Reimbursement of Sales Expenses – Policies and Practices

The two general policy alternatives on reimbursing sales expenses are (1) have sales personnel pay their own expenses or (2) reimburse sales personnel for all or part of their expenses. The first alternative is the simpler by far, but few companies choose it. Those that do are organizations, by and large, that regard sales personnel as independent businesspeople—most of these organizations also use straight-commission plans. The main advantage of the “pay-your-own-expenses” policy, from management’s standpoint, is that no expense records are necessary as sales personnel control their own expenses. In successful applications, the compensation level reflects the fact that sales personnel pay their own expenses. It is essential that their regular commis­sion be sufficient to permit them to further the company’s best interests. Even when the compensation level takes into account salespeople’s probable expenses, some still skimp on expenses, to the company’s detriment. They stay in second and third category hotels; economize on meals, dry cleaning, laundry, and other traveling expenses; and avoid entertaining customers and prospects. Furthermore, they resist or ignore many of management’s direc­tives and instructions. Little management control can be exercised over their call and route schedules, especially in regard to accounts located in out-of- the-way places. Most sales personnel who pay their own expenses neglect non-sales-producing activities—they avoid missionary duties and follow up on sales leads only when no additional expenses are involved. They “high spot”; that is, they call only on large accounts, and they feel justified in adding “sidelines” (other manufacturers’ products sold to the same classes of trade).

Most firms choose the second policy alternative—full or partial re-imbursement. When expenses are reimbursable, sales management needs expense control. Funds used to defray sales expenses are deductions from gross profits. Many factors influence sales expenses, including territorial size and characteristics, caliber of sales personnel, nature and breadth of product line, managerial efficiency, intensity of competition, and mode of travel.

Two commonsense principles guide management in formulating expense-reimbursement policies: (1) reimbursable expenses should be large enough to permit the performance of assigned duties in the expected manner, and (2) all expenses incurred because sales personnel are away from home on company business should be reimbursable.

Expense reimbursement policies should take into account the cus­tomary living standards of the salesperson and the customers, with the emphasis on the latter. The salesperson should eat in restaurants and stay at hotels of the class patronized by the customers. In some instances, differ­ent salespeople in the same company should be allowed different amounts for expense, reflecting deviations in customers’ living standards. Another reason for different-sized expense accounts is that actual expenses vary a great deal from one territory to another.

Reimbursement policies should keep expenses reasonable; they should not cause bad feeling among the sales staff. They should be eco­nomical to administer; that is, they should require only minimum supervi­sion and record keeping. However, the desire for administrative economy should not result in arbitrary or unfair procedures.

Both in formulating reimbursement policies and in their implementa­tion effective sales executives guard against the tendency to over economize. Sales personnel are not forced to skimp to the point of impairing selling efficiency. Nor do they have to dip into their own pockets to pay legitimate expenses. Reimbursement policies and procedures are based upon the rea­sonable needs of those incurring expenses; enforcement relies largely upon each person’s inherent honesty.

Source: Richard R. Still, Edward W. Cundliff, Normal A. P Govoni, Sandeep Puri (2017), Sales and Distribution Management: Decisions, Strategies, and Cases, Pearson; Sixth edition.