In the March edition, we asked the questions:  Are commissions the best way to motivate our employees?  And are commissions there to drive quality or quantity of sales activities?  At the end of the article, I asked for feedback and comments, and as of April 30, we have received about 30 responses from readers.  We can summarize the overwhelming consensus this way: “Commissions are in place to drive the quality of selling activity, but the plan may not be working the way we had hoped.”

As part of our follow-up, we did deep dives with nearly two dozen distributors, in four lines of trade (HVACR, industrial, electrical and automation, and building supplies).  Clearly, distributors are struggling to get to a compensation plan that drives the right behaviors. And thoughts on commission extended past outside sales.  We saw models for inside sales, customer service representatives, product specialists and a few others. They all had three things in common: driving behavior, providing motivation and not working exactly as planned.  But we did run into noncommission-based plans that appear to be functioning quite well. Let’s talk about one of these.

Management by Objective (MBO)−Based Plans

Instead of relying on a commission plan to drive the proper behavior, distributors using a management by objective (MBO)-based plan were specific in laying out the activities and behavior required of their team.  Employees review the plans, which typically pay out quarterly, and focus on precisely which activities the manager felt appropriate for the seller, market conditions and customer needs within the territory. 

There are some inherent strengths in an MBO-based plan.  First, it closely matches activities to the employee. The plan drives personal growth. Sellers lacking in planning skills might tie MBOs to better scheduling of their time.  Objectives covering the creation of more appointments and the proactive work in territories are good examples. Here are a few other positive points found in MBO programs.

Prospecting: Need more prospecting done? Tie specific and measurable objectives involving the finding of new customer contacts to compensation. In some instances, managers have tied the objectives set not only to activities but also to training. For instance, when an employee struggles to identify the right kind of customer prospects, their manager works to train the seller in determining which individuals (by position) are proper targets for prospecting. Metrics for reaching out to these individuals are created and added to the salesperson’s future MBOs.

Opportunity Tracking: Most distributors agree that understanding opportunities is critical for forecasting and developing new business models. The last recession demonstrated the poor state of our industry in this regard. Many companies went into a serious economic downturn, believing their territory might dodge the recessionary bullet because they had no real visibility into the future. Yet managers still struggle to get their teams to properly track and follow up on identified opportunities in the field. Because they ignored even rudimentary information, procrastinated or simply did not do it in a timely manner, investments in CRM systems purchased for this purpose went astray. 

Pricing Deviation: Progressive distributors have found benefit in employing a scientific pricing process.  Pricing models are developed and pushed to their customers. A few disbelieving sellers will short- circuit the entire program by constantly deviating from the “system price.” Pricing expert David Bauders of Strategic Pricing Associates (SPA) has developed a metric called “level of attainment” that ranks each seller by the percentage business run through the process.  Distributors who pay their teams based on attaining a prescribed level of business through what SPA calls the “pricing cube” see dividends in profitability. These distributors found this worthy of tying to compensation.

Utilization of Resources:  Most agree, the days of the “Lone Ranger” salesperson are over. At the same time, some sellers drag their feet in engaging others with their accounts. Whether these issues are deployment of product specialists, key manufacturer salespeople or even their own management team, achieving the expected results involves properly directing and deploying the team. In this model, the employees’ compensation ties itself to their willingness and ability to push company resources forward at their accounts.

Meeting Sales Goals: Too often, sales goals are just an arbitrary number. Sellers often shrug and accept goals with very little interaction and thought about how attainable the number might be, because the number rarely has little financial meaning. The seller just continues forward with numbers they believe are unrealistic. Tying compensation to meeting the goal creates a give-and-take environment where everyone pays close attention not only to the number but actively encourages salespeople to seek help when needed in order to attain the number. 

The Issues with an MBO−based Compensation Plan

While there are several benefits to an MBO-based plan, there are two main issues as well. The first is the quality of front-line sales managers. The sales manager must focus on the efforts and actions required to build sales. This is not a simple task. Why? Because we viewed commission plans as a “self-directing” tool for employees, our industry has relegated the responsibility for understanding what works in the field to the employee. And, since the model has been in place for a half-century or more, managers rarely take the time to evaluate the situation. 

Straight talk with hundreds of front-line sales managers about the situation typically dredges up generic comments like better planning, more sales calls, deeper penetration and enhanced communication between inside and outside sales. Yet pointed questions designed to drill into each of these topics produces very little detailed information on metrics or timelines for completion. 

The second major issue comes in the form of avoiding career growth planning for employees. Here are a few points to ponder. In days gone by, we could summarize the career path for a seller: the company provides an assigned account list, and the seller develops relationships, learns the customer’s needs, grows the business and makes more money. A few become legendary salespeople. Others decide to go with the flow and earn a reasonable income. One or two become sales managers. Others move on to new opportunities with suppliers, competitors and occasionally with customers. I believe this will be an issue in the future.

You need not be a demographic expert to understand the next generation of employee has one foot in their current job and their second foot poised to jump to the next position.  We have done much to interest millennials in our industry, but except for a few mega-distributors, any semblance of forward facing career paths is missing.

A message for current employees on commission

As I wrote in my last article in the May 2017 issue, I suspected, maybe even hoped for, some argument from employees who were fundamentally opposed to compensation plans that stepped away from the current norm. Looking back and reviewing the titles of those asking questions or sharing a comment, I found that only one came from a seller. Based on that point, I decided to include a few comments from the folks who are out turning over rocks and searching for orders. 

I realize most sellers view compensation plan adjustments with a jaundiced eye. One company president shared this thought: 

“Every time we talk about or make a change in our commission plan, the sellers assume this is about taking money straight out of their pockets. We go to great lengths to show them how the new plan will impact them if business grows by 10 percent or 15 percent and what will happen if their accounts don’t grow. But every time, it results in weeks of water cooler and neighborhood bar discussions. At the same time, we have invested mega-bucks in new resources, productivity tools and business drivers that they often see as management positioning to take away their job security.” 

Assuming your company has a fair and reasonable employee culture, there are good reasons for an employee to embrace change. For most folks in distributor-land, working under a different type of compensation plan provides positive benefits.

Without going into a thousand-word explanation, let’s assume the selling environment is changing.  While a few “experts” point to Amazon as an example of the demise of our industry (I don’t), it’s hard to ignore the $6 billion to $7 billion in sales made through Amazon and Grainger’s e-commerce efforts.  If we assumed the average HVACR salesperson was responsible for $0.5 million in sales, this means the commissions of 4,000 sellers are off the table.  nd while I believe our industry has a future, I can pretty much guarantee the future won’t look anything like my early days in the business.

Commissions developed back in the 1960s because they appealed to the entrepreneurial spirit of lone wolf sellers. Big Buick-driving, back-slapping guys without cellphones, computers and technical support rolled across the fruited plains running what was, for all intents and purposes, a business within a business. But those days are as long gone as the leisure suits some of these guys chose to wear.

Sellers must develop new sets of skills, some of which don’t lend themselves to the commission model. We need to learn how to manage customers differently, take advantage of team selling and analyze (and use) data to create revenue streams for our companies. A good many of these skills more closely resemble those of management. Yet we still need to make a living and generate revenue for our employer.

Those with the right skills will still be highly-compensated. Now more than ever, companies are paying attention to what one progressive distributor calls the “fair market value” of employees. If you are an expert on the customer-facing side of our industry, you’ll make a lot of money. And if you happen to be able to deliver on the points outlined in most MBO incentive models, you’ll be demonstrating a comprehension that goes beyond the piece of dirt called your territory.

A Few Closing Thoughts

Before, we asked the question:  "are we looking for quantity or quality of selling activity?" The answer was quality. Looking back, the question should have been: does your compensation plan truly encourage the kind of activities your company needs for the future? I find it strange that most current compensation plans tie themselves to the immediate generation of gross margin instead of bottom-line profitability. I don’t believe the two are always linked as closely as most believe.

Finally, if you are interested in getting more information on alternative compensation plans, shoot us an email.  We have a growing list of things others have implemented in place of old-fashioned commission plans.