Is it Time to Toss Those Commissions?

Here we are a half century later and nearly everything about valve distribution has changed except the compensation plan. The whole concept of commissions for the sales team has become as comfortable as an old shoe. For all but a few of us, commissions have been around our entire lifetimes; yet our environment has changed dramatically. Should we be considering new ways? To look forward, let’s take a look at how we’re set up.

OUR CUSTOMERS

First let’s consider what’s happened with end-user industries that heavily use today’s distribution systems. Economic conditions have tossed and turned the petrochemical and process industries. In response, many companies have downsized engineering and technical resources. For the valve distributor, customer contacts within these companies have sometimes assumed the motto of “don’t call us, we’ll call you.” Yet a great deal of the question-answering that gets done comes via the phone. Customers also report they are spending more time researching technicalities online rather than turning to a seller of a product for information.

Furthermore, the model of today in industrial manufacturing has changed dramatically in just the last decade.

Distributors have always existed to serve customers; when customers’ needs shift, distributors respond. Twenty years ago, however, distributor’s outside salespeople were quite often the only link between the distributor and the end user of the product. Today, it’s not unusual for customer connections to occur with a half-dozen folks. Product specialists, application engineers and application-savvy inside sales folks have been added to the payroll of valve distributors to provide timely technical answers and augment the selling process.

In the past decade, distributors have invested massive amounts of money in productivity tools, marketing efforts and software, all designed to make selling easier. Yet the commission rates have remained largely unchanged. In other words, the commission model lingers while, quite frankly, the time of easy fixes for technical issues is over. It may be time for radical change. To illustrate why, here are a few pieces of evidence commonly observed in many distributor’s sales departments:

• Sales teams resist customer relationship management (CRM) system implementation. Progressive distributors have discovered team selling requires data; the kind that can only be found with CRM systems. The first order of business for such systems, however, involves accurate data on the customer (of the “name” and “functional position” variety). Yet many distributor managers report foot dragging and poor quality of information coming from some salespeople. Opportunity tracking helps management predict the future and forecast more efficiently; but again, the information is often lacking. Salespeople may see very little immediate commission-centric value in all of these CRM activities. Simply put, their incentives don’t align with business goals.
• Salespeople are slow to introduce strategically important new products. This phenomenon just doesn’t make sense to some product managers within the distributor companies. They see the importance of the new technologies to the future, yet their very best sellers lag in launching the business. Again, commission probably has an impact. Commissions are needed now—the missionary work for long gestation sales opportunities produces nothing, at least for the immediate future.
• Salespeople throttle the efforts of other team members. In researching the book The Distributor Specialist: Customer Champion, Profit Generator!, specialists at over a dozen valve providers were surveyed. This research discovered a strange issue: Salespeople often resisted efforts to introduce a specialist to key customers. Candid conversations point to issues that include concern from the salesperson over sharing the credit for driving a sale. While this could be an ego issue, it’s also likely caused by concern for income security based on commission dollars.

Some end-user customers have developed ties to the inside sales and technical support teams within the distributor that eclipse the relationship developed with the distributor’s outside salesperson. In my mind, this should be celebrated and embraced, but sellers feel threatened by the situation and often engage in work more efficiently handled by an inside group, so they remain front and center stage with the customer.

A final point to make in this situation is based on research from a second book: Drive: The Surprising Truth about What Motivates Us (from chapters 1 and 2).

Author Daniel Pink lays out research indicating creative knowledge-based work is not enhanced by monetary rewards. In fact, over the long haul, it can inhibit performance. Considering the reality that selling is largely a knowledge-based activity and creativity is something we should embrace, commissions probably work against most distributor sales departments.

IF NOT COMMISSIONS THEN WHAT?

Instead of relying on a commission plan to drive behavior, an alternative approach would be management by objective (MBO)-based bonuses. Distributors using the MBO model are specific in prescribing activities, behaviors and objectives required of their sales teams. The plans are reviewed with each employee and typically paid out quarterly. They focus on which activities a manager feels is appropriate for both the salesperson and market conditions within a territory, and such plans replace the traditional gross margin-based commission model. They are reinforced with financial rewards for completing objectives.

A number of inherent strengths are built into an MBO-based plan beginning with the fact activities are closely matched to individual employees. A few points about how and why this works include:

• Establishing management level contacts. Distributor sales managers often point to opportunities lost because the competition jumped over the normal customer contacts and sold directly to the customer management team. This is an ongoing problem, but somehow sellers never find time to make the connection. With MBOs, management-level contact activity is tied to the salesperson’s paycheck.
• Opportunity tracking. Opportunities and the data associated with them provide a vehicle for distributors to forecast economic ebbs and flows of the valve industry. This is essential information for strategic direction and helps to align the salesperson and company.
• Price deviation. Valve distributors are discovering the power of price processes. According to David Bauders of Strategic Pricing Associates (SPA), the typical distributor using the pricing process that his company developed adds two points to the gross margin. Distributors who tie price deviation to MBO-style objectives have higher gross margin percentages for the bottom line.
• Use of resources. Instead of discouraging teamwork, an MBO plan incentivizes sales personnel to do more with inside sales, technical and marketing resources within the distribution company. The seller is rewarded and the company grows more efficiently.
• Achieving sales goals. All sales plans have goals of course. But with an MBO, an improvement comes into play. Most traditional sellers admit they accept the goals their managers hand down to them: If they make the goals, great; if not, it doesn’t impact them financially. This creates little buy-in and most salespeople would rather give the impression of compliancy. This does little to allow for improved business planning.

CONCLUSION

The distribution world needs to ponder the future of the whole commission “thing”: It’s been a good run, but everything comes to an end.

According to Alan Beaulieu, ITR Economics, who spoke at VMA’s recent 2017 Leadership Forum, the economic outlook for the coming year looks good. Those distributors that make changes now may very well feel the winds of change at their backs helping them take advantage.

FRANK HURTTE is a speaker and consultant on distribution. Reach him at frank@riverheightsconsulting.com, 563-514-1104 or www.riverheightsconsulting.com.