Question

2. Many large department and specialty stores are changing their salespeople’s reward system from a salary to a commission-based system. What problems can commission-based systems cause? How can department managers avoid these problems?

Answer 1

Some of the problems of a commission-based system can lead to are:

1. Aggressive sales tactics by sales personnel: People can be very driven when money is involved. When a company's compensation plan puts a heavyweight on commissions, salespeople, know that their depends on same resort all sort of manoeuvers in order meet their targets. Some times they push too much and this repels customers leading to negative brand equity which in turn stimulates the opposite effect that the compensation plan was installed to attain. Department managers in consultation with the HR department can work out a compensation system that is not so reliant on commissions so as to create a balance. It is also important to keep a feedback system in place that allows the company to monitor its brand equity.

2. Budget/Compensation Disequilibrium

When a company relies on a sales system that is heavily dependent on a commission-based reward system, sometimes, they could find themselves in a spot where they have to pay out commissions even though the monies have not come in.

This could lead to cash flow problems.

One way out of this is to use policies to manage the amount of days goods can be held in credit by the debtor. That is, if usually, such a company had a credit policy of 60 days, they could shorten it to 45 or 30 days. It can also elect to put an interest rate on the credit. This will discourage customers from holding on to their payment for too long.

Policies can also be used to manage the sales personnel date of payment for goods sold on credit. The policy can state that "commissions for cash sales will be paid as at when due. However, the commission on credit sales will be paid when the company recieves payment for same".

Cheers!