Designing a Compensation Plan for Distributor Salespeople
Edition: March 2003 - Vol 11 Number 03
Author: John Monoky and Tom Hamway
How should distributor salespeople be compensated?
We’re hesitant to ask, “How do we compensate distributor salespeople for the greatest impact?” We’d be more comfortable discussing how to design a sales compensation plan that will offer your sales force incentive to focus on the behaviors that are consistent with what it takes to achieve the overall goals of the organization.
To build such a compensation plan you must be very clear on a few “minor” issues:
· What are your targeted market segments?
· What is your strategy to succeed in those market segments?
· Who are the “strategic suppliers” that your organization has chosen to partner with?
· Who are your most important customers? Your least important customers?
· Have your sales territories been structured in such a way to support a focus on the most important customers (territories defined in terms of a list of customers, rather than a geographic definition with a “hunting license” to add at will)?
· Has the role of your sales force been clearly defined in terms of the functions the seller must perform to implement strategy and the competencies necessary to be able to perform the stated functions? If there are different roles (such as a seller focused on targeted accounts vs. a seller focused on maintaining/servicing key accounts), the role and compensation should be designed to reflect the varied nature of the jobs at hand.
Once these strategic questions have been addressed, a compensation plan can be developed that is simple, flexible, sustainable and focused on incentives for the desired activities. The results will lead to overall success for the organization, as opposed to the final success of the sales rep, whether that is in the best interests of the sales organization or not. (If the strategic decisions are not the foundation of what salespeople do, the likelihood of frequent changes in the sales compensation plan increase greatly.)
To illustrate this point, consider that many distributor salespeople have geographically defined sales territories with a portfolio of customers, which, if managed appropriately, would far exceed the available time of any seller.
For simplicity’s sake, let’s say the rep has 100 assigned accounts with the top 20 representing 80 percent of the total GP dollars in the territory, the next 20 accounts representing the next 15 percent of the total and the bottom 60 representing the bottom 5 percent of total GP dollars.
Arguably, the bottom 60 would not be profitable to the company, taking into account all selling costs, order processing costs (stock, non-stock, back orders, etc.), freight, accounts receivables, and so on. Yet companies continue to pay the same commission (in many cases) on these accounts as they do on the top 20, which arguably represent in excess of 100 percent of the net profit contribution. This same argument could easily be applied to the suppliers on which the salespeople focus. In any event, why ask reps to call on these customers, unless, of course, these customers truly have the potential to be in the key account category (that is, the top 20). Worse yet, why pay an incentive for them to do so?
In our experience working with distributors, we have found that sales compensation plans are traditionally based on a percentage of total gross profit dollars that accrue from the assigned customers, with no consideration to the priority of different markets, customers, suppliers or products. The obvious problem here is that such plans fail to provide the reps any explicit direction in terms of which markets, customers or suppliers they should pursue. Additionally, they don’t affect the types of activities the salesperson is doing. They basically say, “Everything is important. Get more gross profit dollars!”
The Sales Performance Model
Imagine how powerful your company’s selling proposition would be if your company could tell your best customers that a significant percentage of their assigned sales rep’s compensation was contingent upon his or her ability to provide measurable, documented cost savings through efforts to improve the customer’s processes? How often has your company’s management team wondered how they will achieve the sales growth expectations of your best suppliers, short of setting quotas, buying stock and hoping for the best? What if they were able to tell your company’s “strategic suppliers” that they have a compensation plan that emphasizes their line as a means of reinforcing the stated message? Those suppliers’ confidence in your company’s ability to deliver on promises would be greatly enhanced.
Taking all these factors into consideration, a successful sales compensation plan should:
· “Incent” salespeople to focus on the customers who are most important to the organization and to de-emphasize those who are less important (lower commission rate/no commission).
· Place greater emphasis on growth in GP dollars than on retention of them.
· Emphasize the lines of core suppliers (stock or non-stock), and de-emphasize non-core suppliers and non-stocks from non-stock suppliers.
· Emphasize the completion of tasks that will contribute to success with “strategic suppliers” in key and target customers.
· Place significant emphasis in the form of at-risk incentive dollars on the ability of the salesperson to deliver quantifiable, documented cost savings through process improvement to the customer. How better to differentiate your organization, which will add value and prove your importance to the customer? How powerful would it be if every time you delivered a documented cost saving to the customer, all key buying influences were copied on the letter and sent to the buyer.
Do not lose sight of the importance of results. Rewarding reps for doing the right things along the way is clearly the right thing to do. But if, ultimately, doing the right things fails to lead to results, then the rep’s ability to succeed must be questioned. Another possibility to be explored is that the rep has been set up to fail as a result of the accounts he or she is managing.
It’s very important to keep in mind that the sales compensation plan is a tool to augment the sales management task. It is not a replacement for it.
There is no “cookie cutter” plan that will work equally well for all organizations. It’s critical that whatever is important to your organization be reflected in your sales compensation plan. Don’t let yourself develop a compensation plan that is ineffective simply because it’s easy to administer. Nor should it be so complicated that the sellers don’t have a clear understanding of the measures of success.
Dr. John Monoky is founder and president of Monoky Associates, Toledo, Ohio, a management, consulting and training firm focused primarily on strategic marketing and sales management. He is Adjunct Professor at the University of Michigan. An active trainer, he has served on the faculty of executive development programs at the University of Michigan, Syracuse University, Pennsylvania State University, Texas A&M, Ohio State University, the University of Alabama, Queen’s University and the University of Toledo. His primary training, consulting and research interests are focused on business-to-business marketing, sales management and territory management.
Tom Hamway is a consultant with Monoky Associates. He has delivered marketing, sales management and territory management programs for the Executive Education program at the University of Toledo and the Executive Development Program at the University of Delaware.
Monoky and Hamway can be reached at 419/536-7636 or email@example.com.
Keeping Reps on Target
Why management is on the hot seat to guide reps in the right direction.
Reps most often select their key accounts based on the commission associated with them. But while these accounts may be good for the rep, are they good for the company? Who’s to decide? And how can the reps’ best interests be brought in line with those of the company?
To get answers to these questions, Repertoire spoke with John Monoky, founder and president of Monoky Associates based in Toledo, Ohio – a management, consulting and training firm focused primarily on strategic marketing and sales management.
Monoky was recently scheduled to give two presentations at the HIDA Executive Forum in Bonita Springs, Fla.: “Compensation Strategies for the Independent Distributor Sales Force” and “Managing Channels for Results.”
Repertoire: How does a rep identify his or her most important customers?
Monoky: He or she should identify such customers based on whomever the company thinks are the most important customers, as determined by gross margin, profitability and so on. The point is, the seller – or sales rep – should not make that decision. If he is allowed to do so, chances are he will go with his comfort zone.
In the old model, the company would say to the rep, “You find the business; we’ll make it good.” Today, it should be: “Here’s what ‘good’ looks like. Now go and find it.” In this model, management is on the hot seat to tell the reps what they should do.
Repertoire: How can sales territories be set up to support a focus on the company’s most important customers? How can they be based on anything other than geography?
Monoky: Geography will always be a component of territories. But historically, companies rely solely on it. Although it minimizes the reps’ travel and expenses, it doesn’t necessarily mean that the company is getting its best type of sellers in front of its best type of customers. When you simply assign a rep a [geographic area], you allow him or her to call on the customers he or she is comfortable calling on, and sell what he or she is comfortable selling.
Again, we’re saying that it’s incumbent on management to tell its reps what “good” looks like. Management has to fill the reps in on what market segments and product mix they’re going after.
The most effective territories are set up with multiple structures. In some places, you might have geographic sellers (where the square mileage is large, but the customers are small and/or scattered). In some territories, some reps call only on key accounts – maybe only six or eight of them. In some cases, you have new-business developers.
We advise our clients to play off all these models. It’s like a basketball team. You’ve got a point guard, shooting guard, etc. Not all the team members look alike and you don’t evaluate them the same way. You don’t pay them the same way either.
Repertoire: You’ve made the case that sales reps need a broad range of skills to be successful. They have to have knowledge of customer processes, an understanding of the competition, presentation skills and process improvement skills. Is it realistic to expect reps to have this broad an array of skills?
Monoky: Most of it is common sense. The way for the rep to succeed is to act as if he or she is running his or her own business. Can you imagine anyone selling randomly door-to-door? A rep has less than 150 selling days a year. If they have 200 accounts and they treat each of them equally, there’s a problem. What happens is that your better customers always subsidize your lesser ones. Here’s the other kicker: Most sales calls are spent where the rep already has the business, not on other accounts with the potential to become even better customers.
Repertoire: How can the rep successfully identify which accounts have the potential to grow to be important in the future? What’s the incentive for the rep to pursue that customer today?
Monoky: Some of it is an educated guess, no question about it. And you’ll miss some, no question. That’s why on target accounts, the rep should get management buy-in: “Is this an account I want to go to or not?” Reps understand this. And your fulfillment people understand it even better. They know that the majority of incoming customer service calls are from customers you shouldn’t be doing business with.
Repertoire: You believe that sellers should place greater emphasis on growth rather than retention of business. Isn’t it true that it’s more cost-effective (and profitable) to maintain customers than to continually beat the bushes for new ones?
Monoky: Getting a customer is the seller’s role, but keeping a customer is a business role. After a point in time, the majority of business is done not by the sales rep. Yes, it’s true that a bird in the hand is better than two that aren’t. But the reality is if reps focus on getting and keeping accounts, eventually they won’t have any time to get any more.
Part of this is the company’s challenge to build an infrastructure to support the seller once he or she is successful in getting a new account. Maybe it’s establishing an outside/inside sales team, which splits commissions. I’ve seen a lot of movement in this direction. It doesn’t happen easily and your salespeople may sabotage it – unless they understand it.
Implementing the Plan:
· Focus on key and target accounts, de-emphasize all others.
· Focus on “strategic suppliers.”
· Establish relationships throughout the buying center and at all levels.
· Add value through process improvement as a means to grow your gross profit.
Efforts Required to Implement Strategy:
· Profiling of key and target accounts.
· Planning to achieve gross profit objectives by core supplier.
· Planning to achieve cost savings for the customer.
· Documentation of process improvements and cost savings.
· Activities leading to relationships throughout the buying center.
Competencies Required to Implement Strategy:
· Knowledge of customer processes.
· Knowledge of customer buying center and buying process.
· Understanding of competition.
· Knowledge of company processes.
· Knowledge of core product lines and their application.
· Knowledge of the costs associated with customer and company process.
· Presentation skills.
· Negotiating skills.
· Process improvement skills.
· Documentation of details.
· Measurable cost savings to key customers.
· GP dollar growth in key and target customers.
· GP dollar growth in strategic supplier lines.
Source: Monoky Associates.