Dr. Patricia Crisp

1

Compensation

Compensation

Dr. Patricia Crisp

Abstract

Total compensation packages are designed to motivate the employee while achieving required levels of productivity necessary to achieve the organizational goals. Developing a compensation package for an inside sales force is a complex task. The compensation plan has to reward above-average skill and effort, yet at the same time it should be perceived as equitable by sales personnel at other performance levels such as average and even below-average sales reps, who often account for more total revenue than a few top producers. In addition, incentives should focus the sales force's efforts on the most profitable business opportunities, without neglecting coverage of more marginal accounts. How to accomplish both objectives while maintaining a competitive edge over the competition will be further demonstrated.

This compensation package developed for sales representatives at SBC Directory Operations meets several of the criteria for effectiveness as recommended by Ivancevich (2004.) The following package, which includes a base pay plus a commission structure, serves to meet the criteria of “security and balanced pay” since if offers the employee a secure wage earning potential in the form of a base pay; unlike some packages which rely solely on commission based compensation packages.

It is also “adequate” since it was negotiated and agreed on by the CWA union and SBC. Compensation for the inside sales position also meets the second criteria for effectiveness which is “equitable”. Ivancevich (2004) defines“equitable” as each person should be paid fairly in line with his or her effort, ability and training. The following compensation package meets all of these criteria for effectiveness. The compensation package for the position of the sales representatives at SBC combines three basic components to meets all of the above criteria. They are as follows:

1. Base pay. This element of the compensation package is determined based on the standards set by the industry combined with the organization’s budgets and profit margins. Base pay includes payment for time worked. (Ivancevich 2004)The base pay for the sales representative includes wages calculated on an hourly rate. This position is non- exempt and is subject to regulations of the Fair Labor Standards Act of 1938. ( The sales representative is eligible for overtime pay. The starting pay for the hourly rate is $10.00 per hour and for any time (in excess of ten minutes) worked that exceeds 40 hrs in a workweek; the employee will be paid at one and one-half times the hourly rate. The first year’s annual wage would equate to $20,800. The hourly rate is increased by up to fifty cents per hour every six months following a semi-annual performance evaluation. These are merit increases and will be determined by the results of the performance evaluation from the previous six months. Maintaining a base pay for this position allows the employee to cover basic expenses in the event that, there are some unforeseen market changes that impact the revenue objectives of the assignment. This base pay also provides a “cushion” for new hires whose performance does not accelerate immediately after completion of formal training and help to cover their basic expenses until they receive their commission checks.

2. The total compensation package also includes variable pay in the form of commissions paid to the sales representative on a semi-monthly basis. Invancevich (2004) describes commission as compensation based on a percentage of sales in units or dollars. Commissions paid to these employees is on an individual incentive basis, hence the employee is rewarded based on his own output and effort. This segment represents 40% of the total compensation plan. The following table demonstrates how commissions are paid in this position. The objective of this commission structure is to encourage increases in advertising packages vs. straight renewals of current contracts. It also ties the highest rewards to new business sold, thus promoting revenue growth within the sales organization. (See exhibit 1)

Exhibit 1

Graduated commission rates for market assignments

Following is an example of how the above sliding scale outlined in Exhibit 1 works.

If a sales representative is given an assignment with an account that currently has advertising that is billed at $100.00 per month for the current directory on the street and the sales rep renews that account for exactly $100.00 for the next directory, based on the table above the rep would receive 15% of the monthly rate which equals $15.00 in commissions for the that was account renewed. If on the other hand the advertiser reduces their program and cuts back their advertising program to $60.00 per month, the sales representative would receive 10% of the total monthly billing, which equates to $6.00 in commissions. The advantage of this type of compensation can be seen if the sales rep sells the customer additional advertising and increases the package to $175.00 in monthly billing. In this situation both the company and the employee has a gain. The company’s sales revenue increases and so does the sales representative’s income. The rep receives commissions of 94% of monthly billing, which equals $164.50 in commission. If this same sales rep sells $200.00 in new business to a customer who is not currently advertising with the company, based on the above table, the rep receives 105% of total monthly billing.

The commission structure also rewards those sales representatives who exceed assignment objectives. As indicated in exhibit 1, the sales rep can also qualify for a performance bonus. Additional commissions are paid at a 120% of monthly billing on all accounts that exceed performance objectives. This is accomplished after the sales rep meets the required sales objective on each market assignment. At the beginning of each sales canvas in each market, the rep is given an objective to achieve, for example in the Dallas market the sales rep is given an assignment of thirty thousand dollars in monthly billing and is expected to increase the revenue to by 10% or thirty-three thousand dollars in monthly billing after all contracts have been renewed. If the sales rep meets and exceeds this objective, all revenue in excess of 33,000 is paid at the higher rate of 120% of monthly billing in addition to commissions paid as indicated in exhibit 1.

This compensation takes into account average performance where a sales rep would earn approximately forty to forty-five thousand a year in base plus commissions while those in the top one third of the group would earn approximately 25% higher commissions than the average performer with annual earning potential being approximately fifty seven to sixty thousand. Conversely performance in the bottom one third of the group of sales reps, would earn approximately 18% less than the average sales rep, which would equate to annual potential earnings for lower performance within the range of thirty five thousand to thirty eight thousand. This compensation plan is designed to reward varying skill levels and performance and is based on individual productivity.

3. To supplement hourly wages and commissions, SBC also offers indirectfinancial compensation or benefits (Ivancevich2004). The sales representative is eligible for both mandated and voluntary benefit programs. Some of the benefits mandated by the federal and state government and offered by SBC include unemployment insurance as well as social security and workers compensation (should the employee incur any expenses from an on the job injury.)

Combined with benefits that are mandated by law SBC has a very lucrative voluntary benefits program, which includes some of the following as referenced in the 2001 Labor Agreement (CWA and SBC 2001):

1. Paid time off for vacation, which is based on length of service. An employee who completes six months of service but less than twelve months in the first year receives one week of vacation. Any employee who completes more than one year of service but less than seven years is entitled to two weeks of paid vacation. Any employee who completes seven years of service but less than fifteen years receives three weeks of paid vacation. An employee who completes fifteen years of service but less than twenty-five years will receive four weeks of paid vacation. If the employee completes more than twenty-five years of service, the employee is entitled to five weeks of paid vacation

2. Paid Holidays - The sales representative at SBC is paid for ten holidays which are observed as follows: New Year’s Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and the Day After Thanksgiving, and Christmas day. The employee is also eligible for three paid designated holidays, which are days that the employee designates to be observed as holidays.

3. Paid personal time off. The company allocates four paid excused paid days off (EWP) for all employees who complete six months or more with the company.

4. Paid time off for jury duty. The sales representatives at Directory Operations are paid base hourly wages for time to serve jury duty.

5. Funeral leave due to a death in the family. An employee is allowed paid time off for up to three days in the event of the death of an immediate family member and one paid day off in the event of the death of a close family member.

6. Family and medical leave. - In accordance with the Family and Medical Leave Act (February 1993), SBC offers up to 12 weeks of unpaid leave to eligible employees during any 12-month period. This presents the compassionate side of the organization and this benefit allows employees to balance their personal and work responsibilities.

Paid time off is an expensive benefit and for a company with as many employees as SBC, this can be a huge financial burden, however, it does allow the organization to remain competitive in the advertising industry and it supplements the lower hourly wages as compared with industry standards.

Another costly voluntary benefit program is the company paid health, dental and life insurance. SBC pays the full costs for employee, dependent and spousal coverage for all three programs. In more recent times when employees are being asked to take on a greater share of their own health care costs, SBC continues to support this financial burden which helps to set the company apart from its competitors and also re-enforces its reputation as having one of the best benefits program in the industry.

Additionally, compensation for this position includes a matching 401k plan for all employees who have completed at least one year of service with the company. The company matches up to 3 % of the employee’s contribution to the 401k-retirement plan.

The total cost for company paid benefits could cost the company as much as an additional $8.00 per hour per employee. Ivancevich (2004) references a survey done in the US in 1999, which found that on a national basis, the average rate of company paid benefits is $5.68 per hour. Company paid benefits for this position is higher than the national average and places a huge financial burden on the company, however it serves to re-enforce employee loyalty. A well-designed compensation plan also enables a company to minimize attrition. This department has been successful at retaining tenured sales reps. At least 10% of the current work force in the inside sales department have more than ten years of service with the company. Another 12 % have more than five years of service.

A Cost effective compensation is based on the financial status as well the return on the company’s investment in an employee. In this example, the average sales representative generates approximately $465,000 per year in revenue for the company and costs the company an average of $16,000 a year in benefits and another forty-five thousand in wages and commissions. After overhead expenses are deducted (most of which are fixed rather than variable expenses), the company can still be quite profitable as a result of the sales reps’ productivity. The advantage of this type of compensation is that it relies on output and productivity. Low productivity even though it has the same benefits plan does not result in the same compensation as high productivity in this sales position.

Regardless of how a company chooses to reward and compensate sales representatives, the compensation plan must be aligned with the goals and objectives of the sales organization, with business processes, corporate objectives, organizational structure and the sales model. Without such an alignment, it is possible that sales activities may not support corporate objectives. Failure to align compensation with corporate objectives can have far reaching consequences on an organization, on the hand, the sales compensation is the most powerful tool that management can utilize to influence employees to achieve the company’s objectives.

References

CWA and SBC (2001). 2001 Labor Agreements – South Western Bell Yellow Pages.

Ivancevich, J. M. (2004) Human Resource Management. MC Graw Hill Companies. New York.