In his recent MDM
Webcast on sales incentives
, Mike Emerson of Indian River Consulting Group emphasized that all gross profit dollars are
not equal: "If we've got an order from a customer, and we have got the same order for five years, that's worth
something to us. But if we have a new customer ordering a new product – that's expansion. We're expanding our
market and our customer base. If you're paying a straight commission, you're not differentiating on that."
Deliver Distribution News to Your Inbox
Sign up below to
MDM Update, your free weekly distribution news update by email.
Co-presenter Mike Marks agreed, saying: "Where the pay plan gets really critical is when you define which dollars of
GP are worth more than others, and that has to link back in some form or fashion to how they get paid."
But take care not to simply pay more on "more important" product lines than others, for example, when making a
change in your compensation program, Emerson says. "If it just so happened that 60 percent of my territory is made up
of those important products, and you're going to give me a bump in commission on those – I just got a raise. And
I didn't do anything except be a participant in a different compensation program." As a result, using different rates
for different types of products is probably going to have unintended consequences, he says.
Emerson gave an example of how gross profit could be used in a way that aligns with objectives but won't cause these
waves in the sales force:
"In this example, we're looking at paying a commission rate that's historically been paid – up to a certain
target. That target can be last year's total plus some growth," he says. "Once you get above your quota we're
going to pay you a higher rate or a lower rate or the same rate. What rate you end up being paid in this illustration is going
to be a function of hitting what we call secondary objectives.
"Those secondary objectives can be centered around a new product line or growing a customer base or building business
in targeted accounts. Goals can be established, and if they're achieved, there is an opportunity for people to earn more.
If they're missed, people will earn less. What's virtuous about this type of program is that you're not separating
those goals and those payments. It's still a function of overall gross profit."
Of course, this was just one example, and as Emerson and Marks both said more than once during the program, there is "no
perfect answer" when contemplating changes in compensation plans for your company. Sales compensation models are not
one-size-fits-all. Marks and Emerson analyzed the pros and cons of different plans in part two of the recent three-part webcast
series: Build an Effective Sales Organization for the Recovery. A
DVD of all three parts is available in the MDM Store.
Please do not reprint MDM's content on your website without MDM's express permission as it is copyrighted material. To gain permission, email us, or call 1-888-742-5060. For information on PDF or print reprints, visit www.mdm.com/reprints. MDM welcomes inbound links from your site. Please cite Modern Distribution Management.
Download the Top 40 Industrial Distributor List Free
Get the Top 40 Industrial Distributors list in PDF, and you will be signed up below to receive MDM Update, your free daily distribution news update by email.