By Mike Emerson, Partner, Indian River Consulting Group
During a discussion on sales compensation, a client of ours, the CEO of a large electrical distributor, once said: “Sales compensation is the third rail of distribution. If you touch it you will die.” Although heavy on the drama, the sentiment is clear: Making changes to sales compensation can be risky. But we all recognize the importance of sales compensation. When sales representatives are paid for achieving results that align with the company’s objectives, good things happen. The opposite is also true. When a sales compensation program is misaligned, companies may commercially underperform.
NAED’s upcoming Expert Led Roundtable Discussions on sales compensation, which will be held at the three NAED Regional Conferences and facilitated by Mike Marks of Indian River Consulting Group, are a great opportunity to hear about what works and what doesn’t work when leveraging such a powerful management tool. There is a lot of commonality when it comes to the current challenges distributors are facing and many distributors have found changing the sales compensation programs to be part of the solution.
To maximize the value of the session, giving thought to the following series of questions beforehand will prove beneficial:
- What are your company’s top three goals for this year? What about three years from now? What will the impact be on a sales representative pay if these goals are met? What if they are not met? Is it possible for a sales representative to maximize his pay without generating results that contribute to achieving these goals?
- How much easier or more difficult is it to recruit and retain sales reps than it was three years ago? Is the percentage of pay at risk proving more or less attractive to prospective sales reps?
- Has your sales compensation program been an obstacle to making sales structure changes such as implementing hybrid inside/outside roles or adding product/industry specialists?
- Do multiple sales compensation programs exist as artifacts from acquisitions? Is this situation posing an obstacle to achieving company revenue, expense or profitability goals?
- How have sales rep incomes changed relative to the company’s overall top and bottom lines? Is the company’s return on sales increasing at a level close to the increase in sales reps’ W2s?
- Does the compensation benefit a sales rep receives for a great year reflect his performance level? What about for a bad year?
- Are cost-to-serve metrics or other items that impact profitability (i.e. rebates) part of the sales compensation formula? Should they be?
Hopefully, reflecting on the above questions will help identify potential areas of misalignment, which can be considered Step 1. Step 2, of course, is identifying potential solutions. Your fellow participants in the session are likely to have a fair amount of scar tissue from what’s worked and what hasn’t. Additionally, Mike Marks will be able to bring in experiences, both positive and negative, from other industries.
A word of caution: A company can make two potential mistakes coming out of this session. One is mimicking another company’s program because it worked for them. There are many variables that contribute to a sales compensation program’s success. These include sales management capabilities, competitive position, budgeting prowess, customer base, company culture and others. It is critical to take the good ideas from the session and consider them in the context of all these other factors for your business.
The second mistake is failing to run the numbers (and then running the numbers again). What’s the saying? “Success is 10% inspiration and 90% perspiration?” A good analysis will identify the bounds of potential outcomes by asking several “what if” questions, such as “What if a sales rep beats budget by 50% or drastically alters his product mix?” Even with the right approach, disruption and failure are right around the corner without a thorough analysis at the company and territory levels. It may not be death, as our CEO client described it, but it will sure be painful.
Tagged with NAED, sales, tED