Compensation Plans Redesigns Can Benefit Everyone
In an era of run-away costs, there is a big line-item you can still control: sales compensation.
“The total sales and marketing costs for a typical distributor are somewhere between 26 percent and 34 percent of their gross profit,” says Dave Kahle, owner of the DaCo Corp., Comstock Park, Mich., an industry consulting firm.
“Companies existing on compensation plans put in place by their parents are choosing to look the other way on the single biggest cost to their company,” Kahle says.
More and more often, commissions as straight percentages of sales are being replaced with detailed commission plans linked to software programs that automate accounting, performance analytics and audit trails.
Designing the ideal compensation plan is different for every company. Kahle says he receives calls from people who ask if he has a specific plan he could recommend.
“The answer is ‘no,’” he says. “Each company has a unique culture, history, strategies and goals. The compensation plan is a means of implementing and consolidating all of that. You don’t buy it — you create it based on the combination of variables that are important to you.”
“Ask how much experience [consultants] have in creating plans for wholesale distributors,” advises Kahle.
“The world of distribution is significantly different from others. We tell people that it takes three to six months to create a new sales compensation plan. We want to make sure it’s thorough, well designed, and they won’t have to fix it six months from now.”
Bob Conlin, chief marketing officer for Centive, an on-demand software company based in Burlington, Mass., says his firm’s compensation design experts recommend no more than five measures per plan, or it will be too difficult for sales reps to understand how they’re being compensated.
Many times, plans can be easily changed so that they reward employee behavior that’s in line with corporate goals.
“Perhaps there is a disconnect between what [sales reps] are doing and what you want them to do,” says Kahle. “Being paid to do one thing, while being asked to do another is the No. 1 issue in compensation today. For example, paying straight commission, but being asking reps to prospect and get new accounts is a conflict. They’ll do what you pay them to do.”
David Cichelli, senior vice president of The Alexander Group, Houston, and author of Compensating the Sales Force, adds that the best-designed compensation program is a variable commission schedule that ties compensation rate to the profitability of each order.
“The company wants gross margin and gross margin percent,” he says. “A matrix design looks at both. It works because every single gain, no matter how small, drops to the bottom line as profit dollars. Hanging a little tougher on pricing will dramatically move the business, as far as profitability.”
Cichelli says sales reps need to understand that when the company gives them a percentage of gross margin dollars, it can be detrimental to the company. “Instead of raising or holding prices, that method does the opposite — reps sell more at lower gross margin percents. To the company, it’s not very profitable business.”
Finding The Right Software
If all of this sounds complicated, there is software to help you implement your plan. But how do you select a software provider to make it all work? First of all, there are three basic forms of software to choose from, each with unique features and benefits:
• Enterprise (on premise) software requires information technology staff and servers. This software can cost hundreds of thousands of dollars, and upgrades are typically provided annually.
• Customer Relationship Management (CRM) software may also include a sales management function and is less expensive than an enterprise system.
• On Demand (hosted) sales compensation systems are available for a monthly fee per sales rep, which could be a good value.
Cichelli suggests distributors buy a report on the enterprise incentive management (EIM) sector.
He also believes shopping around can help distributors. “Have your IT department bring in multiple vendors, and talk about how they can assist you.”
Every software company offers different features and benefits. One on-demand system’s “plan builder” feature allows your compensation analyst to input parameters and measures such as gross profit dollars and percentages, net margin percentages, rates structures, overrides, etc. It kicks out a prototype to take for a test drive, and once the parameters are fine-tuned, you can roll it out.
“It takes sales compensation from a tactical to a strategic tool to drive performance,” says Conlin.
Don Kellermeyer, president of Bowling Green, Ohio-based distributor Kellermeyer Co., updates his company’s plan every year, and utilizes an enterprise-style software. He says this has increased sales revenue threefold since installing the system ten years ago.
“In our case they get a base salary, and various levels of commission based on sales growth,” Kellermeyer explains. “Everything is categorized. [The system] reports on growth of customer, product categories, products, packaging, percentage of total — and develops goals and a budget for each one of those.”
The program utilized by Kellermeyer also factors in such considerations as whether a sale is made by external or internal staff, as well as the personality of market areas — both of which help determine acceptable margin compressions.
For example, Cichelli says a matrix solution that uses gross margin profit and gross margin percent tends to work best when trucking is involved.
Maintex Inc., a manufacturer and distributor located in City of Industry, Calif., uses a software system that handles sales compensation, manages inventory and accounting. The company upgrades its commission structure regularly with the help of an outside consultant and internal information technology staff.
“Every commission is paid on line-item, and we know the gross profit for every order and what the commission is,” says Linda Silverman, vice president of sales and marketing.
A few years ago, Maintex established a second program for new hires who begin their employment with a monthly salary. It takes time for the rep to make a profit for the company, so when they have achieved an amount in profit equal to their salary, they receive a bonus of 10 percent of that profit.
Other compensatory parameters include a minimum gross profit of $40 to earn a commission, and payout coordinated with accounts receivable.
“Sales are paid as we’re paid,” explains Silverman. “This encourages salespeople to sell to credit-worthy customers that will pay, and be involved in the process of getting paid.”
While you may have evaluated your compensation plan and decided to switch to a different system, it’s important that the people this will effect the most — your sales reps — are kept in the loop.
“It’s not unusual, particularly for a sales person under a compensation plan for a number of years, to be resistant to change,” says Kahle.
He says that when sales compensation is being re-evaluated, it is best to let the reps know that change is on the way. “You’re striking to the heart of their job and vision of themselves. We council our clients to be very much aware of that.”
Have a date in mind for implementation of the new system, Kahle suggests, usually giving the reps at least one month of notice before it will take effect. “Otherwise, you find yourself negotiating and backpedaling,” he says.
Sometimes, implementing a new system can send a strong signal as to which employees truly deserve to be a part of your business. “The only people that left our sales staff when we changed were the weak performers,” says Kellermeyer.
Lauren Summerstone is a Madison, Wis.-based freelance writer.
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