Different companies follow different practices in this regard. A few alternatives are listed here.
1. Straight salary plan.
2. Straight commission plan.
3. Salary plus commission combination plan.
4. Salary plus group commission plan
5. Commission plus approved expenses plan.
Taking due note of these realities, most firms opt for a combination of salary and incentives, including commission. The combination plans helps combine the best features of both the straight-salary and the straight-commission plans, and avoid many of their drawbacks. However a firm has to put in the necessary efforts to work out a good combination. The combination has to be worked out intelligently, taking into account the nature of demand of the product and the circumstances under which the firm markets it. For example, if the demand for the product has to be generated through the push effect, the salesmen will need some gearing and, therefore, a higher proportion of commission/incentives may be desirable in such cases. In contrast, if the product sells largely through the pull effect, created and sustained by the firm’s advertising, a smaller weight age to commission/incentives may be appropriate. Moreover, as a general rule, it can be said that in the case of industrial products, the compensation plan may lay lesser emphasis on commission/incentives. And within consumer products, in respect of durables, the weight age to commission/incentives can be higher as compared with softs.
Obviously a combination plan must be tailored to a particular firm, product market the nature of demand of the product and the circumstances under which it is marketed by the firm and type of selling.
Straight salary plan:
1. Simple to design and easy to administer.
2. Provides a sense of security and a basal motivation to salesman.
3. Helps the firm control the salesman better.
4. Ensures salesman sell all products of the firm and not just those that give them better commission.
5. Ensures salesmen attend to the long-term marketing concerns of the firms.
6. Helps avoid unhealthy rivalry/jealously among salesmen.
7. Is particularly useful when the firm
Has chosen the pull strategy for
Creating sales has a set of fresh
Salesman to be compensated
Goes into fresh territories
Sells a technical product involving long
Negotiation and a long purchase
Sells a new product
Sells in a market that is yet to be developed
In situation where sales efforts and actual sales are not closely correlated (e.g. sales depend on climate and the latter plays truant).
1. It does not offer incentive for salesmen to increase sales.
2. Salary is a fixed cost, unrelated to sales volume or margin; the company has to incur it irrespective of results/profits.
Straight commission plan
1. Provides incentive to perform better, as it rewards the salesmen according to their performance.
2. Commission is a variable cost, related to the sales volume or the margins/profits brought by the salesman
3. Is particularly useful when
The firm has chosen the push strategy for creating sales
High incentive is needed to get the sales
Not much non-selling work (such as setting up displays in stores) is involved.
The company is financially weak and has to relate its compensation expenses directly to sales/margins
The market is highly competitive and sales are closely correlated to sales effort.
1. Difficult to design and administer, sometimes commission plans can become too complex, involving complicated formulae, frustrating the salesmen.
2. May not be of much use when the Salesman are absolutely new.
3. It is difficult to control straight-commission people, as they are freelancers; It is especially difficult to make them perform tasks for which no commission is paid, e.g. they may not care to provide the firm the needed market intelligence.
4. Difficult sales territories may suffer under such a plan.
5. May lead to unhealthy rivalry/jealously among salesmen.
6. If the product is highly seasonal, the income of salesmen will be highly skewed, month-to-month and between off-seasons and season.
7. Similarly, if the market becomes unduly depressed due to some reason, the income of the salesmen would go down drastically.
8. May result in excessive pushing of products without caring for the value satisfaction to the customers.