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 BtoB 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
