Shutterstock | Dusan Petkovic
Summary: Compensation can no longer be a catch-all substitute for either managing your sales team or motivating them. It must be reduced to its proper role, which is to serve the formalized sales process.
The heart of every distributor is sales. It’s where customer experience and relationships form. It’s where revenue is gained or lost on any given day. It’s where half or more of your employees work. It’s one of the largest costs of doing business; commonly 15 percent or more of sales in an industry and where average margins range from only 20 to 30 percent. For these reasons, many distributors are leery of tinkering with how sales teams are structured, managed, motivated and compensated.
Today, with changing buyer expectations of the roles and activities of sellers, new sales models are emerging that reimagine existing roles, such as outside reps and CSRs, and introduce new roles, such as sales specialists, outbound-calling business development reps, sales engineers, etc. As buying processes change, sales processes have to change as well. New sales roles reflect the optimization of sales resource structuring at the convergence of digital buying behaviors, committee buying processes, and digital go-to-market strategies.
When sales force structure evolves to include new roles, competencies and responsibilities, it’s appropriate to ask how management, motivation and compensation should change. Since the decades following World War II, when many distributors formed or expanded, sales structures, roles, management approaches, and compensation programs have remarkably remained unchanged. This article uncovers why that’s been the case and how properly managing the sales team can transform your organization.
Management and Motivation Have Been Tied to Compensation
A typical distributor traditionally has had a branch-level organization, where a branch manager manages a team of outside reps (with car keys) and CSRs (with phones and keyboards). Outside reps have operated on a “Wild-West,” milk-run, geographic territory tied to driving distances. Compensation is most commonly a mix of fixed salary and commissions based on a percentage (commonly 15 to 20 percent) of gross profit (GP) dollars. Inside sellers typically have somewhat similar management, motivation and compensation systems (gross profit dollars), albeit with salary as more important and commission less important. For most distributors, the compensation system has sadly served as a catch-all to manage, motivate, and compensate sellers.
In principle, it seems that the GP dollar approach could serve all three masters when it comes to “sole-proprietor” sellers. Once the branch manager has assigned a geography and/or a list of named accounts to a seller, there’s no perceived need to manage most reps on a daily basis. Train them on the products, show them the incentives, and leave ‘em alone and let ‘em sell. Motivation comes from the seller’s extrinsic motivation to initially maximize or ultimately optimize earnings. Instead of coming at the end of a management process, with appropriate accountability and motivation toward results, commission compensation becomes the master of all three.
The Gross Profit Approach in Selling Has Its Windfalls and Pitfalls
This approach, which is the reigning paradigm in distribution, has produced unequivocal winners, but also some important dysfunctions and unintended consequences. First, in the absence of formalized call planning or account management processes and standards, sellers should simply maximize the eligible accounts and revenue assigned to them. A sales IQ test: why wouldn’t you want to earn commissions on more (rather than less) accounts and revenues? The only brake on this dysfunction is the branch manager’s prerogative to assign customers as house accounts outside the commission structure. Inflation and supply constraints are adding yet another expanding windfall to this paradigm.
The seller windfalls of the GP approach to managing, motivating and compensating are legend, with many sellers achieving deep six-figure earnings that outpace branch managers, sales leadership and even (in non-rare cases) cracking the top-5 earners in the company. In addition, new sellers benefit from others’ retirements that shift accounts into their territory. With sticky customer relationships, sellers’ prospecting dwindles, and they pivot from maximizing earnings to optimizing lifestyle. Distributors will even compete with each others’ dysfunctional comp systems to entice defections and siphon market share, though these strategies (with a few notable exceptions) rarely produce the intended revenue migration. For many distributors, this entrenched conundrum has come to appear irresoluble, as the winners from it have accumulated perceived leverage and resist any efforts at reform.
A Modern Sales Transformation Improves Managing, Motivating and Compensating Sellers
With a modern sales transformation — wherein buyer expectations and buying processes produce new sales systems of processes, roles, skills, methodologies and activities — the old compensation system can’t work anymore. Specialization and collaboration break the old “sole-proprietor” model that engendered the GP dollar approach. Furthermore, with specialization and collaboration comes a greater need to manage and synchronize discrete activities across roles.
Compensation can no longer be a catch-all dysfunctional substitute for either management or motivation. It must be reduced to its proper role, which is to serve the formalized sales process, within the context of formalized activity/call planning and account-management. There are defined competencies and KPIs in each stage of the sales process, and these must be directly managed (rather than indirectly incented). Incidentally, the sales transformation lays bare the obsolete coterminous branch manager/sales manager role. When a branch truck has a flat tire, there’s no time for sales management. But with interdependent systems of specialists, sales management is required.
How do you align your sales transformation with a system of management, motivation and compensation?
First, commit to the buyer-centric sales system above. Once the appropriate buyer-centric sales system has been determined, with associated competencies, methodologies and KPIs, the skilled manager will drive continuous performance improvements in the system KPIs. This will require formalized call planning and account management (which will put an end forever to the open-ended eligible-account list).
Motivation now comes more from intrinsic values of a job well done vs. target performance of KPIs. The variable component is a function of business value delivered by the seller, not the GP dollars of circumstance. Compensation is resolved to its proper role: reward the execution of value-added tasks in a well-managed selling system. Although it may be difficult to switch cold-turkey to the new paradigm, newer sellers should be onboarded on the new system, while grandfathering senior tenured sellers.
Why It’s Time to Commit to a Sales Transformation
It should be clear by now that the sales compensation conundrum cannot be fully resolved without a sales transformation that recasts the role of compensation in the larger sales system. The sales transformation is inevitable because buyer expectations are upending the old paradigm. Commit to the sales transformation. Commit to resolving your sales-management, -motivation and -compensation conundrum.
Embrace the three pillars of a sales transformation.
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