The compensation plan is not the problem
by Scott Benfield
There is a recent and fairly consistent trend in distribution to rework the compensation plan so that sales will rebound. It doesn't help that there are some convincing arguments about compensation that support this claim but, in the end, there is far more to selling than how pay is done. We have pushed the compensation button for all it's worth. It is time to get down to some sales management basics that are forgotten or below radar.
The story of "Big Wholesaler"
Compensation gurus constantly mention goal congruence as a stumbling block to sales growth. The idea is that the goals of the organization must be captured in the compensation plan or sales won't happen. An example of this is the distributor that wanted to increase profits but compensated on top-line revenues and let sellers control price in a down economy. The result was lower profits since the sellers actually cut price to hit the sales target, operating expenses stayed the same and orders didn't pick up because the economy was down. In short, the profit goal was not aligned with a better compensation metric for profit (gross margin percent, gross margin dollars, or both) and profits went south.
Compensation can harm a strategy, but it seldom derails one. In other words, goal congruence with compensation makes things run smoother but won't, by itself, make things run.
Consider Big Wholesaler (name changed to protect the guilty) and the third-generation vice president of sales, Big the Third. For four years, Big III changed compensation plans to move sales forward. He was quite creative in his plan designs and made three major plan changes in four years. In those four years, Big III's sales force never grew the business more than inflation. One could say that Big III changed compensation too much and sellers were confused and couldn't sell. But few sellers left during this time over compensation disputes, so it's doubtful they were too upset with the payout schedules. What was apparent in Big III's compensation schemes is evident in the modus operandi of many distributor sales managers. It is time to rethink what we get and don't or won't get from the compensation plan.
Understanding the STER (Strategies, Tactics, Events and Results) model
Big III didn't succeed because he never really set a strategy, never challenged his sales managers to develop tactics and never required they inspect seller events to gain results. Essentially, Big III would put a growth factor on last year's sales, roll out his "plan," describe the compensation payout, give "plan" targets to each seller, and say, "Go get 'em tiger."
Big's plan was really a budget and it wholly lacked management of how to accomplish corporate strategy, how functions interact to help sales happen, and how to inspect and make accountable seller performance. Big III is probably still changing his compensation plans and getting no further than he did in previous years.
Somewhere in the past, distributor sales managers believed the claims of compensation specialists. I recently received an urgent call from a distributor who wanted to revamp his compensation plan to correct sales. I asked him about his current payout schedules and plan and, while they needed some adjustment, they seemed average. When asked about his account planning, follow-up mechanisms, cross-functional communication and market-based strategies, the distributor literally went dumb. In a moment of stark honesty, I told him what I believed to be the truth.
"All the compensation changes in the world won't amount to a hill of beans unless you research market strategies, develop tactics to answer market needs, communicate across functions to allow the tactics to come to life, and follow up and inspect sellers for their compliance," I said.
Of course I didn't get the work and the former prospect is out soliciting some other consultant who will give him the magic compensation formula.
What will help distributors like this one and Big III is to understand the STER model
The STER model is a fairly simple concept. To have sustainable sales increases, the firm must have market-based Strategies, followed by Tactics to serve the market needs, broken down into measurable and accountable seller Events which yield Results.
For example, suppose Little Wholesaler, a Houston-based firm, wanted to sell midget widgets to refineries. Little Wholesaler would need to research refineries and ascertain the basic questions of which products, at what price, with what services and what applications before the seller ever hit the street. Of course, Little could use its sellers to find this information and then develop a strategy to serve the refineries.
Let's suppose that Little did its research and found that it needed to stock 12 midget widgets instead of five, its top five midget widgets weren't price competitive, it needed two-hour delivery and there was a new "rude crude" application that interested the segment. What did Little do? It stocked the seven more midget widgets, got the price right on the fast movers, raised price on the slow movers, set up a two-hour emergency shipment with an outside firm, and trained sellers on the new technology. Beyond this, the second generation sales manager, Middle Little, made his sellers give him their top five potential midget widget accounts, rehearsed them on a mock presentation, and followed up on their progress every month to see the results.
If your sales aren't where you want them to be and you can't find where the STER steps are being used, then don't turn to compensation for a fix. Turn instead to your key managers. Ask them, "Where's the plan for how to get it done? Who is responsible? When will it get done?"
Management is an active verb
It is sad but true that the majority of sales problems are really a lack of good market planning, communication and follow up. The easy way out is to change compensation and, unfortunately, this almost never works without the STER method. If your sales management doesn't require good marketing process of themselves and others in the organization, then your sales growth is more a matter of luck than good management.
Distributor sales managers and their functional counterparts need to get back to the basics of good planning, execution and inspection for sales to grow. In many instances, compensation seems to fight the STER process. Why? Managers, like Big III, reward for results (the R) and don't put proper focus on the STE part of the process.
If you have managers who make "budgets" instead of sales plans and change compensation when sales aren't coming in, then you really don't have much of a manager. Management is grappling with the tough market issues, developing internal capabilities to answer these issues, and training and following up with sellers to see if they have done what needs to be done to secure the order. There is no easy way around this and there is not enough of it being done in wholesaling.
I often hear that the best firms have the best sellers. I really can't argue with the sound bite, but when I turn it around, it reads the best sellers have the best firms. And, the best firms are those that carefully plan their STER steps before the seller hits the street.
Compensation is important and it does deserve review, alignment with goals and appropriate change. However, it is not the cure-all for poor sales results. Look closely at the STE to ensure the results expected of sellers.
Scott Benfield is a consultant for distribution and industrial manufacturers. He is the co-author of Restructuring the Distribution Sales Effort for Maximum Productivity. He consults in the fields of marketing, channel management, pricing and sales. He can be reached at (630) 428-9311 or at Bnfldgp@aol.com.