Wednesday, March 29, 2017

More questions about commissions and sales compensation

A couple of weeks ago, one of our articles covering sales compensation and commissions ran in two major industry
trade publications.  Never in the previous 12 years of writing for this type of publication have we received anything even vaguely resembling the outpouring of thoughts and ideas.  Thinking more about the situation, it seems our industry is reconsidering and re-evaluating a six-decade old compensation plan.

Many readers asked us to expound on the topic.  This is an attempt to provide some additional thoughts on the topic. 

Do you pay commission on accounts where the salesperson does very little work?
One of the biggest lies in our industry comes by way of the assigned account list.  Sometimes it’s geographical and other times it comes under the heading of “covering all the available accounts," but we continue to see sellers responsible for 100, 150 and even 250 customers.  Either way, it’s more than they can physically support, influence or actively promote your products.  Let’s explore the situation.

First, based on experience in the industry, it’s really hard to influence an account with anything much less than ten or twelve calls per year.  Additionally, most major accounts require many more: perhaps pushing as many as 30 calls a year to service and support.  With the average distributor sales person making around 12-15 calls per week, the numbers don’t add up.  Yet, commissions are paid.

Certainly, you might expect orders from the “long tale” customer list.  Occasionally the orders can be large enough to garner the attention of the seller; resulting in services provided to the customer.  However, most of the time these dribble in small value purchases without any value added by the seller.  Do you really want or need to pay commission?  Are the commissions justified?  Are the commissions serving the intended purpose of driving behaviors or compensating for sales efforts?

In a team based environment, others could be plugged into occasionally servicing inactive accounts.  Specialists, applications engineers and others might be directed to an unassigned account with a technical issue.   Further, a business development specialist might be trained to measure the potential and partnerability of these accounts for later official assignment or an alternative selling channel – web store, telesales, etc.  

Are some accounts “easier” to sell than others?  Is the commission rate the same?
I believe accounts with long term ongoing business are easier to sell than customers who were just introduced to your company.  Extending on this premise, customers who have “standardized” on one of your exclusive lines are locked in for the extended future; this type of sale is practically automatic.  And, customers where you have embedded services (i.e. crib maintenance, engineering support, training and other) will continue to send orders your way for a very long time.  We call this “flow business,”  The commission is often the same as new yet it is harder to develop the business.

Compounding matters, it is often the practice to reassign existing accounts with an existing book of business to sellers.  Typically when this happens, the seller gets an instantaneous raise.  Many times this includes flow business.  It has nothing to do with the work of the seller and instead is merely a function of being assigned the account.  While some sellers might deserve a raise for their loyalty, devotion to the company’s selling process and a myriad of other things, I wonder if a boost in base pay wouldn’t send a better message. 

Tied to the heading of “easier” business, let’s explore another scenario. 

Do you pay commissions on product which are sold via the internet?
Distributors across the country are adding internet based selling tools.  Amazon-like web stores are popping up across the country.  Employing marketing tactics and search engine optimization plans traffic is beginning to pick up.  Proving the plans are working, many distributors have seen significant growth in their e-commerce business.  By and large, local customers are more likely to channel their orders to the distributor.  Further, many of the customers are assigned accounts.  The question becomes, do purchases made via the web justify commission or the same commission as “regular” business?  Let’s explore an example. 

The web store runs a promotion on a new product; something the customer has never purchased. Perusing the site, the customer reads the specifications and decides to place an order for the product. No salesperson has presented the product, yet an order manifests itself. While a case could be made for the salesperson’s efforts in supporting the product after the purchase, a legion of distributors have mechanisms in place for such support. Is this a commissionable sale?  

I believe this will be a much more common scenario over the next few years.  Still the question remains, does your commission plan really align itself with longer ranging company goals?

The 800 pound Gorilla off to the side.
Does your compensation plan encourage the right behavior?  We’ve lumped this group together for additional thought and discussion.  Let’s review their potential impact.

Do they see the customers they call on as belonging to them or to the company? 
Experience shows sellers tend to see customers as “theirs."  I can recall a litany of cases where the salesperson related how they “saved” their accounts from the hassles of some new policy.  In one instance, to improve a downward trend in gross margin performance, the distributor invested in one of the wholesale industry’s best known pricing process.  After an otherwise successful year long roll out, it was noted that two sellers had unilaterally exempted most of their accounts from system pricing.  Excuses were flimsy and all pointed to a situation where every customer in these two gentlemen's territory were exceedingly price sensitive. 

Speaking off line, one of the sellers explained to me that he “Worked for the customer and because these customers were his, he would do everything in his power to protect them from unscrupulous plans coming down from management…”  The implied threat was that if management didn’t leave him alone he would take his customers and go to another company. 

Not too strangely, this same salesperson was notorious for hoarding customer information including contact names and opportunities identified.  He claimed this was his “job security” (his words.)  While it’s impossible to determine if the commission plan (he was 100 percent commission) was the motivator for this outlook, it probably didn’t help matters.

Of course, this isn’t the only issue tied to actual performance. 

Do salespeople “protect” their account information from the rest of the team?
In a team-centric selling environment, withholding information from the rest of the team not only hampers the overall strategy, but potentially robs the customer of added services.  We regularly discover sellers who are leery of introducing product specialists and other necessary team members to their accounts.  They lay down a barrage of excuses every time a product specialists asks for a direct audience with the customer.  Joint calls are postponed, canceled or simply refused. 

Further, the seller insists each specialist’s (and other team member’s) work follow their own personal process rather than the company dictated sales model.  Heaven forbid, a mistake is made by any member of the team, it becomes a long lasting reinforcement of their need to be totally at the center of any customer interaction with their customers. 

I don’t want marketing to bug my customers with spam emails and other crap.
For years, marketing efforts in wholesale distribution were clunky.  Marketing endeavors focused on sending out questionably written newsletters, customer events and coming up with occasional product specials.  Happily, those days are mostly behind us.  Marketing teams are generating leads, gathering customer purchase preferences and some other really cool stuff.  This is also a team based activity and requires critical data generally held by the sales team.

The trouble comes when even rudimentary data like customer contact email addresses and titles are poorly maintained and slow in coming.  Reports back from the field indicate much of the data flowing back to the marketing group is poor; lots of misspelled names, bad email addresses and positions at the customer are not clearly identified.  While I don’t believe all of this is malicious, I do believe there is no commission driven motivation for this behavior, yet it is of strategic importance. 

Do they nurture and help cultivate relationships with strategic vendors?
Have you ever heard the comment, "I’m not making joint calls with that guy?"  If not, you’re one of the lucky few.  I hear it far too often.  Each time the comment comes with a long tale of missing professional demeanor, trust issues or a personal commitment to another product line/manufacturer.   Often times, these issues happened years ago; however, if they didn't, one should ask whether management has the right to determine which supply partners are pushed forward by the company’s sales department.

If commissions are paid regardless of the status of the supply partner, they provide no motivating direction to the seller.  If management is willing to overlook this type of issue, strategically important opportunities fall by the wayside.  Why?  Increasingly, our supply partners look for fast results-- we can no longer wait for new product lines or technologies to trickle through a slow and time consuming sales process. 

Summing this up…
From where I sit, the commission structures most commonly used in our world are flawed.  In some instances, they are terribly unsuited and archaic.  With companies striving for teamwork, the plans in place may actually be doing something completely different.  Taking technology and customer buying styles into consideration, many current compensation plans are already or soon will be obsolete. 

I would love to hear your feedback.  Shoot me a message or drop a comment.  Stay tuned for more information on this topic as we've barely scratched the surface.  We’ve only worked our way through about 30 percent of the comments from others.  There will be plenty more examples worth sharing.  Maybe one of them is yours


jhausch said...

Hi Frank,

Great article(s)

Any empirical data showing what compensation plans result in:

-best long term sales growth?
-best rep retention?
-least amount of accounting?
-best net income to ownership?
-best resilience thru a down turn?

I know, I know - almost impossible to answer those questions. Just food for thought.


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