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Compensation Target Base Salary
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Target Sales Production
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Figure 5-17 Sales Rep: 3A Commission Plan with Base Salary
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Figure 5-18 is an illustration of base salary with a progressive ramp commission schedule
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Component Part 1: Base Salary
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Base Salary with Progressive Ramp Commission Schedule Base Salary/Year $55,000
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1 Commission Rate nd 2 Commission Rate
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Sales Performance To $20M Over $20M
Commission Rate 4% 7%
Figure 5-18 Base Salary with Progressive Ramp Commission Schedule
TLFeBOOK
Five
Sales Representative TI-Commission: 3B Base Salary, Threshold, and Cap
In Figure 5-19, we see the application of a threshold and a capWe will learn how and when to use thresholds and caps later in this chapter
High
Compensation Target Base Salary $125M Threshold
$30M $25M Sales Production Maximum (cap)
Figure 5-19 Sales Rep: 3B Commission with Threshold, Cap, and Base Salary
Figure 5-20 is an illustration of base salary with a progressive ramp commission schedule (with threshold and maximum)
Component Part 1: Base Salary Base Salary with Progressive Ramp Commission Schedule Base Salary/Year $45,000
Part 2: Commission Rate
To Threshold st 1 Commission Rate nd 2 Commission Rate Maximum
Sales Performance $125 $125M $25M $25M over $30M Over $30M
Commission Rate 0% 7% 9% 0%
Figure 5-20 Base Salary with Progressive Ramp Commission Schedule
Observations In addition to a base salary, this plan features a commission plan with both a threshold and a maximum There is no payment for performance below threshold and no payment for performance above the
TLFeBOOK
Formula Types
maximum While there are numerous reasons to use both thresholds and caps, the following are the most common:
Thresholds: The primary reason for using a threshold is to avoid paying an incentive more than once for the same sale, year after year Ongoing revenue from a previous sale should not be treated as an annuity with continuous payments made into future years In such cases, the threshold is set at or above assured recurring revenue There are other reasons for using a threshold First, some organizations believe the salesperson should earn his or her base salary before an incentive is earned; therefore, the threshold is set at a number equal to the equivalent commission earnings for like sales volume Second, some organizations want to motivate the salesperson to achieve a minimum level of quota performance The threshold ensures that performance is consistent with this objective Finally, other sales organizations simply use a threshold as a statement of management intent of what is the minimal level of acceptable performance Maximums: Maximums (or caps) have always been problematic for sales organizations Most sales forces view maximums as very demotivational But companies use maximums for a number of reasonsThe most common reason is to preclude excessive earnings for unexpected, large orders Another reason caps are used is to offset the uncertainty of excessive payments caused by poor quota setting Although sales management should avoid the use of maximums, their use is necessary in certain cases Use caps when excessive sales are detrimental to the company s production capacity, or when sales personnel could achieve extraordinary sales results through unscrupulous sales practices
Sales Representative TI-Commission: 4A Variable Rate Plan
Variable commission plans provide different commission rates for different objectives The most common form of variable commission plan is to provide separate commission rates for different product categories where certain products earn a high commission rate and others do not This variation in commission rates helps guide sales representatives to the most preferred sales outcome Figure 5-21 is an example of a variable commission plan with two different commission rates by Products A and B
TLFeBOOK
Five
High
Product A Commission Rate x% of Product A Sales Production
Compensation Product B Commission Rate z% of Product B Sales Production Low Low Sales Production High
Figure 5-21 Sales Rep: 4A Variable Rate Commission
In Figure 5-22, the two commission rates provide separate payouts depending on the product
Component
Variable Rate Commission Schedule Sales Performance Product A Product B Commission Rate 4% 2%
Commission Rates
Commission Rate x Commission Rate z
Figure 5-22 Variable Rate Commission Schedule
Observations Variable commission rates assume that sales personnel can influence the customers buying preference among products
Sales Representative TI-Commission: 4B Variable Table
The variable table (see Figure 5-23) provides another form of variable commission programThe variable commission table changes the economic value of each sales dollar prior to applying the appropriate commission rate In this manner, the dollar value of each sale is adjusted up or down depending on the sales category For example, a product category that has an adjustment factor of 50 percent would treat the economic value of a $100,000 sale as $50,000
TLFeBOOK
Formula Types
Component Variable Table Commission Schedule Adjustment to sales dollars: Product Table Product ABC Product Blue Product Red All New Account Sales Adjustment Factor 50% 110% 90% 125%
Commission rates applied to summation of the adjusted sales dollars Performance To Goal To 100% Above 100% Commission Rate 6% 8%
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