Progressive Distributor - You get what you pay for

You get what you pay for

by Rich Vurva

I remember talking with a distributor friend a few years ago about his desire to change his company's compensation system. Salespeople at the company he acquired were paid under two separate structures. Some earned a high base salary with very low at-risk pay, while others received a low base with a much higher at-risk element. He discovered that the salespeople who received the higher base pay actually underperformed the sellers who earned the lower base pay. He revamped the comp plan and put everyone on a low pay, high bonus system that rewarded salespeople for achieving specific company objectives.

The problem my friend encountered is similar to the one Scott Benfield writes about in the story “All pay plans are not created equal,” which begins on page 18. He describes a situation where a distributor paid a higher commission to salespeople for margin dollar increases above the prior year. Since sales were high in the previous year, salespeople cut price the next year to drive margin dollars above the prior year in order to earn their bonus reward.

The company hoped to motivate salespeople to increase business by offering a higher bonus, but salespeople manipulated the system to line their own pockets at the company’s expense. As Benfield explains, the problem resulted from a compensation system based on a single metric. For example, if a company rewards salespeople on top-line sales or margin dollars without attention to pricing, some salespeople will simply cut price to reach sales or margin dollar goals. Other salespeople may give services away to entice customers to place an order, regardless of how much it costs the company to provide the services.

He argues that companies are better served by devising balanced compensation programs that align individual behavior with company goals. His article suggests some ways to accomplish that objective.

The story is excerpted from the upcoming book “Restructuring the Distribution Sales Effort for Maximum Productivity,” co-authored by Benfield and myself. It will be available for purchase later this fall.