Outside sales reps are ruthlessly efficient at maximizing their incomes while minimizing their efforts.  Two common laments from sales management are, "How do I get control over my sales people?," and, "No matter what new products we stock or market, they still sell what they are comfortable with, and to whom they are comfortable with."  Read more for a sales compensation plan that lets you gain control.

The ones who swing for the fences usually play for losers. Sammy Sosa, Mark McGwire and Ken Griffey Jr., the dominant sluggers of today, all play for teams that lose more games than they win. How does this relate to distribution? With sales channels available to distributors that complement or work in parallel with outside sales, the companies that combine these channels most effectively will be the winners, much like the baseball teams that can get their best hitters to lay down a sacrifice bunt when the team needs them to.

This article is not about the emergence of new sales channels that are cheaper and in some cases more effective than traditional outside sales. That is a topic that would require many more pages. I'll leave that to the Mike Marks' and Bruce Merrifield's of the world. This article is about outside sales compensation.

The purpose of the analogy at the beginning of this article is to draw attention to the fact that if you think getting your sales people in line with your company's objectives and strategy is difficult now, wait a couple years. I'm already getting calls and working with clients on how an outside sales representative should be compensated when his largest account, 30 - 60% of his total gross profit, starts placing 90% of their orders on-line using product and pricing information found on the company website. The crux of the problem is that the whole point of making significant investments in e-commerce is to produce a very low cost per transaction sales channel. If we pay normal commissions for these sales to an outside sales rep, then we have added costs to the channel instead of taken them out. The other side of the coin is that e-commerce will not succeed without the support of outside sales, and if e-commerce is going to be taking money out of a sales rep's pocket you can bet you won't have his support. An outside sales rep can sabotage e-commerce faster then you can say HFC-134a refrigerant. Imagine your customer's reaction when your trusted sales rep off- handedly states that, "the website's great - we're only losing a couple of orders a day and once we get the security issues worked out it'll be the best thing since the internal combustion engine." This issue may seem as relevant to you now as the melting of the arctic ice fields, but it is on the horizon, and the longer sales compensation goes unaddressed, the more painful and disruptive it will be.

The reason that I know the e-commerce scenario illustrated above is going to create problems is that it ties directly into the biggest compensation concern we're all dealing with today: "How do I get control over my sales people?" This question dominates my conversations with HVAC and other industrial distributors. They follow up that lament with, "no matter what new products we stock or market, they still sell what they are comfortable with, and to whom they are comfortable with." Well the answer is, as long as you are using a traditional commission program, you will never have control over your sales guys. Traditional commission programs do not differentiate gross profit dollars; a dollar from product X to customer Y pays the rep the same as product A to customer B. One thing I can assure you is that outside sales reps are ruthlessly efficient at maximizing their incomes while minimizing their efforts.

The Two Most Common Laments:

1. "How do I get control over my sales people?"
2. "No matter what new products we stock or market, they still sell what they are comfortable with, and to whom they are comfortable with."

Gain Control

Now that we've gotten that out of the way, the rest of this article will describe a sales compensation approach that has been proven to obtain control over sales reps. In so doing, it allows sales to work in concert with other sales channels and functional areas in pursuit of corporate objectives. I want to disclose now that there is no magic formula or "best" incentive structure. Of all the work I've done consulting distributors on sales compensation, no resulting programs have ever been the same. I can say there is an 'approach' that we have found successful in generating managerial leverage over sales reps and this will be described in the following paragraphs.

When approaching the sales compensation issue, start with identifying the activities and results for which you want to reward your sales reps. This should directly correlate with your company's strategy. Generally, these are along the lines of increasing the customer base, further penetrating existing accounts, or focusing on selling products from identified key suppliers. These represent the gross profit dollars that are more valuable than others.

The second step in the sales compensation redesign process is to attempt to gather compensation expense data for your industry. This information is commonly found in PAR reports and will give you an idea of what you can afford to pay. If the industry is paying 26% of gross profit in sales expense, this percentage should give you a ballpark number to work toward. It can be just as unprofitable to be below this percentage as it is to be above it. The repercussions of being above are pretty obvious - fewer dollars are falling to the bottom line than in competing companies because of higher than average compensation expense. The repercussions of being below are less obvious. Turnover is the key here. If you are experiencing high turnover, it is because you are under-paying when compared to the market. If you are not experiencing high turnover, you probably do not have "A Players."

Once the data gathering is complete, we know what we need to pay, as well as which gross profit dollars are the most valuable. It's now time to put it all together and develop a sales incentive program. Based on the two most common laments stated earlier, there should be two primary objectives when structuring a new sales compensation program. One, to change the sales reps' perception that they are working for the customer instead of for your company, and, two, to refocus reps on obtaining the most coveted sales dollars.

Steps of Sales Compensation Development:

• Identify the activities and results for which you want to reward sales reps.
• Gather compensation expense data for the industry.
• Develop a sales incentive program.
  • Shift the sales reps' perception so they know they're working for the company rather than the customer.
  • Refocus reps on obtaining the most coveted sales dollars.

Sales Incentive Program, Objective One

My experience is that the best way to accomplish the first objective is to establish a base salary that represents greater than 50% of a sales rep's total compensation. Although this may sound like it is exposing your company to increased expense exposure, it usually doesn't. If you were to look at each rep's monthly compensation, you would find that 80% of his lowest month's earnings is still greater than 50% of his average monthly earnings. In reality, 50% of his compensation is not really at risk. By rolling these dollars into a salary, you are making the majority of a rep's income dependent on his employment with your company and not on whether he obtains a purchase order. This salary will generally run from $30,000 to $60,000 annually and is dependent, as yours and other employees' salaries are, on continued employment and adherence to company policy.

Sales Incentive Program, Objective Two

There are many ways to address objective two. What we are attempting to do here is reward sales reps more for obtaining highly valued sales dollars than less valued sales dollars. The two most common methods to accomplish this are a multi-tiered commission structure or a Weighted Factor Bonus type approach, where incentives are calculated as a percent of base salary. There are pros and cons for each method.

The benefit of a tiered commission structure is that it is generally less of a structural change from what currently exists. The tiered commission structure also has no cap and allows sales reps to realize significant earnings when those "bluebirds of happiness" come by. The negative side of a tiered commission structure is that if a sales rep's product or customer mix changes significantly, your company is exposed to paying a higher percent of sales in compensation expense. Most often, our clients view this as a problem they would like to have.

A Weighted Factor Bonus Program (WFBP) is usually seen as the end of the sales compensation evolutionary cycle. From a company's perspective, it forces good overall performance in two or three categories and has the flexibility to change regularly as conditions dictate. It pays a percent of salary bonus which limits a company's compensation expense; and because the company picks the factors, the company has complete control. The reason that this is considered the end of the evolutionary cycle is because this program must be phased in slowly. The biggest failures I know of have occurred when a sales manager heard about this program in a seminar and then replaced his traditional commission program by implementing a WFBP immediately. This type of structure is very unpopular with sales reps who do not understand the changing economics of the industry nor how these changes affect their role.

Education of sales reps must precede the development and implementation of a WFBP. The key concept to get across is that an outside sales rep cannot expect to receive the large incomes they are currently receiving for replenishment type transactions or "farming." It needs to be clear that this is not some vengeful arbitrary decision - it is a new fact of life in distribution. The majority of "value added" activities currently being performed by the sales rep need to be allocated to less expensive functions such as customer service reps and product specialists. The sales reps, then, need to become the "hunter." This is just a fact in the new economics of distribution.

We all know that distribution and the way we do business is changing. Sales compensation programs also need to change. Even though the process may not be easy, the longer you wait, the more painful it will be. This article briefly touched on two factors that are absolutely crucial to the success of any new sales compensation program: (1) the existence of a company strategy, and (2) strong sales management. The best, most thought out program in the world will most definitely fail in their absence. Get a plan and get a man (or woman) who will develop a culture that embraces change. This will get your sales people in line with your company's objectives and strategy. This is the key to surviving in the ever-changing world of distribution today. And it will mean that soon the homerun hitters and the winning team will go hand in hand.

About Michael Emerson and Indian River Consulting Group, LLC.

Michael Emerson is the Compensation Specialist at Indian River Consulting Group, a company well known for its founder and Principal, J. Michael Marks, a noted distribution industry expert. Mike Emerson is responsible for helping clients design and model incentive and compensation structures in line with company strategy. His end goal is a win-win situation for both the company and the employees. To accomplish this, he custom tailors each project to the client's needs. Mike has worked with dozens of clients in many different areas of the distribution industry. His clients have been both privately held and publicly traded ranging in size from 20 million to 2 billion in annual revenues. Restructuring the compensation package of the outside sales function is Mike's specialty. Whether it be aligning their income more along the lines of market value, or getting them to focus on selling particular products, sell to certain customers, or sell larger quantities at a higher margin, Mike has been there, done that. Mike also has expertise in structuring compensation for sales teams, inside sales, gains sharing programs, executive and management incentives, and establishing salary grades throughout entire companies. He has a Bachelor degree in Economics from the University of Washington and is a member of the American Compensation Association. Indian River Consulting Group, based in Melbourne, Florida, leads the distribution industry in consulting services and seminar education. Find out more at the web site, www.ircg.com.

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