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Compensation

Are Your Sales Representatives Satisfied?
By Mike Emerson

A recent survey of wholesale distributors by Robert W. Baird and Company found that nearly a third of distributors are dissatisfied with their sales compensation programs. This finding is very consistent with my experience over the last dozen or so years and was my motivation behind writing the book, Effective Sales Incentive Design for Distributors: What’s the Right Plan?

In our first sales compensation book, What’s Your Plan? Smart Salesforce Compensation in Wholesale Distribution, our focus was to link sales compensation structures with overall company performance. That book’s main point was how important it is for a company’s strategy to align with its sales compensation program. However, the book was deficient in describing how to accomplish this at an actionable level of detail. Our new book, What’s the Right Plan?, attempts to address this deficiency.

I believe there are multiple reasons a great number of dealers or distributors endure suboptimal sales compensation programs. One reason is inertia. Although a dealer knows there are issues with its sales compensation program, the trepidation associated with changing it is too great. Changing sales compensation programs is disruptive, and the more time it has been since the previous change, the greater the likely disruption. Dealers simply weigh the potential negative impact of the disruptions – key sales rep defections, loss of focus – and decide to live with the status quo.

Another reason dissatisfied dealers are reluctant to change their sales compensation program is that they do not have a clear understanding of alternatives. Dealers that see the drawbacks of paying their sales representatives with commissions struggle to identify different commission options they feel will create the missing alignment with their business objectives or commercial deficiencies. They see how a commission program promotes maintenance behaviors in its sales force and, being unaware of different incentive structures like multipliers and bonuses, have no better alternatives than being dissatisfied.

Lastly, and most importantly, some dealers lack the strategic clarity required to make a sales compensation program change. An effective sales compensation program is one that ties incentive pay to the most critical business results desired by the company and required of the sales force. The market driven evolution of many dealerships, however, has caused confusion or a loss of clarity on the few critical drivers of their success.

Many MHEDA members recognize the importance of the customer lifecycle to their long-term success. Parts and service are very significant parts of their bottom lines, and selling the initial piece of equipment makes capitalizing on these revenue streams much easier. Unfortunately, the gross profits in new equipment have gotten ridiculously low, which has resulted in dealers expanding their offerings into nontraditional niche markets. Over time, some dealers have so broadened their offerings and the markets they’re targeting that even with specialists and separate sales forces, they dilute the focus necessary.

A good test of whether sufficient strategic clarity exists to realize value from changing a sales compensation program is to informally survey employees or managers on the two or three most important things the company is trying to accomplish. If there are as many answers as people providing them, you should defer redesigning the sales incentives and instead make your initial focus gaining strategic clarity. This process should start from the outside and work inward.

The starting point is creating customer segments based on their needs and not what you would like to sell them. The next step consists of taking a sober view of how your company is positioned to meet these needs relative to your competitors and targeting those customer segments where customer needs best line up with your capabilities. Including an appropriate perspective of the profitability each segment represents should also be part of the deliberations, but be careful to not assume current profitability; look at potential profitability as well. In other words, when assessing profitability, look at potential means to improve profitability by reducing selling costs through the use of lower cost sales channels or the economies of scale realized from greater volumes.

One dealer we know of that went through the process of clearly defining its strategic objectives and then commenced the redesign of its sales compensation program, has realized above-market results. When it took an outside-in view, it concluded that the company had an excellent service reputation within the markets it served, but that service revenues had been declining for two reasons. One was that many customers were buying off national contracts and were limited in who they could use to provide service. The second was that the sales compensation program rewarded sales reps for gross profit dollar generation and sales reps were focused on other revenue streams, mainly used and rental, because they generated higher commissions.

Strategically, this company realized it needed to ensure that its sales organization was most focused on a segment of customers with high volume, but that were also able to make service decisions locally. On the sales incentive issue, the company recognized that it needed to somehow tie incentives to balanced sales instead of how profitable each transaction was.

To accomplish the incentive alignment, the dealer used a commission multiplier approach. It selected this approach because commission was well ingrained in the company’s culture and because it was consistent with industry practices.

The approach it adopted provided a base commission rate on total gross profit with the rate increasing as separate product and service specific volume goals were achieved. It found this approach ideal because it rewarded sales reps who sold across the company’s offerings instead of cherry picking the most commissionable pieces of business. The structure ensured this because the commission rate was not applied to each individual transaction, but to total overall dollars, with the commission rate dependent on how many distinct product category goals were attained. A sales rep who wrote a ton of business but only in two categories would realize a much lower commission rate than one who sold across all the offerings.

You don’t have to live with an unsatisfactory sales compensation program. Knowing where to start and what the options are is the key. As for the first cause of dealers tolerating a suboptimal sales incentive program – inertia –remember, your competitors are reading this article, too.

Mike Emerson is a partner with Indian River Consulting Group, Melbourne, Fla. He is responsible for managing the firm’s compensation practice and also runs many of its channel and research projects.