A Preface to Payment: Designing a Sales Compensation Plan

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FOR SOME decades now, marketing textbooks and professors have assiduously distinguished between sales and marketing. Theodore Levitt’s 1960 definition is still the classic: “Selling is preoccupied with the seller’s need to convert his product into cash; marketing with the idea of satisfying the needs of the customer by means of the product and the whole cluster of things associated with creating, delivering, and finally consuming it.”1 Nonetheless, whatever else marketing encompasses, it certainly includes selling—the getting and keeping of customers and revenues. As the old saying goes, “In most companies, sales is the only revenue-generating function; everything else is a cost center.” Sales’ importance as a source of revenue tends to define the form and substance of companies’ marketing programs—for both good (e.g., close attention to buying processes at specific accounts) and ill (e.g., confusion between sales and marketing).

Of all sales issues, compensation is probably the most discussed. It is now the focus of a vast and varied literature with enough folk wisdom and quantitative studies to satisfy most managerial temperaments.2 But the great bulk of this literature focuses on what might be called “compensation hydraulics”: push this pay lever, is the typical claim, and get this kind of field sales behavior. Lost in this approach is a recognition that sales compensation is an area in which data analysis, values, and the motivation of complex human beings are inextricably linked. The frequent result is that managers, focused on the hydraulics, forget that addressing the fundamental question, “How should we pay the people responsible for dealing with customers?” inevitably implicates a range of issues involved in sales management, as well as other aspects of the business. The emphasis of the sales compensation plan will affect the quantity and kinds of orders received by manufacturing, the cash-flow profile managed by finance, the recruitment and training needs faced by marketing and personnel, and the daily organizational interactions between sales and all of these other functional areas.

To make these decisions, managers need a preface to sales compensation which outlines the issues that must be addressed before worrying about the specific numbers or debating between incentive-based and fixed-salary plans. In that spirit, this article provides the following: (1) a discussion of links between compensation, evaluation, and motivation; (2) an analytical process for developing a compensation plan; (3) an examination of the important choices made in setting goals and rewarding results in sales; and (4) a consideration of the relevance and limits of compensation policies within a healthy and effective sales management system.

Links between Compensation, Evaluation, and Motivation

“We pay for product, not for process,” is a sentiment one often hears voiced. This view nicely emphasizes the importance of results—not just good intentions—in business. But it must not obscure the fact that compensation is primarily a motivational tool and, in most companies, an evaluation mechanism as well. One can still design a sales compensation plan on the basis of results rather than process (a separate issue which is discussed below). But at its most effective, compensation is a tool for achieving sales performance consistent with marketing strategy, a key means of guiding effort toward desired results. This view has two important implications: (1) compensation, evaluation, and other motivational procedures should be linked coherently in the sales management system; and (2) despite the importance of individual abilities in sales, the sales rep is, ultimately, not an “individual contributor” within the organization; he or she should be viewed as the agent of the firm’s marketing strategy, and the compensation plan designed accordingly.

Issues of compensation, evaluation, and motivation do not, of course, have strict cause and effect relationships. They affect each other in myriad ways that might most accurately be described as a web of relationships. However, it is useful to risk oversimplification and consider them as links in a chain in order to illustrate certain relationships that tend to be ignored (see Figure 1).

Motivation is a core function of management. At the heart of most managerial responsibilities is the question, “How do I get other people to do as much as possible of the right kind of work?”3 In sales, motivation involves many factors. One factor is the recruitment policies which influence the personal characteristics of salespeople (e.g., knowledge, skills, and attitudes) that sales managers must manage. Some people work harder than others, and some people are smarter than others. Training can account for and mitigate some of these differences. But in most sales organizations, there is a range of personal abilities that must be selected, developed, and managed. A second factor is the salesperson’s territory or account characteristics, which define the opportunities available and often provide direction for the salesperson’s efforts.4 Some territories and accounts may have an inherently higher yield rate, independent of the salesperson assigned to that territory or account. The salesperson’s perceptions of the connections among effort, results, and rewards constitute a third factor. In some instances, working harder or smarter may not translate into better sales results due to the firm’s product policy, pricing, or competitive situation; in other instances, better efforts by the salesperson may indeed lead to better sales results, but the firm’s measurement, compensation, and recognition systems may not acknowledge them. Finally, a fourth factor affecting motivation is the perceived value of additional rewards. Effort, results, and rewards may be linked, but salespeople may perceive the effort as disproportionately high relative to the rewards received. Many sales incentive systems, for example, pay salespeople for incremental volume increases over previous years’ results, intending to motivate salespeople to develop new business. But in many selling situations, the effort required to develop this business is perceived as “not worth it” by the sales rep who has a base of mature but steady accounts in his or her territory.

An outcome of motivation is effort, which, in sales, has two dimensions: quantity and type. “Quantity” refers to the sheer amount of effort expended by salespeople as measured by call frequency, number of accounts, orders booked, or other relevant activities. “Type” refers to such factors as the focus of the salesforce’s account development versus account maintenance activities, the relative emphasis on new versus established products, or (in some situations) an emphasis on selling products that generate revenue and manufacturing volume versus products that may have higher margins but lower unit sales. Compensation plans influence both dimensions of effort.

Effort leads to results. The issue in sales compensation is deciding what goals should be established in an attempt to guide efforts toward desired results. Some important choices in setting goals and rewarding results will be discussed in a later section.

Having established goals, results must be measured, raising issues of the appropriate (or feasible) measurement criteria, the information systems available to provide the data for such measurements, and the process by which evaluations are conducted. There are many possible criteria for evaluating sales performance. Often, however, the company’s information systems do not gather the relevant data, or salesforce call reports (an important source of sales data in most companies) may be “noisy” or unreliable. Equally important, but often overlooked, is the process for administering the evaluations. At many companies, salespeople receive big bonuses for the results of their efforts. But the process of providing this additional compensation is at odds with the company’s formal performance evaluation of that person—that is, the basis of the bonus (e.g., orders booked by an individual rep) often contradicts what the company and sales managers say they want in individual performance-evaluation sessions (e.g., cross-referrals, joint presentations, or other aspects of “team selling”). The result is demotivation or, perhaps worse, motivation toward the wrong type of sales effort.5 We may “pay for product, not process,” but if we ignore process in a sales environment, we often don’t get what we’ve paid for.

Finally, managers must consider the mechanics of the compensation plan —both type and quantity. “Type” refers to issues such as the relative emphasis on base salary or incentive pay; “quantity” refers both to the total amount of compensation provided relative to industry norms and, within a sales organization, the amount of compensation provided for performing a given sales task. Both topics are discussed in the next section.

The important point stressed here, however, is that there are links (intended or unintended) between sales compensation, evaluation, and motivation. The framework sketched in Figure 1 provides the following advice to managers: Start with the engine (the types of efforts and behavior desired of salespeople), and then design the transmission (the specific compensation plan aimed at encouraging these efforts).

Developing a Sales Compensation Plan

Developing and implementing a sales compensation plan requires an analytical process that answers the five questions examined in this section.

What Is the Sales Task(s) Facing the Firm in a Market?

The starting point for analyzing sales-management requirements, including compensation, should be the nature of the sales task. This means considering the competitive environment, the firm’s marketing strategy in that environment (overall and by segment), and the essential functions to be performed by the salespeople. Selling, directly or indirectly, is almost always a key function. But developing a compensation plan requires disaggregating this category into its constituent parts: How much of selling in a given market is attention to delivery? Price negotiations? Distributor network relations? Customer education? Technical expertise? Personal relationships? Services of various kinds? Cold calling? Sheer persistence?

Moreover, the relative importance of these various aspects changes over the course of a product life cycle or as competition in an industry evolves. In the early stages of a product’s life cycle, for instance, customer education or applications development are often key sales tasks, especially for technically complex products. But as the market develops and standards emerge, salespeople typically spend more time selling against functionally equivalent brands or developing working relationships with intermediaries as well as end users. Too often, however, companies’ compensation systems fail to keep pace with these changes. Such was the case at a number of computer manufacturers during much of the 1980s. As hardware margins declined, many computer firms franchised distributors, value-added resellers (VARs), and other intermediaries, often establishing a certain order-volume size below which sales were to be made through intermediaries. Then, as networking and common product interfaces began to emerge, manufacturers found it difficult to differentiate themselves on the basis of the price or performance characteristics of their hardware. Software applications and the assembly of different manufacturers’ products into networked packages became key in many market segments; VARs, focused on specific industry or occupational groups, often had the expertise and customer contacts for these functions. But many manufacturers provided little or no incentive for their direct sales-forces to work with these influential intermediaries through cross-referrals, training, joint sales calls, or help with specific applications. Indeed, at many companies, the compensation plan effectively encouraged salespeople to sell at the end-user level against the intermediary; frequently the manufacturer and its reseller both lost the sale.

One reason for this misfit in a changing marketplace is that the people making important sales compensation decisions at many firms tend to be headquarters marketing or personnel managers. They may have been in the field some years previously, but now base their compensation decisions on an obsolete vision of the actual tasks facing field sales personnel. The lesson here is that there is finally no substitute for ongoing field interaction, including actual sales calls, by those responsible for sales compensation decisions. This qualitative information is a necessary complement to “hard” aggregate data about the company’s customers and markets, and a key step in developing, and maintaining, a coherent, relevant picture of important sales tasks.

What Must the Salesperson Do to Succeed?

After analyzing the sales tasks that are important in a market, consider the activities necessary to perform them. If, for example, “wining and dining” or attendance at industry trade shows are important aspects of the sales task, then the compensation plan’s treatment of expenses should not discourage salespeople from developing the contacts, relationships, and knowledge accrued through these activities.

What is the nature of the selling cycle? The answer to this question often varies by major account or important segment. But a plan that focuses on short-term incentives will almost certainly discourage attention to the longer-term (and, often, higher margin) accounts or market segments.

What are the controllable and uncontrollable factors? Salespeople cannot control some of the factors that affect sales performance (e.g., macro-economic developments, a customer’s unforeseen demise, competitive moves). The compensation plan can encourage attention to these factors by rewarding accurate forecasting or market intelligence, but the plan should focus on the factors that the salesperson can control. If not, important links between motivation, effort, results, and compensation are broken.

Management must be quite clear how, fundamentally, the salesperson “makes a difference” in a given situation. That difference is what the compensation plan should reinforce and support.

What Is the Labor-Pool Frame of Reference?

Information about the amount and kind of compensation offered by competitors is always “around” the sales office, and comparisons are inevitable. A firm with uncompetitive pay levels will inevitably lose its best sales personnel, and perhaps inadvertently fuel what one sales manager calls “the finishing-school syndrome”: “At my previous company, we hired relatively new people, trained them, gave them experience selling in this industry, and then, like me, they moved on to better-paying jobs at competitors.” Many companies spend a considerable amount of time determining competitive pay levels, yet this information is easily available through trade publications or published surveys.6

An additional issue in determining labor-pool context concerns the salesperson’s potential influence on the buying decision and the abilities required to exert this influence. In many industries, sales requires technical skills, which means companies must recruit highly trained personnel who often have a number of options in different industries and in different functions besides sales. This factor affects pay levels independent of competitors’ wage rates. More generally, what some economists call “transaction-specific assets” are also relevant to sales compensation plans.7 These assets are specialized knowledge and working relationships built up over time by the people selling a product, and specialized to the task of selling that product. They may include technical skills or simply detailed knowledge of the decision makers and decision-making processes at important accounts. When salespeople have developed such transaction-specific assets, the costs of losing these sales personnel may be prohibitive, and the compensation plan should reflect this.

An example of such a situation is the private banking business (i.e., special services offered by banks to high net-worth individuals). During the past decade, most commercial banks aggressively pursued the sizable fee income, high margins, and large and stable deposit base that a productive private banking group can produce. These banks typically reorganized to add or give new prominence to their private bankers, often establishing private banking as a profit center and dramatically altering their compensation programs in the process. The key to this business is the private banker, who must possess an array of company-specific and client-specific skills. Private banking positions require individuals with knowledge of a broad range of areas, including credit, marketing, operations, and special products. Referrals, leads, and effective attention from other parts of the bank are crucial. The private banker must be adept at maintaining goodwill and communications with these other areas. At the same time, personalized client service is the heart of the business, especially since any one bank’s “products” are not highly differentiated from competitors’ offerings. Trust, compatibility, and other elements of “good chemistry” are the essence of the private banker-client relationship and, over time, most clients see themselves as doing business with an individual private banker rather than the commercial bank.

In effect, the private banker’s sales task is to manage this set of internal and external relations. This combination of skills is rare, narrowing the pool of qualified candidates for private banking positions, and also highly dependent on accumulated transaction-specific experience with the company and the client. As a result, compensation for private bankers (traditionally, in keeping with banks’ historical adherence to internal compensation parity, a salary commensurate with that of the bank’s other commercial lenders) increased in the 1980s at annual rates two to three times that of other bank categories.8

How Should the Salary-Incentive Mix Be Structured?

Management must also determine the relative emphasis on fixed salary and incentive compensation (commissions, bonuses, etc.). Some salesforces receive straight salary and some straight commission. But surveys indicate that about two-thirds of companies with salesforces use some combination of salary and incentive compensation. Several factors make a higher salary component attractive: the difficulty in measuring the impact of a salesperson’s performance in a reasonable period of time; the need for salespeople to coordinate efforts (e.g., team selling or national account programs); the complexity and length of the selling task; the importance of “nonselling” activities such as after-sale services; the amount of missionary selling required; and the volatility of demand in a product market.9

These factors tend to make salary a more important factor than incentives in the total sales compensation mix. But a company can have a highly leveraged (i.e., high commission component) compensation plan and still sell highly technical, complex products in a market environment where non-selling activities and long-term relationships are important—if other aspects of the sales management system support the required sales tasks. A number of manufacturers’ rep firms selling high-technology products operate very successfully with highly leveraged compensation plans. Also, many sales managers stress that the issues of fixed salary and incentive compensation (the focus of most academic discussions and models of compensation) may be less important than issues such as: the time frame for compensation pay-outs and performance evaluations; the way sales credit is divided among a dispersed account team or different sales groups; the unit(s) of measurement used to coordinate compensation plans among different salespeople (e.g., units sold or gross profit); and the role of any compensation plan (fixed salary or more leveraged) in the context of the sales organization’s more general reward and recognition systems.10 Nonetheless, salary plans are easier to administer; they often become the “default option” for companies that lack the information systems or managerial skills required to administer more complex plans.

How Should the Incentive Component Be Designed?

Although their variations are legion, the major forms of sales compensation are few: straight salary, salary plus bonus, salary plus commission, and commission, with or without a “draw” (i.e., permitting the salesperson to draw commission in anticipation of actual sales). Bonuses, a form of incentive compensation, are lump sums paid for the attainment of specific objectives. Bonuses can be based on a quantitative formula, or on qualitative objectives (e.g., reaching certain decision makers at a key account), or they can be administered at the discretion of a particular manager. Commissions, another form of incentive compensation, are typically based on a percentage of sales volume or margins. Most companies apply a standard commission rate to all sales, while others vary the commission rate by product or category of customer in order to reflect profitability or competitive objectives. Sometimes commissions are only paid for sales above quota, or different rates apply above and below quota.

Managers should pay close attention to these details. Salespeople study their firm’s plan closely, and many look for what managers often call “loopholes” and what a salesperson might well call “the best use of my time in order to maximize income.” Apparently incidental matters, such as paying commissions when orders are booked instead of when shipped, can make major differences in the company’s cash flow, order patterns, production schedules, and focus of selling efforts. Hence, the specific company context is crucial. However, we can make some general observations about sales incentives.

First, sales incentives typically have three allied purposes: (1) to communicate management’s goals and direct salesforce efforts; (2) to increase return on investment in the firm’s sales capacity; and (3) to provide competitive pay to salespeople. Like wages, compensation plans are always important company communications. The issue is, what behavior is encouraged or discouraged by the incentive portion of the plan? A related issue concerns the incremental efforts to be encouraged by the incentive plan. In effect, the purpose of incentives is to increase the firm’s return on its investment in sales resources by directing effort toward areas where both the firm and the individual salesperson can prosper. Hence, an important objective in designing incentive systems is to establish “win-win” goals for the firm and the salesperson. Finally, the incentive system should be structured so that, given a good performance, total compensation is at or above competitive pay levels; given varying performance scenarios, the ensuing spread in incentive pay should be meaningful and appropriate.

Second, the time frame employed for incentives must be considered. In general, it should be short enough to make an impact but long enough to make each payment significant. The principle here is that the time frame should make the cause-and-effect relationships among effort, results, and rewards visible to the salesforce. Generally, this means trying to establish incentive plans that conform to the typical selling cycle encountered by salespeople.

Third, establishing the overall mix between incentive pay and salary (the majority of compensation systems have both) involves judging the interplay of four key variables: the percentage of total compensation “at risk” via incentives; the salesforce’s perceptions about this proportion of incentive pay; the degree of implied management control; and the degree of fixed cost reduction attainable through incentive (rather than fixed salary) compensation. As an example, a senior sales manager in an office products business (where the average total compensation per salesperson was about $50,000 in 1987) uses Table 1 to consider the interplay of these variables.

Fourth, the performance measures on which incentives are based should reflect important managerial objectives. While sales volume is probably the most common measure used for incentive systems, there are other possible performance measures. For example:

  • Product Mix. This is especially important when the company sells different items (e.g., equipment and related supplies) often used as a system by customers.
  • Pricing. This is especially important when negotiations are an important part of the sales task and the salesperson has discretion over price-exception requests by customers.
  • Bad Debt-Returned Goods. In many companies (e.g., service merchandisers), this is a major component of selling expenses and of firm profitability.
  • Type of Sale. The type of sale (e.g., outright sale versus rental) often has a major impact on cash flow, the nature of the company’s installed base, and after-market revenues.
  • Training. In some industries (e.g., computers or corporate software), training is both an important aspect of the sales task and a major source of gross profits.

Clearly, no one form of sales compensation plan is optimal for all companies, or even for different divisions in the same company. The nature of the sales tasks, and the nature of the salesperson’s influence on the buying decision (a factor affected by marketing strategy), will help to indicate the most suitable form.

Setting Goals and Rewarding Results

A key choice in any compensation system is the process adopted for setting goals and rewarding results. This is a complex issue, involving the mechanics of the particular compensation system, the information and administrative talent available to the company, and, in most situations, questions about the basic “social contract” a company seeks to establish with its sales personnel. There are two basic approaches available, as suggested by Figure 2.11

An emphasis on product over process generally leads to the approach outlined on the left side of Figure 2. Management sets goals, sends the sales-force out into the field, and waits for results. It rewards on the basis of whether or not the goals are met. The reasoning here is that (a) the salesperson can best decide how to meet those goals (“Isn’t that what we pay them for, anyway?”); (b) over time, a natural selection process will retain the “best” salespeople while the others leave for lack of rewards; and (c) salespeople are inherently entrepreneurs who resist attempts to control the focus of their field activities.

In the approach outlined on the right side of Figure 2, management rewards specific activities aimed at achieving the desired results and attempts to directly influence those results. This approach assumes first that, in the absence of clearly defined and prioritized sales activities, the salesperson may not be the best person to design a strategy for reaching goals; sales managers should understand the sales tasks facing their company and improve the performance of those tasks (“Isn’t that what managers get paid for, anyway?”). Second, over time, the former approach can significantly waste and misdirect effort by salespeople, especially since the most productive sales activities are likely to change during a product’s life cycle or as a market grows and matures. Third, salespeople may well be entrepreneurs, but successful entrepreneurs typically endorse processes that increase their earnings; the issue is not whether salespeople like to be told what to do, but whether the company exerts its influence on salespeople in the right directions. Ultimately, the function of management is not to administer “tests” but to optimize the allocation of resources, including sales resources.

These philosophical differences have significant implications. The choice of approach affects all major dimensions of sales management—recruitment criteria, training initiatives, first-level sales management, performance evaluation criteria, and compensation. It also has a significant impact on the climate or culture within the organization. Further, as international markets, global accounts, team-selling activities, and new technologies make the selling process more complex in many industries, the essentially laissez-faire approach outlined on the left side of Figure 2 is effective in fewer situations. However, many companies adopt this approach without considering the alternative method, because they think it is not applicable. Others lack the information systems required to implement it.

Relevance and Limits of Compensation

“You won’t get what you don’t pay for” is a fact of life in most sales organizations. But compensation issues are ultimately what some writers have called organizational “hygiene factors”:12 necessary, but not sufficient, conditions for motivating people to do what you want them to do. A compensation plan is a part of, not a substitute for, a coherent sales management system.

Developing an outstanding salesforce is, in the final analysis, a function of the firm’s total environment, including its external market and internal organization (management, value, and information systems). While a sales compensation plan affects the company’s revenue stream and its pattern of resource allocations in many areas besides sales, problems with sales compensation are often really symptoms of weaknesses in sales management or other areas of the firm. For example, in the scenario illustrated by Figure 3, compensation problems reflect larger deployment, information, and strategy problems. As noted earlier, moreover, many other factors besides compensation affect sales results. These include economic conditions, competitive initiatives, pricing, and product quality.

Hence, it is important to recognize both the relevance and limits of compensation issues. In analyzing sales situations, consider the following four factors as part of a quick “audit” of sales management policies and practices:

  • Marketing Strategy. In weak sales systems, the company’s marketing strategy is often implicit, interpreted differently by different parts of the sales organization, and so implemented on an ad hoc basis by different salespeople or account teams. In strong sales systems, marketing strategy is usually explicit, widely communicated, and (at any given time) executed with a high degree of consistency by the salesforce.
  • Role of Personal Selling in the Strategy. In weak sales systems, definitions of sales tasks are often frozen, remaining the same for years despite important changes in customer-buying processes and in functions performed by channel intermediaries. In strong sales systems, managers continually reexamine the role of personal selling in the marketing mix to determine which tasks are still important to customers and at what level—manufacturer’s salesforce or perhaps an intermediary— they should be performed.
  • Sales Performance Expectations. In weak sales systems, there is often an “everything is important” attitude, reflecting an inability or unwillingness by management to establish priorities. In strong sales systems, there are often two or three key requirements that are defined, clarified, and emphasized by management at a given point in time.
  • Sales Compensation Plan. Because the strategy is implicit, the role of personal selling taken for granted, and sales expectations relatively undefined, weak sales systems tend to manage sales compensation plans on a “tweak-the-formula” basis, letting small, incremental changes substitute for the kind of analytical process outlined in this article. By contrast, in strong sales systems, the compensation plan is the focus of frequent (annual or biannual), cross-functional reviews. These reviews seek to make trade-offs, establish priorities, and use the discussion of sales compensation as a way to clarify the responsibilities of management, not replace them.

Placing Compensation in Context

Evaluating comparative pay levels and deciding the relative emphasis of fixed salary or commission compensation are the outputs of the process outlined here and, in many respects, the easier aspects of compensation design. Managers also sensitive to issues of motivation, evaluation criteria, goal setting, and rewards, can avoid unpleasant surprises and misdirected effort, both by themselves and field salespeople.

Figure 4 serves two purposes. First, it suggests a framework that places in context some of the topics discussed in this article, such as compensation systems, the analysis of sales tasks, and the role of sales management in influencing types of selling behavior. Second, it includes aspects of sales management not discussed here but that are nonetheless important in analyzing sales situations and compensation issues. “Salesforce control systems” refers to aspects of sales management that are relatively quantitative and measurable, and susceptible to management by objectives, or policy direction by sales management. It includes performance measurement, evaluation, compensation, and training systems. In contrast, “salesforce environment” refers to more qualitative issues concerning human resource patterns (e.g., amount of turnover in the salesforce), communication patterns (e.g., amount and types of communication among sales personnel), interaction patterns (e.g., management of conflicts), and management patterns (e.g., the way goals are set and results rewarded). Policy (quantitative aspects of control systems) and process (qualitative aspects of the salesforce environment) affect each other. For example, what a company measures and rewards will affect its sales process; conversely, how salespeople interact should affect what a company decides to measure, train, and reward. In turn, both the control systems and environment will affect the focus of the company’s sales personnel, their types of selling behavior, and their performance of required sales tasks.

Using the framework in Figure 4, a manager contemplating a change in sales compensation might first want to consider the following questions:

  • What does the firm’s marketing strategy imply for the role(s) of personal selling activities at the company? What specific tasks must the field sales personnel accomplish to implement the strategy? Unfortunately, although it is the field sales personnel who execute strategy in most firms, most so-called strategic plans make scant reference to the necessary field selling activities.
  • Who are the important salespeople at the company? What are their competencies, experience, and selling preferences? Particularly in service businesses, but increasingly in just-in-time-oriented manufacturing firms as well, many people outside the officially designated salesforce are involved in customer acquisition and retention. As one manager puts it, “Not everyone here is called a salesperson, but everyone sells.” Do compensation and other sales-management practices encourage or discourage coordination among these groups?
  • What control systems, besides pay, influence salesforce behavior? To what extent are productivity measurements, performance evaluations of individual salespeople, and sales training programs consistent with the analysis of important sales tasks? As one top manager notes, “I can pay my salespeople any way I want. But if market coverage is inadequate [a deployment issue] and they don’t know what to do when they’re in front of customers [a training issue], the world’s best pay-for-performance system is of only limited use.”
  • How well or poorly are these control systems being implemented? In most sales organizations, the branch manager (or similar first-line sales supervisor) remains the key player in the control system. Who gets this job? How do the company’s career paths, communication systems, and interaction patterns between sales rep and sales managers affect salesforce behavior?
  • Finally, what gaps exist between the required sales tasks and the types of selling behavior? How (if at all) can a change in sales compensation address these gaps?

The basic idea behind this framework is that a sales management system must integrate three factors internal to the sales organization with two factors external to the sales organization. The internal factors are the following:

  • the people involved;
  • the systems established to influence those people’s behavior (salesforce control systems); and
  • the application (or misapplication) of those systems in the sales organization (salesforce environment).

The external factors are as follows:

  • the vendor’s marketing strategy (e.g., “push” versus “pull” emphasis and the consequent impact on the role of sales personnel); and
  • the key market-account characteristics (e.g., buying processes and market structure).

The external factors largely determine the nature of required sales tasks; the internal factors influence selling behaviors to ensure optimal performance of those tasks.

When these factors are coherently integrated, the company is focusing on customer encounters, and selling has travelled a long way toward effective marketing.


1. T. Levitt, “Marketing Myopia,” Harvard Business Review, July–August I960, pp. 45–56.

2. A seminal and still pertinent discussion of sales compensation is the two-volume study by H.R. Tosdal and W. Carson, Jr., Salesmen’s Compensation (Boston: Harvard Business School Division of Research, 1953). For more general discussions for managers, see:

J.K. Moynahan, Designing an Effective Sales Compensation Program (New York: AMACOM, 1980);

C.A. Peck, Compensating Field Sales Representatives (New york: The Conference Board, Research Report No. 828, 1982); and G.A. Churchill, N.M. Ford, and O.C. Walker, Sales Force Management (Homewood, Illinois: R.D. Irwin, 1985), ch. 14.

The more theoretically oriented, marketing-models literature has also devoted considerable attention to the design of “optimal” sales force compensation systems. Under assumptions about the salesperson’s objective function (usually, to maximize income), constraints under which the salesperson operates, and the firm’s knowledge of the individual salesperson’s sales-response function, these studies have generated models for considering how the firm can set compensation to maximize the firm’s profits across a line of products or accounts. The key managerial decision at issue in these models is the amount and composition of commission pay versus “fixed” salary. Important studies here include:

J.U. Farley, “An Optimal Plan for Salesmen’s Compensation,” Journal of Marketing Research 1 (1964): 39–43;

C.B. Weinberg, “Joindy Optimal Sales Commissions for Non-Income Maximizing Sales Force,” Management Science 24 (1978): 1252–1258;

R. Lal and R. Staelin, “Salesforce Compensation Plans in Environments with Asymmetric Information,” Marketing Science 5 (1986): 179–198;

and, for an excellent review and extension of these previous studies,

A.T. Coughlan and S.K. Sen, “Salesforce Compensation: Theory and Managerial Implications,” Marketing Science 8 (1989): 324–342.

Broadening the focus from sales compensation per se, a relevant review of the connections (and contradictions) between many common features of organizational incentive systems and traditional economic theory is available in J.E. Stiglitz, “The Design of Labor Contracts: The Economics of Incentives and Risk Sharing,” in Incentives, Cooperation, and Risk Sharing, ed. H.R. Nalbantian (Totowa, New Jersey: Rowman & Littlefield, 1987), pp. 47–68, and

G.P. Baker, M.C. Jensen, and K.J. Murphy, “Compensation and Incentives: Practice versus Theory,” The Journal of Finance 43 (1988): 593–616.

An interesting discussion of recent developments in pay practices is provided by:

R.M. Kanter, “From Status to Contribution: Some Organizational Implications of the Changing Basis of Pay,” Personnel, January 1987, pp. 12–37.

3. More formally, motivation in the personal selling context has been defined as “the amount of effort the salesperson desires to expend on each activity or task associated with the job. This may include calling on potential new accounts, developing sales presentations, and filling out reports.” Churchill et al. (1985), ch. 13, provide this definition as well as a general review of the marketing literature on sales motivation.

In recent years, “attributional” theories of motivation have become common in personal selling research. This approach views people as motivated to maximize rewards but also “to attain a cognitive mastery of their environment”—that is, they want to know why an event occurred, why they succeeded or failed at a task, and what to attribute for success or failure. Their answers to these questions affect their future behavior. A comprehensive review of this theory and empirical evidence for it are available in B. Weiner, Human Motivation (New York: Holt, Rinehart and Winston, 1980). For its use in the sales context see:

H. Sujan, “Smarter Versus Harder: An Exploratory Attributional Analysis of Salespeople’s Motivation,” Journal of Marketing Research 23 (1986): 41–49; and

A. Dubinsky, S. Skinner, and T. Whittler, “Evaluating Sales Personnel: An Attribution Theory Perspective” Journal of Personal Selling and Sales Management 9 (1989): 9–21. This view of motivation is implicit in my discussion of compensation, evaluation, and motivational links in this article.

4. The relationship between territory characteristics and sales performance lends itself well to quantitative modeling which, in turn, can be a useful input to quota-setting and compensation design. A number of territory-design models have been developed, and declining costs of information technology have made such models increasingly available and practical for companies. For review of the underlying theories, see:

L. Lodish, “ “Vaguely Right’ Approach to Sales Force Allocation,” Harvard Business Review, January–February 1974, pp. 119–174;

A. Ryans and C.B. Weinberg, “Sales Territory Response,” Journal of Marketing Research 16 (1979): 453–465;

A. Zoltners and P. Sinha, “Integer Programming Models for Sales Resource Allocation,” Management Science 26 (1980): 242–260; and

R.W. LaForge, DW Cravens, and C.E. Young, “Using Contingency Analysis to Select Selling Effort Allocation Methods,” Journal of Personal Selling and Sales Management 6 (1986): 16–31.

5. Although not concerned with sales situations, per se, a classic analysis of reward systems that “pay off” for one behavior while the rewarder hopes for another is S. Kerr, “On the Folly of Rewarding A, While Hoping for B,” Academy of Management Journal 18 (1975): 769–783.

6. Sales and Marketing Management magazine publishes an annual survey of competitive pay levels. It provides data, by industry, on average annual compensation levels for different categories of sales personnel (e.g., sales trainee, mid-level salesperson, top-level salesperson, sales supervisor), by region, educational level, and other variables. Other standard sources include the biennial survey, “Salesforce Compensation,” published by Dartnell; and TPF&C’s annual “Sales Compensation Survey,” a data bank that covers different types and levels of sales positions and also looks at various companies’ policies in the areas of benefits, expenses, perquisites, and design of incentives. Interestingly, these sources usually provide different numbers in a given category, because each defines and aggregates its categories differently. This in itself can be useful, spurring thinking about the activities that do and don’t seem relevant for a given sales position in the company.

7. The notion of “transaction-specific assets” is developed most fully by the economist O.E. Williamson in “The Economics of Organization: The Transaction Cost Approach,” American Journal of Sociology 87 (1981): 548–577; and

O.E. Williamson, The Economic Institutions of Capitalism (New York: The Free Press, 1987). Applications of Williamson’s theory to sales compensation include

G. John and B. Weitz, “Salesforce Compensation: An Empirical Investigation of Factors Related to Use of Salary versus Incentive Compensation,” Journal of Marketing Research 26 (1989): 1–14.

An interesting application of transaction-costs theory to more general issues in sales management is

E. Anderson and R.L. Oliver, “Perspectives on Behavior-Based Versus Outcome-Based Salesforce Control Systems,” Journal of Marketing, October 1987, pp. 76–88.

8. See B.D. Dunn and S.E. Morrison, “Incentive Compensation Programs for Private Banking,” The Bankers Magazine, July–August 1989, pp. 16–19.

9. For discussions of how these factors affect the salary-incentive mix, see John and Weitz (1989);

Coughlan and Sen (1989); or

G. Tubridy, “How To Pay National Account Managers,” Sales & Marketing Management, 13 January 1986, pp. 50–54.

10. See FV. Cespedes, “Toward a Conceptual Understanding of Sales Coordination” (Boston: Harvard Business School, Working Paper No. 89–046, January 1989).

11. I am indebted to Robert J. Freedman, a vice president and specialist in sales and executive compensation at TPF&C, for the example provided as Figure 2 of this article. A similar point concerning the interrelationship of goal-setting and reward systems is made by Moynahan (1980), pp. 26–28.

12. F. Herzberg, “One More Time: How Do You Motivate Employees?” Harvard Business Review, September–October 1987, pp. 109–120.

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