In the introduction to AED's latest sales compensation report, distribution consultant Mike Marks poses the following question: If you had to build your sales force from scratch, what would it look like? Would it end up looking like it does now?

These days, more and more construction equipment dealership executives are saying no, it wouldn't. And many industry observers-including accountants and sales trainers- say it shouldn't. Margins on the sale of new equipment are razor thin, national rental chains are putting increasing downward pressure on rates, and the Internet is becoming an increasingly important-and cost-effective sales channel. In the face of these realities, Marks says, dealer executives should take a cold, hard look at the cost of their sales organizations and, in particular, how they compensate their equipment sales reps.

"Years ago, we all knew that growth was available in the industry and that we could best achieve this by representing the 'right' suppliers with strong sales people," Marks writes in the introduction to AED's 1999 Sales Compensation Study Report. "Sales people owned the customers, and relationship management was the key competitive advantage. In this situation a dealer could afford to pay lots of money to hire a sales rep away from a competitor because margins were strong and incremental growth was even better."

Those days are coming to a close, thanks to industry consolidation, the burgeoning growth of rentals as a distribution channel, the growth in the market for used equipment, e-commerce and the shift in profit growth from new equipment to product support. As a result, says Marks, the industry should abandon its "Wild West approach" to sales compensation, which focuses primarily on the traditional sales rep as the primary contact with the customer. Instead, distributors should favor activity plans, resource targeting, performance reviews and team-selling approaches that enable a dealership to deliver the products and services customers value most- and that free up additional margin dollars without increasing the dealership's expenses.

Team selling, according to Marks, is a good example of how a dealer might choose a different configuration for his sales force if he were designing it from scratch. Let's say a dealership has four sales reps, each doing a fair amount of his or her support work. If one of the reps leaves, the dealer might want to consider expanding the territories of the remaining three but adding a lower-paid employee whose main job focus is to provide support for the reps. The dealership has lowered its costs, and the reps are making more money and spending more of their time engaged in higher-level functions-which is what you pay them to do.

Moving away from the industry's traditional compensation structure, says Marks, also would go a long way toward correcting some inequities that have crept into the system.

"As an industry we do pay 'A' players 'A' money, but we also frequently pay 'A' money to 'C' and 'D' players," Marks says. "The large number of sales people who are dramatically overpaid (in terms of the volume generated) is a reflection of old deals from the old days. Companies that continue to carry this burden are essentially mortgaging their futures with high costs for little contribution. A sales manager needs to think carefully about the pain of confronting this problem and the consequences of delay."

Certified public accountant Garry Bartecki, director of distributor services in the Chicago office of international consulting and accounting firm BDO Seidman, has followed the construction equipment industry for nearly two decades- and agrees. "Times have changed, and it's time to start looking at some different ways of doing things," he says. "The whole makeup of the dealership should be turned upside-down, because the primary kingpins up to this point-the equipment salesmen-don't make any money for us. The guys who are going to make money for us going forward are the after-market guy and the rental guy-maybe they should become the most important.

"However," he acknowledges, "saying that and making it happen are two different things."

The median sales rep costs a dealership 14% of gross margin, according to the AED sales compensation survey. In their efforts to decrease this percentage, dealerships are tinkering with their compensation plans in bold ways. One owner put his four equipment sales reps on a straight salary-a novel tactic for distributors in any industry, not to mention equipment distribution.

Others dealerships are taking a page from the early days of equipment distribution, when sales reps were paid solely on commission. Instead of paying a minimal base salary plus a commission, these dealers are replacing the base salary with a draw-a loan from the dealership to the sales rep that the sales rep repays with future commission earnings. "The draw performs the same function as the base, but it isn't a fixed wage," says management consultant Ron Slee, who's been working with equipment dealerships for three decades.

Yet another dealership has a "cafeteria plan" type of compensation structure in which the sales rep chooses one of three payment plans that vary in the amount of risk the sales rep assumes.

AN IDEA AHEAD OF ITS TIME?

The following is the story of a dealer who devised a compensation scheme that increased revenues by 8% the year it was implemented. Yet he ultimately had to abandon the plan and go back to a more traditional sales compensation scheme. Was the idea ahead of its time? You decide.

John Mordecai had been selling construction and mining equipment for Volvo dealership Golden Equipment Co. in Albuquerque, N.M., for six years when vice president Larry Linne sat him and the company's three other outside sales reps down and told them something they'd never heard before.

He said the reps would no longer receive a commission on their sales of new and used equipment and supplies. Instead of being paid a base salary of $1,500 a month plus a percentage of margin or volume, they'd receive a salary only, paid every other Thursday- just like the dealership's 54 other employees. At the end of the year, depending on how well they'd achieved their performance goals, they'd be eligible for a raise ranging from 4% to 10%.

Linne, a former Ryder Truck vice president who joined Golden Equipment three years ago, explained that he and owner Bill Golden had been studying the distribution dynamics of other mature industries. What they learned, combined with the tremendous growth in rentals of construction equipment, led them to conclude that the earning potential of the traditional equipment sales rep is no longer limitless.

"High-paid salesmen in a world that buys over the Internet and where margins have deteriorated are going to be a thing of the past," Linne said. He pointed to what's happened in car dealerships as an example of what was to come for equipment dealerships.

Margins in the automobile industry had deteriorated even before consumers were able to look for and buy cars on the Internet, bypassing the sales rep entirely, and car salesmen had been making less as a result. In many cases, sales managers and mechanics were making more than car salesmen were. Turnover among car sales reps at all but the highest-end luxury car dealerships was high. It was difficult to recruit car sales reps because of the low pay and long work hours.

Better to bite the bullet now by receiving a salary, Linne said, than be out looking for a high-paying sales job when the construction equipment industry hits its inevitable downturn.

In addition, Golden Equipment was wrestling with a situation that is becoming increasingly common in the construction equipment industry. The dealership was competing with rental operations in its market territory (which consists of most of New Mexico and the "four- corners" area where New Mexico, Colorado, Utah and Arizona meet) that were paying their sales reps much less but offering similar equipment and services.

To remain competitive, Bill Golden wanted the dealership to change from a sales- oriented organization to a marketing- and solutions- oriented organization that helps its customers serve their customers. As part of the dealership's 100-year plan, he no longer wanted his sales force to concentrate on moving the highest-priced iron; he wanted them to provide their customers with solutions-not just in equipment, but in knowledge and product support as well-to their construction problems. He believed that putting sales reps on a salary and giving them specific performance objectives designed to stimulate sales of service and equipment in all categories- light equipment as well as heavy, service as well as equipment-would make them most responsive to customer needs.

"We need to stop being so consumed with selling stuff and more interested in making the customer's customer happy," he says.

Going to salary would also free up additional margin dollars without increasing the dealership's expenses.

Instead of "account manager," Mordecai and the three other sales reps would be called "customer development managers" (CDM). A new position, "industry specialist," was created to maximize the dealership's penetration in specific industry segments such as mining and paving. A higher-salaried position than CDM, the industry specialist would serve as a consultant to customers, helping them become more competitive by educating and coaching them on the nuances of a particular industry. The dealership's aggregate and mining specialist, for example, not only accompanies the CDMs on their sales calls, he also teaches customers how to "super-pave." The dealership would support a CDM who aspired to become an industry specialist by providing training.

No cries of joy greeted Linne's announcement.

"There were some mixed feelings, because you could look at it a couple different ways," says Mordecai, who joined the dealership in 1990. "You could look at it like, 'Aw, geez, I'm going to make less this year than I did last year.' "

But the dealership had tinkered with its compensation plan before, and Mordecai was willing to try a straight salary. Bill Golden was a good man to work for. And he was doing something right, because the number of the dealership's employees had more than quadrupled since 1987, when Golden and his wife bought out two other partners, and annual revenues were ranging from $22-$25 million.

"Over the years, our company has gone through a lot of changes to keep up with the industry and not get bogged down in the same old routine, so it was just another change," Mordecai says.

But it was not to be. Despite the growth in sales revenues, Golden Equipment returned Mordecai and the other reps to a commission plan the next year. Competing dealerships whose sales reps worked on commission had tempted the CDMs with the possibility of making more money; with an outside sales force of only four, Golden Equipment couldn't afford to lose even one. Bill Golden says the CDMs also were putting more energy into talking about their pay than they were into providing solutions to customers. He's disappointed at the switch back to commission, and still supports the move to salary.

"Timing is everything, and this idea is just a bit ahead of its time," he says. "As soon as the economy slows down, the customer development managers are gonna really wish they were on salary."

For his part, sales rep John Mordecai is happy to be back on commission, reinforcing the notion that money is the ultimate motivator, and that sales reps perform best when their earnings potential is unlimited. "A commission is what makes a salesman go out and sell," Mordecai says. "The salary wasn't bad, but it kind of takes that rush out of the sale. When you're on commission, it's a little more stressful-but a little more fun."

YOU GET WHAT YOU PAY FOR

Golden Equipment's bold experiment was based on solid reasoning.

"Historically, commission is a cost-effective way to increase sales when demand for product exceeds supply, because there are always more markets you can grow into," says Mike Emerson, compensation specialist for Indian River Consulting Group in Melbourne, Fla., the same firm Mike Marks works for. "But a commission program differentiates zero in quality of sales dollars."

By putting his sales reps on straight salary, Bill Golden was putting less of their compensation at risk, which gave him more say in what business they pursued. Being paid a salary takes the pressure off the sales rep to sell, "allowing them to focus on customer service-not volume-which is what's going to keep you in business over the long haul," Emerson says.

Indeed, Golden Equipment CDM John Mordecai says that when he was on salary, he was more able to focus on a customer's true needs-not just on whether or not he was going to make a sale and how much it was going to be worth. "With a salary, you know there's always going to be a certain amount of money coming in," he says. "We were actually trying to sell the value of the equipment and the dealership-the full package the customer's going to get when he buys a piece of equipment from us. That's different than saying, 'Here's a great piece of equipment, here's a great financing package on it' and being your used-car salesman-type guy."

Even though they're back on commission, Golden Equipment's CDMs must sell a quota of business, provide a specific number of non-equipment construction solutions to customers, quote equipment of all sizes (small, medium and large), promote and sell parts and service, help in collections and follow up on marketing activities like special promotions. Linne says the dealership's newest compensation plan requires a sales rep to sell more margin than in the past year to make the same amount of commission.

"When it comes to compensation, we don't care about revenue, we don't care about the number of pieces of equipment being sold," he says. "We care only about the amount of margin you bring into the store," he says.

Golden Equipment's move to salary may have had a greater chance for success, says Emerson, if the dealership had given the CDMs the chance to buy into the company or had settled on a salary that was substantially above market. Under Golden Equipment's salary plan, the CDMs made 85% of what they'd earned the previous year-a decent amount of money, but not more than what sales reps in other Albuquerque-area dealerships were making. Emerson knows of just one other distributor-in the electronics industry-that pays its outside sales reps a salary, and that salary, he says, is "substantially above market."

TAKING ANOTHER TACK

Beckwith Machinery Co., a Caterpillar dealership that serves western Pennsylvania and northern West Virginia, has gone in the totally opposite direction of Golden Equipment by paying on commission only.

For the past decade its machine sales reps have been paid a draw against their commission (based on a percentage of gross profit) and a year-end bonus based on specific performance criteria. They are required to pay for their car, travel and entertainment expenses and some cell phone expenses. In essence, the dealership's 27 equipment sales reps are independent contractors whose main client is the dealership.

General parts and service manager and former machine sales manager Tom Montgomery says that putting all of a sales rep's compensation at risk in this way "keeps the focus of the sale on its profitability. They have to hustle to meet their goals with regard to maintaining a level of market penetration and maintain a level of profitability in the sale. If they're not achieving at least minimum benchmarks, their commissions are severely reduced.

"It becomes somewhat of a self-policing mechanism. It makes it very clear who the standout performers are, and that helps the dealership overall."

Waukesha-Pearce Industries Inc., a Komatsu dealership in Houston, lets its 17 machine sales reps decide what level of risk they want to assume. The size and density of the sales territories of the dealership, which serves south and east Texas from seven branch locations, vary widely. A sales rep who covers metropolitan Houston- a very hot market right now-has more prospects within a smaller geographical area than a rep who's covering a larger rural territory.

"The rationale behind the program was to have something that fit every sales territory," says Mike Green, vice president of operations in the dealership's construction machinery division. "We've found it's very difficult to write a program that's a good fit for both a highly concentrated market and one that covers a lot of geography."

As a result, the machine reps can choose from three compensation plans that vary in the amount of sales expenses the dealership and sales rep pay for. In the first plan, the sale rep receives a $1,000 monthly salary, 1% of the sales volume and 8% of gross profit, and the dealership pays all transportation and entertainment expenses. In the second plan, the sales rep receives a base monthly salary of $1,500, 1% of sales volume and 10% of gross profit and a car allowance but must pay for his or her travel and entertainment costs. In the third option, the sales rep receives a $2,000 base salary and 12% of the gross profit but has to pick up all sales expenses. Most reps choose the second and third options.

Green says the dealership probably wouldn't consider paying reps solely a salary. "We're in a hot enough market where a salesman who's willing to get out and work can make quite a bit of money on commission, and I don't think we'd get that same kind of intensity on straight salary," he says.

It may seem complicated, but it works for the dealership-and that's the most important thing when devising a compensation plan that works for both the dealership and the sales rep.

"You're struggling with the forces around you in the marketplace," says management consultant Ron Slee. "To protect your good people, you have to do things that are outside the typical programs. With a straight salary, you protect the salesman when equipment sales are low. But the really good salesmen are going to get drawn away to somebody else."

Slee says so much of the profitability has gone out of equipment sales that some-just a few, so far-equipment sales reps have switched to selling parts and services. But that's a story for another day.