Sales Compensation: Are Commissions Obsolete
There is nothing new about distributor compensation issues. As far back as the 1960s, wholesalers have been concerned about innovative approaches to motivating salespeople. The environment back then was different; warehouses were smaller, inside sales were untrained, and phone systems were inefficient. Clearly, an “ACE” Attitude, Confidence and Enthusiastm seller could create major financial benefits. Feeling that salespeople needed to be compensated differently from the rest of their staff, distributors looked for a way to capture what was referred to at the time as “the natural born salesman.” Somewhere along the way, the industry established, adopted, and embraced the sales commission model. And, based on interviews with a few industry pioneers, the commissions were mostly based on sales volume. But, we put a man on the moon, saw the summer of love and Woodstock, and business changed.
Now fast foward a couple of decades to the mid-1980s. The first round of margin pressure hit. Computer systems allowed even counter salespeople to see the cost, while cost plus pricing expanded. Additionally, a new generation hit the workplace, and we had a recession. Adapting to the business environment, distributors tweaked commission programs, shifting from gross sales to gross margin-centric plans.
Distributor managers liked the shift for three reasons:
Gross margin-based commission plans provided incentives to sellers to get the very best price possible for their products;
Margin-focused commissions built variability into the compensation plan. Sales compensations were less during periods of down economies; and
Salespeople on commissions don’t need raises because they create their own.
Thirty-some years have passed. The environment for distributors has faced many radical shifts, and progressive distributors are taking a new look at the whole compensation model.
Old habits die hard
After speaking with hundreds of distributors throughout the country, we find a great many are exploring new options for sales compensation. Most have wisely taken a go-slow approach. Sellers, who should be the harbinger of change, view even slight adjustments in compensation with a jaundiced eye. Plus, most distributor managers and sales leaders grew up in a commission-based environment. Instead of radical change, we see a steady stream of piecemeal differences with a sprinkling of sugar-coated temporary incentive programs focused on some small bit of the distributor product line. The problem is that very few have taken a holistic approach, taking the time to build a strategic plan around this critically important topic.
I believe the model needs a major overhaul and invite you to join me as we explore five important questions around compensation and its close cousin, commissions.
Is the selling process/practice changing?
In our fathers’ days, selling was a lonely job. It was commonplace for a journeyman seller to not only be the major contact of the distributor, but quite commonly the only real connection. But this has changed. Wholesalers throughout the industry have stressed teamwork. The number of people touching the customer in a meaningful way grows daily.
Today, distributors employ product specialists, marketing experts, VMI/crib managers, customer service reps, and highly skilled inside salespeople. Moving from people to other resources, many have implemented online order entry systems and customer-based mobile applications to encourage dealers and contractors to further interface with the company. Often, this brings distributor IT people into direct customer interactions. Selling is becoming a team-driven function.
For a moment, we need to ask ourselves a question: Can a well-developed team outperform and outsell a group of semi-autonomous sellers? If your answer to this question is yes (and many believe it is), the follow-up question becomes: Does it make sense to pay one part of the team a commission while the others work on some other plan?
What is the salesperson’s real role?
Recalling Michael Marks and Steve Deist’s research in “Myths and Misperceptions,” supplier tenure for all but one segment of our customer base is measurable in decades. For example, an owner-operator contractor only converts about one-and-a-half percent of their business to another supplier each year based on being sold a better value. On the other side of customer segmentation, institutions and industrials are switching 29 percent of their business each year because of some kind of dissatisfaction with suppliers. Few distributors think about aligning seller skills and compensation with customer segments.
Clearly, sellers focused on the first contractor segment are mostly in the account maintenance mode. In the case of institutions and industrials, acquisition of new business may be the single most important job. This boils down to the age-old “hunter and farmer” sales analogy. And, most distributors report, it’s somewhere between difficult and impossible to find a seller with both skill sets.
What does this mean for sales managers responsible for salespeople covering both ends of the spectrum? First, it implies a need for different kinds of goal setting, skills training and management oversight. And, if such plans are to be used as a motivator and director of action, we need different compensation arrangements.
For account maintenance, one would assume a greater value in a team-selling approach, where the inside sales, specialists, and customer service part of the team pick up much of the maintenance work load. Exploring account acquisition activities, team play might not be quite as important. Rather than inside sales, the team might consist of telesales prospectors, marketing staff, and perhaps, a business development group could play pivotal roles in opening accounts.
Going back to the question of commissions, allow me to ask: Are commissions really necessary for account maintenance? And are they structured properly to drive behaviors and properly reward workers for their efforts?
Are commissions the best alternative for motivating employees?
I once made the statement, “I wish everyone in the world could work on a commission basis.” Many of my friends and clients in our industry feel the same way. But we as a group tend to be entrepreneurs, business people, and salespeople with years of conditioning on the merits of receiving payment for our success (or similarly paying for our mistakes). Most of us also happen to be Baby Boomers. However, not everyone feels the same way.
After speaking with young people at various job fairs and during client interview sessions, I have discovered not everyone shares my view. In fact, very few millennials embrace the whole commission concept. Many steer clear of selling roles based entirely on their fear of uncertainty. Furthermore, those who do end up accepting commissioned roles do so only after a great deal of selling on the part of their new employer and sometimes end up with multiyear guarantees. These guarantees basically void the entire concept of commissions as a motivator.
For wholesalers, this pushes forward the question: Does the commission side of our compensation plan exclude qualified candidates who could make a difference in our business?
Do commissions drive quantity or quality of sales work?
In his book, “Drive: The Surprising Truth about what Motivates Us,” Daniel Pink lays out new research indicating that you do not enhance creative knowledge-based work with monetary rewards. This should result in the re-evaluation of the concept of commissions.
Most distributors struggle to answer the question of why they cannot get more than a dozen sales calls per day from their team. Sales managers grow frustrated because the actual selling time of their charges hovers in the sub-20 percent range. They push for more, yet experience shows their push only results in lower quality drop-by calls with little or no impact on bottom-line growth. The quantity of selling work remains the same.
Working smarter, not harder, might appear to be the motto of this lack of quantity, so let’s review the quality aspect. Does a commission plan incentivize sellers to actively promote strategic new products that require a great deal of missionary work before making the first sale? I believe the answer is often no. How about this point: Can the need for immediate commission dollars impact results with a long sales cycle? Interviews with distributor sales managers point to the opposite taking place. Instead, there is a consistent loss of long-term opportunities.
Are sellers distracted by commissions?
After reviewing account lists of hundreds of distributor salespeople, the number of accounts assigned to their charge amazes me. It’s not uncommon to see a seller with more than 200 accounts on their list. Obviously, that seller doesn’t have time to properly service such a massive number of customers. Research points to something like 90 percent of selling results coming from the top 40, yet the numbers continue to creep upward.
Conscientious sellers make attempts to work on some of these underserved accounts. But, for the most part, their efforts to influence buyers with a couple of calls each year produce limited, if any, results. However, the time invested is a major distraction to the real opportunities presented by their top accounts. Conversely, less engaged sellers simply use the long list as a way of staking a claim to business in the unlikely event the customer accidentally makes a purchase.
Going back to a point already made, I love the concept of commissions. Paying people based on performance seems like a good thing. At the same time, our current compensation plans are ready for a fundamental overhaul. Whether you stick with commissions or go to another plan, we are talking about something strategically important to our long-term survival. You cannot do it without giving the subject serious thought.
I have a comprehensive list of points to consider in your compensation future. It’s yours for the asking. Just shoot me an email.