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If not commission, then what?

By Frank Hurtte

In the March/April edition, we asked the questions: Are commissions the best way to motivate our employees? And, are commissions there to drive quality or quantity of sales activities? At the end of the article I asked for feedback and comments, and as of April 1, we have received well over 50 responses. The overwhelming consensus might be summed up this way: “Commissions are in place to drive the quality of selling activity but the plan may not be working the way we hoped.”

As part of our follow-up, we did deep dives with nearly two dozen distributors, in four lines of trade (Industrial, Fluid Power, Electrical/Automation and Heating and Cooling). Clearly, distributors are struggling to get to a compensation plan that drives the right behaviors. Thoughts on commission extended past outside sales. We saw models for inside sales, customer service representatives, product specialists and a few others. They all had three things in common: driving behavior, providing motivation, and not working exactly as planned. But we did run into non-commission based plans that appear to be functioning quite well. Let’s talk about one of these.

Management by objective-based plans
Instead of relying on a commission plan to drive the proper behavior, distributors using a management by objective (MBO) plan were specific in laying out the activities and behavior required of their team. The plans are reviewed with the employee and typically paid out quarterly, focusing on precisely which activities the manager felt appropriate for the seller, market conditions and customer needs within the territory.

There are a number of inherent strengths in an MBO-based plan. First, activities are closely matched to the employee. The plan drives personal growth. Sellers lacking in planning skills might have MBOs tied to better scheduling of their time. Objectives covering the creation of more appointments and the proactive work in territories are good examples. Here are a few other points found in MBO programs.

Prospecting: Need more prospecting work done? Specific and measurable objectives involving finding new customer contacts can be tied to compensation. In some instances, managers have tied the objectives set to not only activities but to training. For instance, the employee struggles to identify the right kind of prospects and the manager assists/trains in determining which individuals (by position) are proper targets for prospecting, and metrics for reaching out to these individuals are created.

Opportunity Tracking: Most distributors agree that understanding opportunities is critical for forecasting and developing new business models. The last recession demonstrated the poor state of our industry in this regard. Many companies went into a serious economic downturn believing their territory might dodge the recessionary bullet because they had no real visibility into the future. Yet, managers still struggle to get their teams to properly track and follow-up on identified opportunities in the field. Because even rudimentary information was ignored, procrastinated or simply not dealt with in a timely manner, investments in CRM systems purchased for this purpose have gone astray.

Pricing Deviation: Progressive distributors have found benefit in employing a scientific pricing process. Pricing models are developed and pushed to their customers. Yet, a few disbelieving sellers will short circuit the entire program by constantly deviating from the “system price.” Pricing expert, David Bauders of Strategic Pricing Associates (SPA), has developed a metric called “level of attainment” that ranks each seller by the percentage business run through the process. Distributors who pay their teams based on attaining a prescribed level of business through what SPA calls the “pricing cube” see dividends in profitability. These distributors found this worthy of tying to compensation.

Utilization of Resources: Most agree, the days of the “Lone Ranger” salesperson are over. At the same time, some sellers drag their feet in engaging others with their accounts. Whether the issue comes in deployment of product specialists, key manufacturer sales people or even their own management team, achieving the right results involve properly directing and deploying the team. In this model, the employee’s compensation is tied to their willingness and ability to push company resources forward at their accounts.

Meeting Sales Goals: Too often, sales goals are just an arbitrary number. Sellers often shrug and accept goals with very little interaction and little thought process tied to how attainable the number might be. Because the number rarely has financial meaning, the seller just continues forward with numbers they believe are unrealistic. Tying compensation to meeting the goal creates a give and take environment where everyone pays close attention not only to the number but actively seeks help when needed to attain the number.

The Issues with an MBO-based Compensation Plan
There are two main issues tied to this type of plan. The first is the quality of front-line sales managers. The sales manager must focus on the efforts and actions required to build sales. This is not a simple task. Why? Because commission plans were seen as a “self-directing” tool for employees, our industry has relegated the responsibility for understanding what works in the field to the employee. And, since the model has been in place for a half century or more, managers rarely take time to evaluate the situation.

Straight talk with hundreds of front-line sales managers about the situation typically dredges up generic comments such as the need for better planning, more sales calls, deeper penetration and enhanced communication between inside and outside sales. Yet, pointed questions about each of these topics brings on very little detailed information on metrics or timelines for completion.

The second major issue comes in the form of avoiding career growth planning for employees. Here are a few points to ponder. In days gone by, the career path for a seller could be summarized as such: The company provides an assigned account list, the seller develops relationships, learns the customer’s needs, grows the business and makes more money. A few become legendary salespeople. Others decide to go with the flow and earn a reasonable income. One or two become sales managers. Others move on to new opportunities with suppliers, competitors and occasionally with customers. I believe this will be an issue in the future.

You need not be a demographic expert to understand the next generation of employees has one foot in their current job and their second foot poised to jump to the next position. Much has been done to interest millennials in our industry, but with the exception of a few mega- distributors, any semblance of forward-facing career paths is missing.

A message for current employees on commission
As I wrote last issue, I suspected (maybe even hoped) for some argument from employees who were fundamentally opposed to compensation plans that stepped away from the current norm. Looking back and reviewing the titles of those asking questions or sharing a comment, only one came from a seller. Based on that point, I decided to include a few comments for the folks turning over rocks and searching for orders.

I realize most sellers view compensation plan adjustments with a jaundiced eye. One company president shared this thought: “Every time we talk about or make a change in our commission plan, the sellers assume this is about taking money straight out of their pockets. We go to great lengths to show them how the new plan will impact them if business grows by 10 or 15 percent and what will happen if their accounts don’t grow. But every time, it results in weeks of watercooler and neighborhood bar discussions. At the same time, we have invested mega-bucks in new resources, productivity tools and business drivers which they often see as management positioning to take away their job security.” Assuming your company has a fair and reasonable employee culture, there are good reasons for an employee to embrace a change. For most folks in distributor-land, working under a different type of compensation plan provides positive benefits.

Without going into a thousand-word explanation, let’s assume the selling environment is changing. While a few “experts” point to Amazon as an example of the demise of our industry (I don’t), it’s hard to ignore the $6 to $7 billion in sales made through Amazon and Grainger’s e-commerce efforts. If we assumed the average industrial salesperson was responsible for a million and a half in sales, this means the commissions of 4,000 sellers are off the table. And, while I believe our industry has a future, I can pretty much guarantee the future won’t look anything like my early days in the business.

Back in the ’60s, commissions were developed because they appealed to the entrepreneurial spirit of lone wolf sellers. Big Buick-driving, back-slapping guys without cellphones, computers and technical support rolled across the fruited plains running what was, for all intents and purposes, a business within a business. But, those days are as long gone as the leisure suits some of these guys chose to wear.

Sellers must develop new sets of skills, some of which don’t lend themselves to the commission model. We need to learn to manage customers differently, take advantage of team selling and analyze (and use) data to create revenue streams for our companies. A good many of these skills more closely resemble those of management. Yet, we still need to make a living and generate revenue for our employer.

Those with the right skills will still be highly compensated. Now more than ever, companies are paying attention to what one progressive distributor calls the fair market value of employees. If you are an expert in the customer-facing side of our industry, you’ll make a lot of money. If you happen to be able to deliver on the points outlined in most MBO incentive models, you’ll be demonstrating a comprehension that goes beyond the piece of dirt called your territory.

A few closing thoughts on compensation
Previously we asked the question, “Are we looking for quantity or quality of selling activity?” The answer was quality. Looking back, the question should have been: “Does your compensation plan truly encourage the kind of activities your company needs for the future?” I find it strange that most current compensation plans are tied to immediate generation of gross margin instead of bottom-line profitability. I don’t believe the two are always linked as closely as most believe.

Finally, if you are interested in getting more information on alternative compensation plans, shoot us an email. We have a growing list of things others have implemented in place of old-fashioned commission.

Straight talk, common sense and powerful interactions all describe Frank Hurtte. Frank speaks and consults on the new reality facing distribution. He blogs on “The Distributor Channel” at http://thedistributorchannel.blogspot.com. Contact River Heights Consulting at frank@riverheightsconsulting.com or via phone at (563) 514-1104.

This article originally appeared in the May/June 2017 issue of Industrial Supply magazine. Copyright 2017, Direct Business Media.

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