Rethinking sales compensation
By Frank Hurtte
There is nothing new about distributor compensation issues. As far back as the ’60s, wholesalers were concerned for an innovative approach to motivate salespeople. The environment was different; warehouses smaller, inside sales untrained and the phone systems inefficient. Clearly, what they called an “ACE” (which stood for Attitude, Confidence and Enthusiasm) seller could create major financial benefits. Feeling salespeople needed to be compensated differently from the rest of their staff, distributors looked for a way to capture what was referred to at the time as “the natural born salesman.” Somewhere along the way, commissions were established, adopted and then
totally embraced by our industry. Based on interviews with a few industry pioneers, guys with 50-plus years of experience, the commissions were mostly based on sales volume. But, we put a man on the moon, saw the summer of love, experienced Woodstock and business changed.
Fast forward a couple of decades; it’s the mid-’80s. The first round of margin pressure hit. Computer systems allowed even counter salespeople to see cost. Cost up pricing expanded. A new generation hit the workplace and we had a recession. Adopting to the business environment, distributors tweaked commission programs, shifting from gross sales to gross margin-centric plans.
Distributor managers liked the shift for three reasons:
1. Gross margin-based commission plans provided incentives to the seller to get the very best price possible for their products.
2. Margin-focused commissions built variability into the compensation plan. Sales compensations were lower during periods of down economies, like those early recessions.
3. Salespeople on commissions don’t need raises because they could create their own. This took pressure off distributor owners, who hated frank discussions on employee compensation.
Thirty-some years have passed. The environment for distributors has faced radical shifts and progressive distributors are taking a new look at the entire compensation model.
But, old habits die hard . . .
Speaking with hundreds of distributors throughout the country, we find a great many exploring new options for sales compensation. Perhaps wisely, most have taken a go-slow approach. Sellers, who should be the harbinger of change, view even slight adjustments in compensation with a jaundiced eye. Plus, most distributor managers and sales leaders grew up in a commission-based environment. Instead of radical change, we see a steady stream of piecemeal changes with a sprinkling of sugar-coated temporary incentive programs laid over the top of small bits of the distributor product line. The problem is very few have taken a holistic approach, taking time to build a strategic plan around this critically important topic.
I believe the model needs a major overhaul and invite you to join me for the next few minutes as we explore five important questions around compensation and its close cousin, commissions.
Is the selling process/practice changing?
In our fathers’ days, selling was a lonely job. It was commonplace for a journeyman seller to be not only the major contact of the distributor, but the only real connection. For distributors in our industry, this has changed dramatically. Wholesalers throughout distributor-land stress teamwork; the number of people touching the customer in a meaningful way grows daily.
Today’s distributor employs product specialists, marketing experts, VMI/crib managers, customer service reps and teams of highly skilled inside salespeople. Moving from people to other resources, many have implemented online order entry systems and customer-based mobile applications to encourage dealers and contractors to further interface with the company. Often, this brings distributor IT people into direct customer interactions.
Selling has become a full-blown team function.
For a moment, we need to ask ourselves a question: Can a well-developed team outperform/outsell a group of semi-autonomous sellers? If your answer to this question is yes (and many believe it is), the follow-up question becomes: Does it make sense to pay one part of the team a commission while the others work under some other plan?
What is the salesperson’s real role?
Hunter or farmer? It’s a common metaphor applied to selling. Sales managers often lament their team’s lack of hunter talent. Deeper examination indicates some accounts prosper under the directive of a well-trained farmer. Actually, many of your largest and most mature accounts might be farmer territory. On the other hand, high-quality prospects and accounts with high potential and low sales volume align well with the hunter’s skillset.
What does this mean for sales managers responsible for salespeople covering both ends of the spectrum? First, it implies a need for different kinds of goal setting, skills training and management oversight. If such plans are to be used as a motivator and director of action, they need different compensation plans.
For account maintenance, one would assume greater value in a team selling approach, where the inside sales, specialists and customer service part of the team pick up much of the maintenance work load. Exploring account acquisition activities, team play might not be quite as important. Rather than inside sales, the team might consist of telesales prospectors, marketing staff and, perhaps, a business development group could play pivotal roles in opening accounts.
Going back to the question of commissions, allow me to ask: Are our commissions really necessary for account maintenance? And, are they structured properly to drive behaviors and properly reward hunters for their efforts? Is there a divide between reality and your compensation plan?
Are commissions the best alternative for motivating employees?
I once made the statement, “I wish everyone in the world could work on a commission basis.” Many of my friends and clients in this industry feel the same way. But, we as a group tend to be entrepreneurs, business people and salespeople with years of conditioning on the merits of being paid for our success (or similarly paying for our mistakes.) Most of us also happen to be baby boomers. But, not everyone feels the same way.
After speaking with young people at various job fairs and during client interview sessions, I have discovered not everyone shares my view. In fact, very few millennials embrace the whole commission concept. Many steer clear of selling roles based entirely on their fear of uncertainty of the model. Further, those who do end up accepting commissioned roles do so only after a great deal of “selling” on the part of their new employer and sometimes end up with multi-year guarantees. These guarantees basically void the entire concept of commission as a motivator.
For wholesalers, this pushes forward the question: Does the commission side of our compensation plan exclude qualified candidates who could make a difference in our business?
Do commissions drive quantity or quality of sales work?
In his book “Drive: The Surprising Truth About What Motivates Us,” Daniel Pink lays out new research indicating creative knowledge-based work is not enhanced by monetary rewards. This caused us to ponder and re-evaluate the concept of commissions.
Most distributors struggle to answer the question of why they cannot get more than a dozen sales calls per day from their team. Sales managers grow frustrated because the actual selling time of their charges hovers in the sub-20 percent range. They push for more, yet experience shows their push only results in lower quality drop-by calls with little or no impact to bottom-line growth. Quantity of selling work remains the same.
Working smarter not harder might appear to be the motto of this lack of quantity, so let’s review the quality aspect. Does a commission plan incent sellers to actively promote strategic new products where a great deal of missionary work is required before the first sale is made? I believe the answer is often no. How about this point: Can the need for immediate commission dollars impact sales with a long sales cycle? Interviews with distributor sales managers point to the opposite taking place; long term opportunities are constantly lost in the shuffle.
I really want to know. Quality or quantity? Email, call or send a carrier pigeon flittering off to Iowa.
Are sellers distracted by commissions?
Reviewing the account lists of hundreds of distributor salespeople, I am amazed at the number of accounts assigned to their charge. It’s not uncommon to see a seller with over 200 accounts on their list. Obviously, they don’t have time to properly service massive numbers of customers. Research points to something like 90 percent of selling results come from the top 40, yet the numbers continue to creep upwards.
Conscientious sellers make attempts to work on some of these underserved accounts. But, for the most part, their efforts to influence buyers with a couple of calls each year produce limited, if any, results. However, the time invested is a major distraction to the real opportunities presented by their top accounts. Conversely, less engaged sellers simply use the long list as a way of staking a claim to business in the unlikely event the customer accidentally makes a purchase.
Our time together is coming to a close . . .
Going back to a point already made, I personally love the concept of commissions. Paying people for performance seems like a good thing. At the same time, our current compensation plans are ready for a fundamental overhaul. Whether you stick with commissions or go to another plan, we are talking about something strategically important to our long-term survival. It can’t be done without thought.
I have a comprehensive list of points to consider in your compensation future. It’s yours for the asking. Just shoot me an email. And, if you were thinking about sending me an answer to my question, “Quantity or quality,” I look forward to your comments.
Straight talk, common sense and powerful interactions all describe Frank Hurtte. Frank speaks and consults on the new reality facing distribution. He blogs on “The Distributor Channel” at http://thedistributorchannel.blogspot.com. Contact River Heights Consulting at email@example.com or via phone at (563) 514-1104.
This article originally appeared in the March/April 2017 issue of Industrial Supply magazine. Copyright 2017, Direct Business Media.