Antecedents of Executive Compensation
Fiet presents a view on executive compensation packages and their approaches to determine company benefit programs. When one thinks about multiple pay and benefit programs, a general overview of the company plan comes to mind. However, one often overlooks the vast differences between those of an executive versus those of non-management standing. Compensation programs must align throughout the company.
However, most Fortune 500 companies, along with help from the human resources department, create multiple pay scales, promotion lines, and benefit programs to address all aspects of their employees. For example, medical benefits and pension plans are generally common across the board. The differences occur in the bonuses achieved through promotion as well as the added compensation packages for upper and executive management. The disadvantages usually occur over executives becoming obsessed with wealth and using stock returns to their own personal advantage, rather than a compensatory benefit to the company. One must consider this extremely important to ensure a balanced compensation package so that company benefits are more aligned across the industry.
Canonical Correlation Analysis of CEO Compensation and Corporate Performance
One of the key findings in this article is that executive compensation is a direct result of corporate performance. Both accounting and market research justify this thesis statement. Compensation, as well as company performance, is intended to occur over a long period. Therefore, as performance increases, so should benefit packages for employees. However, this is not the reality of the situation. Does company performance pull the same weight in an industry, regardless of the work performance location? Shim finds it interesting that the executive benefits at the home office will always be higher than those of an equal counterpart in another country. Therefore, executive compensation packages are driven on a positive side by company performance but profit and loss will determine allowances in a negative outcome.
In the end, one can see the positives and negatives to the compensation structure of most companies. Analysts usually review these benefits when a problem arises, which may be too late and affect performance as well as profit. The key is to maintain a monitoring system so that discrepancies between compensation benefits for the same position are carefully considered as well as warranted.
Pay for Profit
The pay for profit approach is fast becoming a major compensation method used in the sales industry. The root of the issue encompasses the need for salespeople to learn the necessary techniques required to make sales, while also increasing the profit margin for their company. Instead of just “making the sale,” salespeople will learn how to perform in a way which also generates an increased profit margin for the company.
The need for change was evident in the financial data reported from the sales department. Revenue-based compensation has long been a standard pay arrangement for salespeople. A few salespeople at Arctic Spas were poor performers and used a few unconventional selling tactics to boost their sales. Trevor Wasney, CEO of Arctic Spas, discovered that sales representatives were slashing prices too low and throwing in free merchandise to secure the sale. Wasney admits, “I wasn’t making any profit but I was still paying them a commission, basically, I was going backwards” (Beaton, 2004, p. 1). These salespeople were “giving away the farm” so to speak, in an effort to generate higher commission. These salespeople were increasing revenues for the company, as they were instructed to do, but, none of these revenues produced a profit for the company.
After analyzing the situation I have determined that the “Pay-for-Profit” method for compensating salespeople is a good choice. It only rewards those who produce an increase in sales, while also increasing the company’s profit margin. One major problem exists that extends far beyond the realm of how salespeople are compensated. The problem stems from the poor communications which led these few poor performing salespeople in making the poor decisions in the first place. Two issues exist that need to be taught to salespeople as part of a continuing workplace education program. Ethics and legality should be incorporated into the training of all salespeople. The decision to cut prices too low and give away free merchandise constitutes poor ethical judgment.
Sales Force Compensation Plans Incorporating Multidimensional Sales Effort and Salesperson Efficiency
To analyze properly the “Multiple Incentive Principal-Agent Model” (MIPAM) compensation method, management must understand that two presumptions or theories exist, which are the basis for the creation of the model.
“The first theory is the Agency Theory: The Principal-Agent Model. The creators of the MIPAM believe that exchange between parties is the essence of marketing. To facilitate these exchanges, an individual or organization (principal) may delegate responsibilities to another individual or organization (agent) and an “agency” relationship is formed. Agency relationships present potential benefits and pitfalls for both parties. It is almost always too difficult for a principal to monitor all the activities of its agent. The second theory is the Agency Theory in Sales Force Compensation Modeling. Agency theory has widely been applied to studying relationships based upon delegation of responsibility by a company (principal) to a sales agent” (Erevilles, Dutta, and Galentine, 2004, p. 2).
The MIPAM model is used under the assumption that salespeople perform multiple tasks, while on the job. Other companies use the single-effort model, only extending it to cover multiple products. The single-effort model may work for some companies. The manager who uses the “Multiple Incentive Principle-Agent Model” exploits the different levels of effort involved with the salespersons job to compensate them at different increments. Compensation is then commensurate with the level of difficulty. The manager who uses MIPAM recognizes that multiple tasks are involved, which aids salespeople in learning and becoming more efficient in the way they do their job.
It is Time to Pull the Plug on Sales Commissions
The internet has changed the way the world purchases good and services. Historically, pushy sales tactics could often yield a company high profits. However, in today’s world of consumer choice and competition, customers are pushing back and taking his or her business to the internet. In the article by Graham (2008), he suggests a new tactic for the struggling salesperson, trust. His opinion is consumer feedback showing knowledge and integrity is the only hope for struggling salespeople competing with internet business. Graham advises the only way to get customers back into the store is to give them something they can not get on the internet, knowledgeable salespeople who’s goal is to assist the consumer in purchasing quality. This shift in sales focus will force a change in compensation models. He advises business to place salespeople on salary based income and arm company employees with knowledge and value based incentives to bring consumers into value-conscious instead of price conscious.
If You Pay Them They will Come
Another compensation strategy proposed in the article by O’Connell and Hankin is maximization of retention by bridging salespeople’s salary during the initial phase of training. The article describes the first two years in a salesperson’s career as the most critical. Sales historically have a sharp learning curve, and new salesmen need support, training, and mentoring in order to become successful. However, once a salesman is trained and productive they become vulnerable to turnover.
O’Connell and Hankin suggest providing at least a minimum income level to these salesmen during these first two years. This not only will allow the new salesperson critical time to orient to the company and learn the characteristics of the business, but also will inspire a sense of loyalty to the company and decrease costly salesperson turnover. Cost of turnover coupled with the need to retain quality staff is a motivating factor in companies “bridging” sales peoples’ compensation. The article points out that the majority of individuals, who enter sales do so due to the financial return often associated. “If salespeople believe that there will be a favorable financial return form their association with the company, they are more likely to stay in that position” (O'Connel and Hankin, 1994).
Finding the Best Sales Compensation Plan
In this article the authored took the results from a survey to explore an effective method of compensation for sales employees. The survey was directed to different industries to identify the most commonly accepted and used plan in the sales force that motivates and rewards deserving employees. This study reviewed several topics as it relates to sales compensation and notably recognized concerns and potential difficulties that would assist in the failure of sales employees and thereby decreasing profits for the company as well as the associate.
Compensation Management of Commissioned Sales
The purpose of this article is to identify multiple forms of compensation for commissioned sales employees and ways to manage the programs in the ever changing business environment. The author compares and contrasts the differences between company’s different compensation management programs. It has become increasingly difficult to satisfy the needs of the sales employees as their sales raise they continue to want more from the company in return. Many companies have taken the approach of having employee specific plans to reward the sales persons differently in accordance to their performance. This allows the company to only give incentives to those associates who deserve the reward.
Before companies can make incentive offers to prospective or current employees, they must evaluate what is the best fit for the company and what is least costly, in order to maximize profits and drive sales. The company will not always be able to arrive at the best solution on their own, and in such cases, consultation firms should analyze profit, growth, stability, environment, and products. These firms can give recommendations as to the best method of compensation for the company at that point in time. The main focus is to assess the most effective compensation management plan among commissioned sales employees.
10 Synopses on Pay and Benefit Strategies
Team Performance Management – Synopsis 1 (Mike)
“Teams have become a popular way to organize business because they offer companies the flexibility they need to meet the demands of the ever changing, competitive business environment” (Zobal, 1998, p. 235). Many different strategies can be used by companies to accomplish this. This article by Zobal (1998) illustrates that one way to accomplish this is to support and reinforce this team concept through a compensation system. However, conventional, individually-based compensation systems do just the opposite. These compensation systems oftentimes are not effective and even work against team-based work environments that are collectively working together. As a consequence of this counter productivity, organizations are frantically looking for new and healthier ways to compensate their teams.
Many different benefits result by implementing team compensation systems, organizations are:
- supporting the new environment;
- encouraging cooperative, team oriented behavior;
- emphasizing the importance of effective teamwork; and
- providing incentives for improved team performance (Zobal, 1998).
Based on this article by Zobal (2008), he suggests that ideal team-based compensation systems are based on the principle of customization. Initially, organizations must understand the structure and context in which their compensation systems will function. This includes making certain that the compensation system is mirrored with the organizational structure, the business strategy, the performance management system, and even within itself (Zobal, 2008). The next step is for organizations to pay attention to both critical components and other related operational deliberations. Critical components include the compensation system's level of focus (the team level, the individual level, or a combination of both); the compensation mixture (i.e. base pay and base pay adjustments, other financial rewards, and, or non-financial rewards) and the employee factor (i.e. conditions that facilitate the motivational relationship) (Zobal, 2008).
Special Incentives for Salesmen – Synopsis 2 (Mike)
In this article by Haring and Myers (N.D.), special incentives are those incentives that are not part of the regular compensation plan. The incentives that are discussed relate mostly to sales contests and honor rewards. The study was broken down into three sections and analyzed to determine the best and most effective results. The first was done by reviewing books and periodicals over a 20 year period. Second, personal interviews were conducted by personally contacting business firms. Both successful and unsuccessful results from firms that used sales contests and honor reward programs were contacted. Third, questionnaires were mailed to 18,000 members of the National Sales Executives, who represent approximately 8,000 companies.
The survey reported favorable results from sales contests. In fact, over four-fifths of the sales executives that provided information for the study reported significant success from sales contest and honor rewards. A point that needs to be noted is that no more than one quarter of the sales force used these types of incentives as a tool for motivation. However, the sales contests have increased the goal of improving sales. Three weakness that were detected in contests directly related to volume were (a) customers were over-loaded with little increase over a span of time; (b) unless quota or individual goals were absolutely fair, many salesmen did not actively compete after the first few days or weeks of the contest; (c) salesmen let down after the end of the contest (Haring and Myers, N.D.). In addition, when a jackpot type of award was used it was only effective for participants who believed that he or she had a chance to win the jackpot. Therefore, the answer for this was to provide all participants with a prize, or to set a percentage of participants (maybe 50% or more) that can win a prize. Cash prizes are always popular rewards, but many companies have started using merchandise prizes in order to enable everyone to win. This type of prize is paid off in accordance with performance. In order for the honor reward to be effective, the organization must couple the reward with material recognition of accomplishment. The reason for this is because salesmen can not eat honor rewards. The results were then proven to be very effective and, in fact, motivate the sales individuals and teams. “Sales contests and honor rewards are important stimulants to improve salesmen’s performance and that many sales mangers are effectively using these techniques today” (Haring and Myers, N.D., p. 159).
Antecedents of Executive Compensation – Synopsis 3 (Carrie)
The antecedents of executive compensation in the sales profession is quite often misunderstood and well overlooked. Fiet’s article, Antecedents of Executive Compensation, displays the method for understanding executive compensation based upon company performance. The author determines that several factors are necessary in order fully to comprehend company benefits, all the way up to executive management levels.
A company’s overall performance relates to executive compensation. However, there can be a problem with upper management generating wealth for executive gain rather than for the stockholders, who in most cases are company employees. The article presents research that describes conflict between executives and stockholders over company compensation. There must be a checks and balances system to guarantee that company benefits are available as well as closely monitored. Compensation is designed to provide a level playing field among stockholders or employees. However, in sales, advantages do exist for management that does not apply to the average sales representative. The most common example concerns monetary incentive for executives upon maximizing shareholder wealth.
The key in executive compensation is to align the benefits of upper management to the stockholders and sales representatives. Once a company fully understands the forces behind its profit, compensation packages can be monitored much easier no matter what level the employee holds within the company.
A Canonical Correlation Analysis of CEO Compensation and Corporate Performance – Synopsis 4 (Carrie)
Debate is common concerning the relationship between executive compensation and corporate performance. These debates are based upon both the accounting and market based performance standards. A firm must note that these measures are directly associated with long-term compensation. Executive compensation debates may begin in the home office and within the company but eventually the practices can flow into overseas markets. For example, “in 1991, a typical US CEO at a top-30 company earned $3,200,000 on average, which is about 7 times greater than his Japanese counterpart's earnings of $525,000.” (Shim, 2003, p. 4) Studies show that the direct correlation between compensation levels and profitability is uniquely intertwined in most cases. Compensation is positively related to profit and sales, and negatively related to social performance.
The simplest measure of profitability reflected in compensation packages is through the company stock value. The article continues to stress that executive benefits should be synonymous with stock returns. Otherwise, performance is lacking in one or more areas. “Market-based performance measures are considered to be consistent with the outlook of stockholders and provide a long-term view of profitability” (Shim, 2003, p. 6).
If the stock returns are not increasing throughout the fiscal year, then the executive compensations and benefits should remain stagnant as well. There cannot be a large void between the benefits employees receive versus the benefits of an executive. If an executive in one country is receiving far more than an executive in the same position in another country, while the daily personnel continue with the same benefits package, then one can identify an obvious problem. In this article, variance analysis shows that compensation for executives is directly related to performance metrics.
Pay for Profit – Synopsis 5 (Jim)
This article is about managers using the “pay for profit” as the preferred method for paying and rewarding salespeople. Beaton (2008) describes the previous commission-based pay: Reward salespeople for generating margin rather than revenue and one will not only boost the bottom line, but retain the organizations best sellers. A major problem was discovered with a few of the sales representatives, shortly after the opening of Arctic Spas, a gazebo, hot tub and pool table retailer. These sales reps. were being paid revenue-based commission. They were paid to move product, but, the poor performing reps slashed prices too low, and threw in free merchandise to secure the sale.
Trevor Wasney, the CEO of Arctic Spas explained, “I wasn’t making any margins but I was still paying them a commission.”
“Revenue-based compensation has long been a standard pay arrangement for salespeople. But more and more, entrepreneurial businesses are switching to profit-based compensation plans, which pay sellers commissions on how profitable each sale was for the company. When structured properly and executed well, a profit-based compensation strategy can increase margins by creating salespeople who proactively negotiate highly profitable sales. It can also help motivate and help retain your best employees. But done poorly, it can result in chronic commission miscalculations, which will, in turn, alienate and act as a disincentive to salespeople” (Beaton, 2008, p. 1).
Sales Force Compensation Plans Incorporating Multidimensional Sales Effort and Salesperson Efficiency – Synopsis 6 (Jim)
This article is about the use of sales force compensation models, one in particular, the (MIPAM) Multiple Incentive Principle Agent Model. Erevelles, Dutta, and Galeantine (2004) state, “Sales force compensation models are often constrained by the assumption that salesperson effort is one-dimensional. Some models have extended the scenario to multiple products but retain the single-effort assumption. In addition, salesperson efficiency has been ignored”
The use of MIPAM has changed the way the tasks of the salespeople are viewed and analyzed.
“As selling is clearly multidimensional, we present a formulation of an agency model (MIPAM) that incorporates multidimensional sales effort as well as salesperson efficiency. We also show that under certain assumptions, we can build the second-order condition of the agent’s maximization into the principle-agent problem, instead of assuming it, as has been done in the past. Traditionally firms have compensated their sales representatives using an individual performance model. In these models, agency-theoretic approaches have been widely used to develop sales force compensation plans. These traditional models usually assume that effort put forth by the salesperson is one-dimensional-that is, they of often oversimplify the sales scenario” (Erevelles, Dutta, & Galeantine, 2004, p. 1).
The MIPAM model was designed to be used in conjunction with two underlying agency theories. These two theories are:
- Agency theory: The Principle-Agent Model. Exchange between parties is the essence of marketing.
- Agency theory in sales-force compensation modeling.
These agency theories have been widely applied to studying the relationships based upon the delegation of responsibility by the company to a sales agent The MIPAM model incorporates these relationship activities into the model and formulates the proper compensation based on each sales agent’s outcome.
If You Pay Them They Will Come – Synopsis 7 (Jackie)
A successful sales team can lead a company to financial success or guide them to economic disaster. Known facts in the sales industry is good salespeople are hard to find, but even harder to keep. The article by O’Connell and Hankin (1994) describes various pay strategies for salespeople in order to maximize retention of new salespeople.
The article describes the first two years in a salesperson’s career as the most critical. Sales historically have a sharp learning curve, and new salesmen need support, training, and mentoring in order to become successful. However, once a salesman is trained and productive they become vulnerable to turnover.
In order to deal with these critical first two years O'Connell and Hankin (1994) suggest using a payment “bridge” in order to tide new salespeople over until they are independent and productive enough to sustain themselves. “If companies do not at least provide a minimal income level to new salespeople, candidates may turn down the company’s employment offers solely for that reason (O'Connel and Hankin, 1994). The article describes several methods of “bridging” pay during the training period which include straight salary, recoverable or non-recoverable draws, or incentive plans based on training milestones.
Cost of turnover coupled with the need to retain quality staff is a motivating factor in companies “bridging” sales peoples’ compensation. The article points out that the majority of individuals, who enter sales do so due to the financial return often associated. “If salespeople believe that there will be a favorable financial return form their association with the company, they are more likely to stay in that position” (O’Connel and Hankin, 1994).
The Internet's Impact on Salespeople's Commission System – Synopsis 8 (Jackie)
One has little argument on how the internet has changed the way consumers shop for products, thus impacting in the salesperson’s commission system. In the article by Graham (2008) the author discusses how customers are seeking independence from a salesperson’s hefty commissions and pushy sales tactics. In the past if customer’s did not trust the salesperson or he or she felt distrust or deceived, there was little they could do other than take their business elsewhere. However, in today’s world, the internet provides an alternative for consumers who wish to take control of the sale.
Graham suggests a new tactic for the struggling salesperson, trust. His opinion is consumer feedback showing knowledge and integrity is the only hope for struggling salespeople competing with internet business. He advises business to place salespeople on salary based income and arm company employees with knowledge and value based incentives to bring consumers into value-conscious instead of price conscious.
Graham also advises spending time on supporting and sourcing customers and less effort on high pressure sales tactics. “When considering a sales compensation, considerations should be given to a system that brings everyone in the company on board, one that helps all employees recognize that they play a critical role in helping customers reach their goals (Graham, 2008, p. 11). The article suggests that all sales companies must adjust strategies in order to compete with the growing internet sales industry. This can be accomplished with knowledgeable, trustworthy salespeople who use incentives to provide quality service versus high volume sales.
Discovering the Best Sales Compensation Plan – Synopsis 9 (Shemekia)
In 1986, A.S. Hansen created a sales compensation survey. In this survey Hansen examined a variety of subjects relating to four basic salary plan options, in order to uncover which plan if implemented worked best at hiring and keeping the best sales employees. The four basic plan options are targets/quotas; incentive caps, total cash compensation, and team vs. individual sales. Many companies participated in the survey and the results were mixed. Eighty-five companies from a mixture of industries such as food and beverages, forest products, and telecommunications led in the survey representation. The survey unveiled similar difficulties of their respective sales compensation plans. There were concerns with performance tracking, equitable targets, transfer of accounts and reps, sales force motivation, and the coordination of goals. Generally in all companies the sales compensation plan was available in written format for employees to review without notice.
Of the 85 represented companies that participated in survey with the various plans, only three companies developed a commission only plan. Those companies signify the apparel industry with staff levels ranging from 25 to 150 employees, and sale ranges from less than $10 million to more than $750 million. A majority of the companies surveyed make use of targets or quotas in their compensation plan. The companies adjust the goals during the performance period during change of territory, alteration in the line of products, change in marketing, or external change’s that are not at the hand of the salesperson. In these cases, the goals are set to be attainable by the salesperson in order to receive incentives or bonuses.
The survey also revealed that companies with salary bonus plans would cap more often than companies with salary plus commission and commission only. Barnes (1986) stated the use of caps was a restrictive measure in many cases; by putting a limit on possible compensation, it prevents salespeople from receiving deserved rewards for outstanding performance. Salary plus incentive was reportedly the most widespread and accepted form of compensation among sales industries. In this plan, associates receive a base salary and incentive based on their sales performance. This plan rewarded individuals on their work without regard to any other determining factors. The plan is designed solely to award all sales by the employee.
Team sales compensation plans was also a useful tool among the companies in promoting teamwork and harmony on the sales floor. In most cases when organizations have individual sales quotas, competition runs ramped and the company can have difficulty in establishing a team. To eliminate this problem and promote support and teamwork, companies created plans that would reward associates, based on the overall performance of the group and not just the individual. One third of the groups surveyed offer group and individual incentives and as a result the importance of the individual in the selling process may be lessened. The outcome of the survey reveals that industries that allow more flexibility with the use of targets are the ones that usually pay employees the most.
Compensation Management of Commissioned Sales Employees – Synopsis 10 (Shemekia)
Almost every industry in the world has some type of sale force. Sales employees need to be compensated in a way that will motivate them to produce high volumes of revenue. Simply stated, compensation means to reward or pay. A compensation management plan of commissioned employees can mean several things to different organizations. Each organization should create and implement an individual compensation plan that would be specific to each employee.
The first plan and most commonly used in the sales force is a base pay with commission from attaining the preset sales goals. With this type of plan each salesperson is given a salary and an opportunity to make an unlimited amount of money. As long as they are selling they are earning. The goal is set in correlation with the employee’s previous sales record. If an employee has reach high goal levels, management will continue to raise the bar in order to get the most effort and profitability from the sales associate.
The next type of is strictly base salary, but the sales associate’s annual raise depends on whether or not the set goals were met for the year. This plan is excellent because it gives security to the employee, which is something most career hunters look for in job; but it also keeps the employee below in wages if they do not make his or her target goals. This plan should be revised to cater to each employee instead of having the goals for everyone.
The last type is a commission only sales employee. This is typically found in real estate and auto sales. Employees in this field will not make money if they do not make a sale. This type of compensation is directed toward aggressive salespersons that are able to create opportunities and close them. That makes them profitable for the company and themselves. Generally, no goal setting is established by the company, but the sales associate will usually set their own goals in accordance to their daily needs. Sales associates can determine how much of a product they need to sell in order to pay their bills and have extra and depending on the type of lifestyle they have will usually dictate how well they sell.
The sales force is ever evolving and the compensation management used by different organizations must keep up with the changes. One way to do this is to incorporate teamwork and customer service in the compensation plan. This invokes a work environment that promotes customer service, teamwork, personal growth and profit. Management needs to identify what motivates their staff and be able to adhere to their work ethics with qualifying rewards.
In conclusion, there are a multitude of approaches that managers can use to award the proper compensation and benefits to salespeople. In our analysis we analyzed ten of these sales compensation plans. One or more of these compensation and benefits plans can be used to effectively motivate the salespeople at InterClean during the transition. By including the salespeople in the decision-making process, managers can be assured to find the appropriate mixture of benefits to motivate employee behaviors. By choosing the appropriate plan that satisfactorily motivates salespeople to achieve higher performance, managers will achieve their main objective, a higher profit margin for InterClean.
References
Barnes, L. (1986). Finding the Best Compensation Plan. Sales & Marketing Management,
46-50.
Beaton, E. (2008, May). Pay for profit, 27(2), 39-41. Retrieved April 15, 2009,
from MasterFILE Premier database.
Erevelles, Dutta, & Galentine (Spring 2004), Sales force compensation plans
incorporating multidimensional sales effort and salesperson efficiency. Journal of
Personal Selling & Sales Management, v24 i2 p101 (12) Retrieved April 15, 2009,
from Business & Company Resource Center, Gale database.
Fiet, James O. (1995). Antecedents of Executive Compensation: The Use of
Covariance Structure Modeling. Vol. 21, P.42-58 Retrieved April 13, 2009, from
website .
Graham, J. (2008). It is time to pull the plug on sales commissions? The Enterprise,
38(13), 11.
Haring, A. and Myers, R. (N.D.). Special Incentives for Salesmen. Journal of Marketing,
18(2), 155.
O’Connell, B., & Hankin, L. B. (1994). If you pay them they will come. Sales and
Marketing Management, 146(10), 123.
Shim, Eunsup. (2003). A Canonical Correlation Analysis of CEO Compensation and
Corporate Performance in the Service Industry. Vol. 2, P. 72-90 Retrieved April
13, 2009, from website: .
Shipley, C.J., & Kleiner, B.H. (2005). Compensation Management of Commissioned
Sales Employees. Management Research News, 28(3), 2-9.
Zobal, C. (1998) Team Performance Management: The “ideal” team compensation
system – an overview: Part 1. Bradford, 4(5), 235.
