Millennials and Sales Compensation
I received an email a few months ago with the following subject line: “Compensation One of the Least Important Factors in Recruiting Millennials.” Well, the subject line served its purpose and enticed me to open the email. The body of the email contained the summary of a survey performed by renowned recruiter Korn Ferry where pay, selected by 18 percent of respondents, was well down the list of reasons those born between 1980 and 2000 chose one job over another.
On the other hand, other surveys I have seen indicated the exact opposite, that the generation that values compensation more than other generations is not the Baby Boomers or Generation X, but Millennials. The main evidence presented in these surveys is that student debt for most Millennials is well above that of previous generations – at about $20,000 per student.
So which is it? Are Millennials indifferent to pay, or is it of the utmost importance? Well, I’ve come to realize it’s both. In recent years a trend has emerged in the conversations I’ve had with clients. More and more of my firm’s clients report they are facing challenges recruiting field sales representatives, not because of the total pay being offered but because the fixed portion of the package they are offering is too low.
When these conversations first started, we would agree that a prospective field sales representative who wanted more guaranteed pay and less risk was a bad fit. The traditional view we took was that successful field sales reps needed enough confidence in their abilities to have “some skin in the game.” Wanting a higher salary was a red flag. However, as these conversations started to occur more frequently, and more and more companies struggled to fill open field sales positions, it became time to question this old way of thinking.
Turns out these conversations were symptomatic and that we are at a generational inflection point. Today it appears that those interested in entering the field sales profession in their 20s and early 30s see many things differently; it seems that they don’t perceive traditional methods of paying field sales reps very positively.
Much has been written on Millennials and the fact that by 2020 nearly half of those in the U.S. workforce will be of this generation. A little time on the Internet can provide all sorts of information on how to motivate Millennials, how technology has been part of their lives since birth and how the terrorist attacks of 9/11 have shaped their lives. This article’s focus isn’t to rehash the coverage on how Millennials are different. It focuses on how distributors can adopt sales compensation programs that appeal to this burgeoning group without losing the virtues of historically effective programs.
Twenty-five percent of distributors offer no salary as part of their sales compensation programs, according to the National Association of Wholesaler-Distributors’ industry compensation study. This is the wrong answer when it comes to Millennials. Historically, when someone entered the field sales profession, he understood the bargain. The deal was that it would take time to build relationships and that their incomes would start out low, but as time progressed, their incomes would grow, potentially to amounts well beyond what other jobs provided (including doctors and lawyers, in some cases).
The traditional approach is a nonstarter with Millennials for multiple reasons. One is the debt mentioned previously. Millennials don’t have the luxury, or don’t believe they have the luxury, of starting out with a salary that may not meet these financial obligations They’ve got rent, a car payment, student loans and of course a cell phone bill. They want to earn a predictable amount that covers these regular expenses. Many Millennials also believe that they are likely to be working for a different company five years from now. Although jobs data don’t support the widely accepted notion that this generation changes jobs more frequently than other generations, according to a recent Wall Street Journal article, “Millennials: Love Them or Let Them Go,” the “work your way up” message does not resonate with them.
The question is how to maintain the tried-and-true motivational compensation upside while also providing the predictable monthly income Millennials desire. A logical solution would be to offer a draw on commissions that provides the desired predictability. For those unfamiliar with the term “draw,” it is a mechanism that provides sales reps with a set amount per paycheck with a deduction for commissions. I am aware of several companies that have tried this approach, typically with poor results. The issue is that when sales reps see deficits accrue because they are not meeting the draw, it adds to their debt anxiety, and they go professional Chapter 7, liquidate their debt and find another job.
A slightly better alternative than the draw is moving income from variable to fixed by lowering the commission rate. Instead of paying $2,000 a month in salary plus 15 percent commission, increase the salary to $4,000 while paying 7.5 percent commission to provide higher initial pay despite the higher expense (when the lower salary was greater than 50 percent of total pay). However, the upside opportunity would be reduced, which dilutes the pay-for-performance motivational aspect.
The paradox: how to offer higher fixed pay and provide meaningful and motivational rewards for performance – but making sure sales reps have some skin in the game if they under-perform. The best answer is to use a bonus approach where the payout matrix is not linear to performance. With this approach, you establish a salary and a target incentive amount based on a company’s cost structure and the market value required to successfully recruit a sales rep.
Goals are also established, but the percentage achieved of the goal does not correspond to the percentage of the target incentive earned. In other words, 80 percent of goal attainment does not equate to 80 percent of the target incentive. The performance deficit is magnified two or three times such that missing the goal has a real financial impact.
The magnification also occurs on the upside. In essence, the slope of the line that plots earnings with performance is much steeper, albeit with a higher floor, than traditional distribution sales compensation programs.
If you’ve experienced more difficulty than usual filling field sales positions, you’re not alone. Today’s aspiring field sales reps are looking for a meaningful amount of fixed pay while also being able to realize a lucrative upside opportunity. With the bonus matrix approach, it’s possible to attain this threshold, allowing them to have their cake and eat it too.