Sins of Commission

by Chuck Holmes

One of the biggest mistakes distributors can make is to commit one of the four sins of commission. Here are the common mistakes to avoid when building a sales compensation program.

Many of the most perplexing questions facing distribution sales managers today have to do with compensation. How much should I pay salespeople? How should I structure the compensation? Should inside sales be paid a commission? If so, on what? Should variable compensation be on an individual basis? A team basis? Neither? Both?

This article promises to answer none of those questions. And you probably won’t find the answers in a book, either. Compensation plans are like eyeglasses; everybody needs something different.

There are, however, some things that are true about compensation generally, and about performance-based compensation specifically. One is that a properly designed performance-based compensation plan communicates your company’s objectives to your employees in a powerful way. The second is that there is no one in your company who cannot have at least part of his or her income based on specific performance.

Those are the positive and general truths. Equally important are the following four negative and specific ones. These are the root cause of failure of many compensation programs. They are the sins of commission.

Experience shows that compensation programs are doomed to failure if you:

We’ll look at each of these more closely, but first there is one basic fact of compensation life. Every successful compensation program must satisfy three constituencies.

The first is obvious; it’s the employee. The employee must perceive that the program meets his or her security needs and offers at least a chance of prosperity.

The second is functional management. The sales manager (or warehouse manager or any other manager) must believe that the compensation program will focus the employee on the goals of the functional area and provide motivation to attempt to reach those goals. And, finally, there’s financial management who wants all of this to happen without increasing expenses.

To have a financial plan that works, you have to have the expressed approval, preferably with enthusiasm, of all of the above.

Less than 30 years ago, Fredrick Herzberg wrote that money was a “hygiene” factor, and not a motivator. But even 30 years ago that was contrary to the experience of many who worked as or with commissioned salespeople. It seems more likely that money is not a motivator if there is not a direct connection between the efforts of the employee and the monetary reward. Money is a motivator when people are empowered to create their own financial success. In other words, their success is in their hands, not management’s.

This means the compensation program has to be perceived by the employee (note the emphasis) to be understandable, doable and potentially successful on a personal level. This immediately eliminates compensation plans that take a dozen single-spaced pages to explain or that set the bar for reward so high that nobody sees the possibility of reaching it. It also eliminates those programs, common to distribution, where the incentive is so small and payday is so far away that nobody takes it seriously.

One client created performance-based compensation for inside salespeople based on orders entered. They were paid a small commission based on the dollar totals of orders they entered during the pay period. The result was an emphasis on entering orders and those things that most efficiently got the inside salespeople orders to enter. They hovered around the fax machine like vultures. They certainly didn’t want to talk to an actual customer who might or might not place an order. The plan, though well intentioned, was detrimental to customer service.

For years, most people have been paid a salary essentially to show up. Too many people do just that; they show up, do what they have to do, collect their pay and go home.

The first question you need to answer when you create a compensation plan is “what do I want these people to do?”

One company focused its compensation plan on increasing gross profit and emphasizing a number of new lines. Another wanted to focus on growing business with current customers. And still another wanted the salespeople to stop babysitting current customers and find new business.

Keep in mind that people do what you pay them to do. Unless you develop your plan carefully, that may be the worst thing that can happen to you.

Simple math would have told salespeople that the new plan paid them more money for the same effort. But they never did the math. They focused on a single point; the new plan eliminated their expense accounts. It didn’t matter that they could have paid for their customer’s lunch, bought their own gas and still had a larger net. What mattered was the company took away something they considered important.

Another company spent a considerable amount of money creating a compensation plan, but refused to give it to the employees in writing. The branch managers presented it in the sales meeting, and if they were asked for a written explanation, they had to refuse. Nobody knows whether this plan was a good one or not. It didn’t last long.

There are two points to keep in mind. The first is that employees should be included in some stages of planning to prevent management from making dumb mistakes. The second is that the rollout of the plan is as important as the numbers in the plan. It should provide a full and enthusiastic explanation of how this new plan gives them even greater opportunities for success.

Actually, this can be done. If you’re paying them for the right things and in the right way, their increased success will result in even greater success for the company.

Unfortunately, some people enthusiastically agree, up to a point.

The distribution industry is full of plans with commission caps, decreasing commissions on increasing sales, and the eyes of management making sure no one below them makes more than they do. There are also true stories of owners who cut territories or reassigned accounts because someone made too much money.

In technical terms, these measures are called demotivators or disincentives. In non-technical terms, they are called stupid.

Keep this in mind: If you have designed your compensation plan properly, there is no such thing as too much money. If salespeople through their skills and efforts make more than the owner of the company, don’t attempt to cut their commission, territory or income. Give them a bonus and put a plaque in the lobby. That type of thing makes money a motivator.

One of the great rules of compensation is that you can make more money worrying about how your people can make more money than worrying about how you can make more money.

You may want to retain a compensation specialist to create your new plan for performance-based compensation for the sales force or the warehouse staff or inside sales. Or, you may want to tackle it yourself. If you decide to do it yourself, be careful not to sin against your employees’ paychecks. They probably won’t forgive you. 

This article originally appeared in the May/June 2001ssue of Progressive Distributor. Copyright 2001.