data. In
this way, it improves the prediction from the past sales data. Experience reveals that time series analysis
for sales forecasting are quite accurate for short and medium term forecasts and more so when demand
is stable or follows the past behaviour. Some of the popular techniques of time series analysis are:
moving averages, exponential smoothing, time series extrapolation, and Box-Jenkins technique.
Correlation and Regression Methods
These methods attempt at examining the relationship between past sales and one or more variables
such as population, per capita income or gross national product, etc. The use of regression analysis is
done in order to determine whether any relationship exists between the past sales, and changes in one
or more economic, competitive or internal variables to a firm. The accuracy of forecasts made by using
correlation and regression methods is generally better than the other methods. Typical forecasting
applications of these methods are sales forecasts by product class.
Market Tests
Market tests are basically used for developing one time forecasts particularly relating to new products. A
market test provides data about consumers' actual purchases and responsiveness to the various
elements of the marketing mix. On the basis of the response received to a sample market test and
providing. For the factor of a typical market characteristic as well as learning from the market test,
product sales forecast is prepared.

MEANING AND IMPORTANCE OF SALES BUDGETING

A sales budget is a financial plan depicting how resources should best be allocated to achieve the
forecasted sales. The purpose of sales budgeting is to plan for and control the expenditure of resources
(money, material, people and facilities) necessary to achieve the desired sales objectives. Sales forecast
and sales budget are therefore intimately related as much as that if the sales budget is inadequate, the
sales forecast will not be achieved, or if the sales forecast is increased the sales budget must be
increased accordingly. Sales budget by relating sales obtained and resources deployed also acts as a
means for evaluating sales planning and sales effort. It aims at attaining maximum profits by directing
the emphasis on most profitable segments, customers and products.

PURPOSE OF THE SALES BUDGET

A sales budget generally serves three basic purposes. 1). Planning 2). Coordinating 3). Controlling

1) A Planning Tool : In order to achieve goals and objectives of the sales department, sales
manager must outline essential tasks to be performed and compute the estimated costs
 required for their performance. Sales budgeting, therefore, help in profit planning and provide a
guide for action towards achieving the organisational objectives.
2) An Instrument of Coordination: As we all know selling is only one of the important functions of
marketing. To be effective it needs support from other elements of the marketing mix. The
process of developing realistic sales budget draws upon backward and forward linkages of
selling with marketing and in turn brings about necessary integration within the various selling
and marketing functions, and co-ordination between sales, finance, production and purchase
function.
3) A Tool of Control:

METHODS OF SALES BUDGETING

A variety of methods ranging from the sales manager's gut feeling to application of management science
models are used for determining the sales budgets. The popular methods are as under:
− What is affordable: This method is generally used by firms dealing in capital industrial goods. Also,
companies giving low emphasis to sales and marketing function or having small size of operation make
use of this judgemental method.
− Rules of Thumb: Such as a given percentage of sales. Mass selling goods and companies dominated by
finance function are major users of this method.
− Competitive parity: Large sized companies whose products face tough competitions and need
effective marketing to maintain profits make use of this method. The use of this method presumes
knowledge of the competitors activities and resource allocation.
− Objective and Task Method: A systematic method help in determination of the sales budget by
identifying the objective of sales function, and then ascertaining the selling and related tasks required to
achieve each objective. Later, the cost of each task/activity is calculated to arrive at the total budget.
The finalisation of the budget may require adjustment both in the objectives as well as in the way the
task may be performed.
− Zero based budgeting: It is relatively a new approach to budgeting. It involves a process in which the
sales budget for each year is initiated from Zero base thus justifying all expenditure and discarding the
continuation of conventions and rules of thumb. The method suffers from practical limitations which
relate to a very - elaborate and time consuming process required by it. In practice, companies make use
of a combination of the above methods and Sales Sales Budgeting and Control Budgeting and Control
depending upon the experience gained sales - budgeting approach stands refined. The status of the
sales and marketing function within the organisation determines the extent of sophistication used in the
approach to sales budgeting.

PREPARATION OF SALES BUDGET

Preparation of sales budget is one of the most important elements of the sales planning process.
Generally three basic budgets are developed, the sales budget, the selling expense budget and the sales
department administrative budget. Mostly sales organisations have their own specified procedures,
formats and timetables for developing the sales budget. While all sales budgets relate to the sales
forecast, the steps taken in systematic preparation of budget can be identified in the following
sequence.
 Review and Analysis of Marketing Environment
 Communicating Overall Objectives
 Setting a Preliminary Plan for Allocation of Resources and Selling Efforts to Different
Activities
 Selling the Sales Budget to Top Management
Sales Quota
Sales quota can be defined as the sales target, which is assigned to any sales unit for a
particular duration of time; here sales unit can be a person, region, distributor etc. Sales
quota provides a target to be achieved in particular duration, which increases the
productivity.
Commercial firms set up sales quotas in order to improve sales volume and increase the
net profit of the organization. It can also be viewed as a standard to determine the
effectiveness of sales unit. Sales quota is determined using various factors such as
market potential, marketing method, past sales record etc., with effective projection of
market sentiments. For planning sales quota, control of sales operations can be an
effective method.
Objectives
Sales quota is imposed in an organization to fulfil various objectives required to increase
the sales of product and maximize profit.
Sales objectives help an organization in the following ways:
They provide a standard to measure the performance.
They help to control sales expenses for customer acquisition.
They help define a target; this further facilitates motivation and enhanced
performance.
These help to identify and monitor the performance of salespersons.
Types of Sales Quota
Sales quota is divided into four different categories according to the difference in
forecasting and cost allocation procedure, management goals, selling issues and
executive decision.
The following are the different types of sales quota:
Sales and Volume Quota
Sales and volume quota is allocation of sales quantity for salesperson, geographical
regions, distribution outlets etc. This quota can be implemented according to sales
performed or revenue earned by respective units.
The combination of both the criteria can also be used for the implementation of this
quota. The quantity of sales and revenue earned can be allocated to the respective unit
(salesperson, region) and it has to fulfil at least one of them.
Financial and Budget Quota
Financial and budget quota is used to determine and restrict expenses on sales to attain
desired net profit planned.
It is implemented on various segment of sales organization to control the expenses
accordingly. The aim of these quota is restriction of expenses for making sales so that
profit can be increased.
Activity Quota
In competitive market, the effective performance of sales group is required. It can act as
a long term benefit for the organization. Organizations set up activity quota for sales
force for efficient results. These can be performed by allocating sales target to
salespersons.
The following are the activities listed under sales quota:
Number of accounts opened through the salesperson
Number of sales calls made to potential customer
Number of demonstrations made to show the product
Number of maintenance activities performed
Activity quota is planned on the basis of these activities performed by the salesperson.
By setting quota for the activities, efficient performance and controlling can be managed.

Combination Quota
It depends on product type and market condition, issues related to sales of product and
the challenges faced during the sales of a product. Organizations set up quota with
combination of sales volume and activity quota in order to increase sales.

Sales Territory
A sales territory consists of a group of consumers or a geographical area assigned to a
particular salesperson. The area allocated to the salesperson contains the present and
the potential consumers of the organization.
After the allocation of sales territory, the sales manager can be in a position to contest
between sales efforts and sales opportunities. It would be very difficult for the sales
manager to monitor the total market as it is too large and unmanageable by one person.
Hence it is divided as per territories to manage effectively and efficiently and control the
sales force.
The salesperson does not only pay attention to the area but also the consumer
prospects. Thus, a sales territory can be known as the grouping of customers and
prospects, which is assigned to an individual salesperson.
Sales territory is for the big companies having huge market share. Small and medium
scale companies do not use geographically defined territories. The market share is not so
high to divide into territories.

Reasons for Establishing Territories

To obtain thorough coverage of the market

To establish the salesperson’s job and responsibilities
To evaluate sales performance
To improve customer relations
To reduce sales expenses
To improve control of the sales force
To coordinate selling with other marketing functions

Procedure for Designing

At the time of designing the territory, the manager has to keep in mind the size of the
territory that is going to be assigned to the salesperson. It should be neither too small
nor too large. If the territory is geographically too small, the salesperson would keep
calling the same customers repeatedly. In contrast, in a too large geographical area, the
salesperson will not be able reach the scattered customers as most of his time will be
utilized in travelling. Hence the territory should not be too large or too small; it should
be such that all potential customers can be visited as per the requirement.
The procedure of designing sales territories is the same for all companies, whether
setting the territories for the first time or revising the existing territories.
Territory Shape
The sales manager has to decide the shape of the territory. The territory shapes affects
the selling expenses and also helps for sales coverage. There are four types of shapes,
which are used widely.
The wedge
The circle
Hopscotch
The cloverleaf
The Wedge
This shape is suitable for the territories, which contain both the urban and non-urban
areas. The radius starts from the most populated urban center. Wedges can be divided
into many sizes and the travel time can be maintained by balancing between the calls of
urban and non-urban areas.
The Circle
When the clients are distributed evenly throughout an area, the sales manager chooses
the circle shape. The salesperson starts from the office, moves in a circle of stops until
he reaches the office again. This helps the salesperson to come near to the customer as
compared to the wedge.
Hopscotch
In this shape, the salesperson begins from the last point from office and reach out the
customers while coming back to the office. While going, the salesperson does not stop
anywhere and attends calls in one direction while coming back to the office.
The Cloverleaf
When the accounts or client are located randomly in a geographical area, the cloverleaf
shape is used. This type of shape is more often found in industrial markets than in
consumer markets.