With decades of experience as a consultant to wholesale distributors, I am very familiar with the industry’s sensitivity around sales compensation programs. I recently learned that this sensitivity isn’t constrained to North America or Western countries. A client in China quickly took sales comp changes off the table when discussing potential strategies for improving sales effectiveness.
Distributors’ hesitancy is logical and prudent. Regardless of industry, no one likes it when their bosses start messing with pay. Distributors take this hesitancy to a higher level because of the historical value ascribed to field sales reps and the mysterious “relationship magic” that salespeople possess.
Few will argue that a motivated and energized field sales force is valuable, which is at the heart of why distributors often treat sales compensation as the third rail. If a compensation program change decreases a field sales force’s incremental energy investment, it is hard to see how making a change makes commercial sense. However, there are some situations, such as the four outlined below, where a positive ROI may accrue from going through the redesign process.
1. The field sales role has changed
This is probably the most prevalent trigger driving changes to sales compensation programs today. Many distributors are experimenting with changes in their go-to-market strategies based on recognizing that customer needs are evolving. The one-size-fits-all approach with generalist, relationship-based roles is not aligning with the situational needs of customers.
Introducing material account assignment changes, as is often the case with sales structure changes, to sales comp programs that rely on commissions is as volatile as kerosine and flame. When sales reps, who are paid a percentage of gross profit dollars they generate, see accounts moving from their books to others, combustion follows. And rightly so. Having sales reps realize lower earnings to support better overall company performance is a really bad idea.
2. Recruiting sales reps is proving difficult
There is a continuing trend that younger sales professionals view highly variable compensation programs unfavorably. According to Industry Insights 2020 Cross-Industry Compensation Study (available from most distributor trade associations), 44% of a senior outside salesperson’s pay is variable, and even more relevant is that 38% of an entry-level outside salesperson’s pay is variable. Theoretically, having this much pay at risk has created a headwind for some distributors as they pursue younger talent.
There is some simple science that can be used to design a sales compensation program that provides higher base pay (non-variable) without losing meaningful “skin in the game” by looking at monthly pay variability. In many cases, the risk and reward tradeoff actually increases while also providing more predictable and stable cash flow.
3. Special deals are proliferating
In some instances, the recruiting issue is addressed by offering guarantees. Special deals from the standard sales compensation program also occur when account assignment changes occur, as mentioned in point one. Recently, I came across a situation where over 50% of the sales force had some sort of deviation in place. When a large percentage of the sales force is on a one-off program, the existing program is almost by definition ineffective.
Speaking of special deals, it is very important to make sure all these situations are documented before beginning any redesign effort in larger organizations. I’ve seen too many instances where this didn’t happen, and the rollout went sideways when they surfaced after the fact.
4. Profits are stagnant
Traditionally, sales compensation redesigns were driven by unsatisfactory company profit levels more than any other reason. Over a multi-year period, a distributor would see sales increase, sales wages increase and company profits remain flat. The reasons for this were generally two-fold. One was the layering of sales support functions. As sales grow, additional roles are added, such as product or vertical specialists that add cost. When this is combined with paying sales reps a fixed percentage of gross profit, as outlined in point two, it saps what’s left for the shareholders at the end of the day.
Fixing this undesirable situation can be done effectively in two different ways. One is to shift compensation from variable to fixed pay. Whereas variable pay in the form of commission will grow in direct proportion to gross profit dollars, fixed pay (salary) will increase per company discretion through salary increases. Although both can be used concurrently, the other option is to narrow the overall percentage of the business assigned to field sales reps, and thus subject to commission, by using hybrid or more stratified roles.
It is wise to be cautious around making changes to sales compensation programs. But, if any of the above conditions apply, it might be time to start looking at potential program alternatives.
Mike Emerson is partner at Indian River Consulting Group. Reach him at firstname.lastname@example.org and hear him speak in-person about how to solve sales compensation challenges at MDM’s upcoming Sales GPS Conference in Chicago, November 1-3.