Sales Force Compensation: The Weight of the Net

Dominique Rouziès, Professor of Marketing - June 15th, 2009
man balancing positives and negatives - equal pay

Key Ideas

•To ensure that sales force remain motivated, companies should increase the variable component of sales representatives’ salary for people operating in areas where fiscal policies translate as modest differences in compensation for more and less effective sales people.

•The performance of sales directors has a major impact on that of the sales force. Sales director compensation must reflect this fact. 

Dominique Rouziès @HECParis

A graduate of McGill University (Ph.D.), Dominique Rouziès is professor of marketing, member of CNRS-GREGHEC – a joint research laboratory between the French National Research (...)

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In B2B industries, sales representatives play a critical role. They are the company’s ambassadors when they visit customers and the clients’ ambassadors when they return to the office. They must not only respond to customer needs, but also ensure that their companies keep the promises they have made—which is not always easy, given that the number of people involved in the sales process has significantly increased. As the company’s primary means to promote product sales, sales representatives are a highly strategic business issue. How much should they be paid to ensure their commitment and motivation? How can compensation schemes be adapted to specific fiscal contexts? Should sales directors also receive incentivized salaries?


SALES FORCE COMPENSATION IN B2B INDUSTRIES

Given the specificities of this group of employees, considerable research has been conducted on how to determine their compensation. The following observations have been made:

•There is an information gap between sales representatives and their managers. The first group is, in fact, more knowledgeable than the second when it comes to customers, their potential, and the competition. Further, as sales reps are generally quite independent, it is difficult for managers to assess the challenges they have to deal with, evaluate their performance, and define suitable, motivating compensation schemes and levels.

•Manager/sales rep relationships are subject to the problems of any principal/agent relationship. The manager (the principal) hires a representative (the agent) to generate sales. These sales depend on the amount of effort the rep puts into the job, yet reps strive to maximize the utility of their efforts. In this context, an optimal compensation scheme would involve a variable component of salary that would serve to encourage efforts to make sales, and a fixed component that would provide reps with a degree of security.


IMPACT OF TAXATION ON SALES FORCE COMPENSATION

Most research has been conducted in North American countries, where low taxation levels mean little difference between what companies pay their sales force and these people’s take home salaries. Up until now, there have not been any studies that look at the impact of tax imposition levels on sales compensation levels and structures. Dominique Rouziès has considered this matter and found that:

1) Sales people are motivated by net compensation;

2) To motivate sales people, there must be a pay difference between those who perform the most and least less effectively. Yet, research show that the greater the tax pressures, the smaller the gap between the compensation of strong and weak performers. So in countries with high taxes, sales representatives may question whether their pay is truly commensurate with the amount of work provided. To counter the risk of demotivation, sales managers should increase the variable component in sales people’s total salary. This will serve to increase pay differences (that have been artificially reduced by taxes) between the most effective sales representatives and others. Still, a weighty variable component is not always ideal, because as work becomes more complex, performance becomes increasingly difficult to evaluate. That is why, when challenges are very tough and sales are particularly difficult to make, companies must ensure that a rep’s final salary depends more on its fixed component.


THE IMPORTANCE OF SALES MANAGER COMPENSATION

The question of sales manager compensation is equally important. Research reveals that the more effective the sales manager, the more effective his or her sales force. Sales managers thus have a high impact on organizational success. Rouziès explains that while a poor sales rep may be responsible for the dissatisfaction of a few customers, a poor manager will negatively influence a dozen and even a hundred sales representatives! Like CEOs, sales managers have far-reaching influence. This justifies generous compensation and explains why marginal growth rates increase according to the difficulty of their undertakings


Based on an interview with Dominique Rouziès and on her article “Determinants of Pay Level Structures in Sales Organizations” (forthcoming in Journal of Management , November 2009), coauthored with Anne T. Coughlan (professor of marketing, Kellogg School of Management, Northwestern University, USA), Erin Anderson (former John H. Loudon professor of international management and professor of marketing at INSEAD, deceased November 21, 2007; the forthcoming article in Journal of Marketing is dedicated to her), and Dawn Iacobucci (E. Bronson Ingram professor of marketing, Owen Graduate School of Management, Vanderbilt University, USA).

BUSINESS APPLICATIONS
BUSINESS APPLICATIONS

This is the first time a large-scale study has focused on the impact of taxation policies on the definition of sales force and manager pay structures and levels. Analysis of the compensation of 14,000 sales representatives and 4,000 sales managers enabled the researchers to highlight common yet previously unstudied practices. Findings are particularly relevant for multinational corporations, which tend to export their compensation policies without adjusting them according to the fiscal policies of the countries they go to work in. For the sake of comparison, an American sales rep earning the equivalent of 50,000 euros can expect to put 85% of this amount in his or her pocket once deductions for social charges and income tax have been made, however his or her European counterpart will only get an average of 70% of this amount. To adapt to such local specificities, the researchers make a simple suggestion: Positively vary the variable component of sales representatives’ salaries according to taxation levels.

METHODOLOGY
METHODOLOGY

The researchers studied over 14,000 sales representatives and 4,000 sales managers working in five European countries (Germany, France, the United Kingdom, Italy, and the Netherlands) and five B2B industries. Data about compensation structures and levels was provided by the Hay Group and analyzed taking the taxation policies of each of the five European countries into account (taxation information provided by Ernst & Young).