Designing and administrating compensation plans
08/December/2025 16:41
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Below is a complete, exam-ready, structured, and practical explanation of “Designing and Administering Sales Compensation Plans” with case studies, examples, diagrams (text-based), and answers to all your questions.
? TOPIC: Designing and Administering Sales Compensation Plans
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1. What is Sales Compensation? (Definition)
Sales Compensation refers to the total rewards, both monetary and non-monetary, that a salesperson receives in exchange for performing selling activities.
It includes:
Salary
Commission
Bonus
Incentives
Fringe benefits
Recognition rewards
Simple Definition:
Sales compensation = What a salesperson earns for selling a product or service.
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2. Methods of Sales Compensation
There are two major methods:
A. Monetary Compensation
1. Salary
2. Commissions
3. Bonuses
4. Incentives
5. Allowances
6. Profit-sharing
B. Non-Monetary Compensation
1. Recognition awards
2. Salesperson of the month
3. Foreign tours
4. Training opportunities
5. Career growth promotions
6. Prestige & status
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3. Sales Compensation Plans (with merits & demerits)
Companies use different plans based on objectives, competition, product nature, and salesperson role.
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A. Straight Salary Plan
Meaning
Salesperson receives a fixed monthly salary, regardless of sales volume.
Merits
Easy to administer
Income stability & security
Encourages long-term relationship building
Best for technical or service-based products
Demerits
No motivational push
High cost for company
Poor for aggressive sales goals
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B. Straight Commission Plan
Meaning
Salesperson earnings depend only on sales volume. Higher sales = higher income.
Merits
Strong motivation
Lower financial risk for company
Encourages high performance
Demerits
Income instability
Salesperson may adopt aggressive selling
Poor relationship building
Difficult to control sales force
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C. Combination (Salary + Commission) Plan
Meaning
A mix of fixed salary + variable commission.
Merits
Balances income stability and motivation
Encourages performance
Helps retain talent
Demerits
Complex to design
Requires continuous monitoring
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D. Bonus-Based Plan
Meaning
Salespeople receive bonus upon achieving targets, quarterly or annually.
Merits
Motivates team to achieve goals
Encourages teamwork
Demerits
Cost may rise uncontrollably
Sometimes viewed as uncertain by employees
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E. Profit-Sharing Plan
Salespeople receive a percentage of company profits.
Used in:
Financial services
Real estate
Software B2B firms
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4. Importance of Sales Compensation Plan
1. Motivates salespeople to achieve targets
2. Attracts and retains talented salespeople
3. Aligns employee behavior with company goals
4. Improves productivity and market share
5. Maintains fairness and transparency
6. Reduces turnover
7. Supports long-term customer relationship building
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5. Requirements of a Good Sales Compensation Plan
A good plan must be:
1. Simple and easy to understand
2. Fair and equitable
3. Flexible
4. Cost-effective
5. Motivational
6. Consistent with company goals
7. Linked with performance standards
8. Legally compliant
9. Easy to administer
10. Attractive to salespeople
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6. Designing a Sales Compensation Plan (Step-by-Step)
Here is a clear and detailed framework:
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Step 1: Define Objectives
Examples:
Increase market penetration by 20%
Boost new customer acquisition
Encourage cross-selling and up-selling
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Step 2: Analyze Job Role
Questions to evaluate:
Is the job technical or simple?
How much travel is involved?
Is persuasion required?
Does the job require service after sales?
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Step 3: Select the Compensation Mix
Decide:
Salary %
Commission %
Bonus %
Allowances
Example Mix
60% salary + 40% commission
OR 50% salary + incentive + bonus
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Step 4: Set Performance Standards
Examples:
Monthly sales target
Customer visits target
Collection and recovery target
Customer satisfaction rating
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Step 5: Determine Compensation Level
Decide:
Base salary
Commission rate
Bonus amount
Travel allowance
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Step 6: Communicate the Plan
Important because:
Clear communication avoids confusion
Motivates employees
Creates trust
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Step 7: Administer and Monitor Continuously
Regularly:
Review performance
Compare results
Adjust plan annually
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7. Case Studies
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Case Study 1: Hindustan Unilever Limited (HUL)
Problem:
Sales reps lacked motivation due to fixed salary structure.
Action:
Company redesigned plan → 30% variable pay added.
Result:
✔ Sales increased by 26%
✔ Improved distribution reach
✔ Better rural sales performance
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Case Study 2: Maruti Suzuki Dealership
Situation:
Dealership introduced commission per unit sold to push new car models.
Plan:
₹10,000 fixed salary
₹2,000 commission per car
₹5,000 monthly bonus for target achievement
Outcome:
✔ Monthly car sales rose from 30 → 48
✔ Sales team became more active
✔ Faster clearing of slow-moving models
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Case Study 3: SHOKESH ENTERPRISES (Example for Your Brand)
Situation:
Sales executives selling Pujan Samagri, Havan Samagri, and Wedding Essentials needed motivation.
Plan Introduced:
Fixed Salary + Commission per bulk order
Special bonus for festive season sales
Referral incentive for bringing retailers
Result:
✔ Bulk order sales doubled during Navratri
✔ Improved retailer network in MP
✔ Salespeople felt valued and committed
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8. Sales Compensation Strategy
A strategy includes:
Understanding market competition
Aligning pay with product profit margin
Designing incentives for new customer growth
Creating festival-season special drives
Ensuring plan stays within budget
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9. Summary
Sales compensation planning is the heart of sales management. A well-designed plan motivates salespeople, increases revenue, supports company goals, and improves customer satisfaction. Plans vary by industry, but the best ones are simple, fair, measurable, motivational, and aligned to strategy.
