It’s a question many distribution managers voice in frustration about their sales forces. They can’t get their salespeople to spend more of their time on profitable accounts and less time chasing product sales that don’t drive profits to the bottom line. So they’re looking for a silver bullet solution to motivate what they perceive to be a complacent sales team.

What many don’t recognize is this: their problem may not be with the sales force. They may have an outdated compensation system that pulls salespeople in a direction management doesn’t want them to go.

Unless the compensation model has changed in the last five years, nine out of 10 companies will have an inefficient compensation program for meeting the company’s strategic objectives.

“A lot of distributors developed a compensation plan years ago and then moved on to other things. They forget about their comp plan,” says Mitch Roye, managing director of The Cambridge Group, a management consulting firm in Newport Beach, Calif., that specializes in sales and marketing operations effectiveness. “You need to make sure your plan is linked to and in sync with your company’s overall goals and strategic objectives.”

Is your sales compensation structure geared toward motivating salespeople to pursue and achieve the strategic goals of the company? All too often, that’s not the case. Most distributors utilize a general commission program focusing on one objective, which is revenue generation.

According to Al Bates of the Profit Planning Group in Boulder, Colo., 85 to 90 percent of distributors pay salespeople a combination of salary and commission.

“They’re paying salespeople on revenue generated,” he says. “It’s a 20-year-old model. There’s nothing in terms of rewarding them for bringing in new accounts or paying bonuses based on specific activities they’d like them to do.”

If cash is king, what’s wrong with salespeople who bring in revenue? Nothing, as long as they’re making profitable sales. Unfortunately, while the industry trend is to move toward rewarding salespeople for gross margin dollars, about 60 percent of distributors still pay commissions based on sales volume, Bates says.

“We’re moving slowly toward compensating salespeople on gross profit, but we’re not moving as fast as I’d like to see,” he says.

“I realize, however, that in today’s labor market, it’s hard to hire people using that structure,” he says. “You have to provide a large base and a small incentive. But in my opinion, that provides a disincentive.”

Other compensation experts disagree.

Mike Emerson, a compensation consultant with Indian River Consulting Group in Melbourne, Fla., says best practice companies use a model much more heavily weighted toward salary than commission or bonus.

“They might pay as much as 75 or 80 percent salary and an additional 25 or 20 percent bonus based on two or three defined areas,” he says.

The higher salary reflects the changing nature of the sales process, according to Roye.

“The sales process is changing,” he says. “In the old selling model, product and price were the primary sales focus. Now it’s about value-added service and consultative selling.”

Historically, distributors thought any sale was a good sale. To succeed today, they must identify niche markets to sell into and align their companies with the products to sell into those markets.

In some situations, distributors might require the outside sales force to change its stripes. They want them to open new accounts, yet continue to work with existing accounts to maintain volume. They want them to focus on sales that bring in the highest gross margins and understand which product lines to sell to specific customer segments, yet also prospect for integrated supply business.

Often, distributors do not clearly communicate the company’s objectives to salespeople. They may hold discussions at the executive level about the company’s strategic goals, but it’s not filtered down to the people on the street.

“Companies must have a strategic plan and a compensation plan that rewards people for achieving strategic goals,” says Emerson. “Then it’s up to the sales manager to devise any kind of resource necessary to get people to do it, whether it’s training, team visits with certain customers or other activities.”

Like many distributors, Machinery Tooling & Supply in Schaumburg, Ill., pays salespeople on a draw against commission. If Joe earns a $40,000 draw annually, his draw would be about $3,300 every month. If Joe earns $4,000 in commission one month, he’ll get the monthly draw, plus an additional $700 commissions check.

The plan is a recoverable draw. In other words, if Joe can’t produce enough sales, he could end up owing the company money. Ninety-five percent of the time, however, salespeople exceed their draws and receive a monthly commission check.

The commission is based on gross profit and collections.

“We don’t believe an order is an order until we have the money in house,” says president Dave Zaval. “It protects the company’s cash flow and also gives our salespeople some incentive to pay attention to accounts and occasionally help us with collections if it becomes a problem.”

Right now, the more overall gross profit Joe generates, he gets to take home a higher percent of the overall gross profit. In the future, Machinery Tooling & Supply may add a margin element so there will be a disincentive for Joe to sell at lower margins and an incentive to sell at higher margins.

“When you’re getting paid purely on gross profit, the easiest road to take is to load up sales at very low margins and take home as much as you can,” Zaval says. “What we’re trying to do is get them to recognize that leaving money on the table is a cardinal sin.”

Zaval understands this basic tenet about salespeople: Unless given a reason to do otherwise, salespeople will do what they’ve always done.

If you’re going to pay someone based on what they have done in the last 30 days, you’re not allowing people to develop relationships and get business from new customers. They’ll keep selling the same products to the same people over and over because that’s what puts money in their pockets.

“If you put a sales rep on a full commission plan, expect him to aggressively focus on winning the next order,” says Roye. “Contrast this scenario with the customer who is focused on total cost reduction or integrated supply. They don’t want someone coming in trying to stuff another order into their warehouse.”

Integrated supply and similar managed inventory agreements have longer sales cycles and require involvement from more than one salesperson.

“That’s not conducive to a full commission plan that rewards people for selling the next order,” says Roye. “Therefore, you’re seeing more compensation plans incorporating a base salary to reward longer term or strategic sales activities.”

“Although we had two basic plans, there were many iterations depending on the individual,” Van Dyke adds. “Everyone negotiated their own deal to a certain extent.”

When he looked closely at the numbers, Van Dyke detected a disturbing trend. The salespeople who earned the higher salary with lower incentives were the lower-performing individuals.

After carefully researching how other distributors pay salespeople and reading about compensation trends, Van Dyke and his branch managers settled on a single comp plan.

All Lewis salespeople are now on a low-salary/high-incentive plan, with commissions paid on gross profit.

“I know what I have done is counter to the trend in the industry at this point, but I felt it was what we needed at this time,” Van Dyke says. “I had salespeople who were underachieving. They had reached a very comfortable level and they weren’t growing their territories.”

Initially, those people who had been on a higher salary were uneasy about the change.

“With a higher salary, they had a safety net under them,” Van Dyke says. “Now they realize they’re going to have to perform.”

The new plan went into effect on January 1, so it’s too early to predict long-term success. But he likes what he has seen so far. Salespeople who had become complacent are now visiting new accounts and calling on accounts they had previously written off.

“We’re seeing some nice growth in the business as a result,” he says.

Lewis Supply took several months to investigate how other distributors pay salespeople before it settled on its current plan. Van Dyke realizes there is no one-size-fits-all solution.

“You have to sit back and look at your compensation plan and how you want to direct your outside salespeople and how you want to manage your business,” he says. “Then you need to review it every two to three years.”

“You play with the numbers and pay him what you think he’s worth,” Thompson says. “Five years down the road, you realize you have five different programs and it’s a mess.”

Turner pays members of its sales staff a salary plus a commission against gross margin. Some are on a straight salary plan. In addition, salespeople can earn a performance bonus. If a salesperson comes in at, say, 110 percent of quota, he or she can make serious bonus dollars. All sales representatives receive a detailed report each month outlining their monthly and year-to-date progress as it relates to gross margin, gross margin percent compared to their quotas and compared to company goals.

The company has experimented with a method to reward specific activities. For example, sellers may earn points for making an integrated supply presentation at three accounts in the first quarter, or for testing a carbide insert at a particular account. If Mary accumulates 10 points in a quarter, she might earn a $2,000 performance bonus. If she attained five of the 10, she’d get $1,000.

“We’re beginning to think about developing a comprehensive, across-the-board program that will still be tied to gross margin, but will pay salespeople for activities we want them to do,” says Thompson.

Here’s one way such a program might work: Suppose Joe spends most of his time calling on maintenance supervisors and plant floor personnel. You want him to contact people higher up in the customer’s organization. So you establish a point system that rewards him if he starts making regular calls on the purchasing agents at his top 10 accounts.

One drawback to such a program is that it takes more time and management involvement. Establishing, reviewing, evaluating and ensuring that the program follows objective criteria for each salesperson is a time-consuming process. It requires management involvement with individual salespeople on at least a quarterly basis.

“We’re moving toward trying to attach activities to bonuses,” Thompson says. “But it’s difficult to do. I don’t want to get to a point where we’re paying our people to do 10 activities and they lose sight of their sales quotas and gross margin quotas.”

Thompson realizes that the best compensation programs take thoughtful planning and careful execution, particularly when the goal is to reward people on something other than simple revenue generation. He has hit upon what Emerson believes is the single most important factor in any compensation plan: strong management involvement.

“The key is strong sales management,” says Emerson.

It requires documentation and regular meetings between sales managers and sellers to make sure the sales staff is focusing on the right product lines aimed at the right customer types and the right activities.

“Commission programs are self-regulating,” he says. “Base/ bonus programs are management regulating.”

If management takes a hands-off attitude, they won’t work.

This article originally appeared in the May/June 2000 issue of Progressive Distributor. Copyright 2000.