Redesigning sales compensation in merchant wholesaling

Part 2: The Performance Cycle

by Scott Benfield

“When I came to this company, I asked the sellers how their compensation related to performance, how compensation acted as an incentive and how their compensation plan worked. You wouldn’t believe the litany of BS answers I got.” – Wholesaler president and CEO

Unfortunately, the opening quotation is common in compensation systems. Far too often compensation is an extrapolation of what was done in the past and what is needed to keep key employees on board.

This installment of our series deals with the key features of designing the compensation system. It talks less about dollar amounts and competitive comp levels. Instead, this article discusses the design features of a compensation system that help salespeople understand the key drivers of performance, what they need to do to improve performance and how all this leads to results and greater compensation.

You don’t just pay for results
One the most prevalent falsehoods in sales management is that you pay solely for results. Believing that performance on key factors secures results, managers assume they must pay for performance to get results. 

Currently, most wholesalers measure performance in margin dollar increases compared the prior year or a set goal. For instance, if a salesperson had a territory that generated a $400,000 margin, the pay-at-risk (PAR) might be predicated at reaching $420,000, a 5 percent increase. Because management wanted a 5 percent increase, the sales manager simply rolled the incremental growth into the compensation level for his salespeople. He explained the plan to his salespeople, placed appropriate documentation in the employee file and gave the formula to the payroll department. 

The following year, if the salesperson generated $450,000, he or she would get some cut of the incremental $30,000 over the goal. So, management kept the formula intact for another year and the process started anew until several key salespeople missed bonuses or the plan failed to generate the growth management wanted.

Of course, sales management took this to mean the compensation system was out of whack. They then reworked the numbers by paying off top-line sales, paying more for new accounts or for key products or some other measure. This compensation system game is common and fills conversations of sales managers in all walks of distribution.

Such changes are subtle forms of bribery, and the vast majority of these numeric gerrymandering efforts do little to address the problem. 

What is the problem? In part, the problem is that compensation is a reward for a set of skills and implemented tasks to accomplish the sales goal. You can’t pay for just a number but you must link pay to the learned behavior and tasks to get the number. And, an overriding issue in compensation design is that many sales managers don’t have a solid understanding of the skill sets needed to get the job done. So, we’ll take a peek behind the numbers at the building blocks of a successful compensation system and how to use them in the quest for results.

Results by any means vs. the performance cycle
Our first installment mentioned the problem of results by any means. We’ll refresh your memory by briefly reviewing the concept. The problem with results by any means is caused by simple, one-number compensation systems. In essence, one-number compensation systems leave a tremendous amount of discretion to the salesperson to achieve the financial results. One number does not take into account the elements of the performance cycle, and one number is not balanced with a countervailing measure to guard against undesired behavior.

The results by any means problem is illustrated by salespeople who cut price to drive up volume and reach margin dollar goals. This is exacerbated by frequent price cutting in accounts with high activity costs, against entrenched competitors with better cost positions, and when sales managers infrequently review the price discounting approach. 

Often, the weakest salespeople use price as an entry into an account. Price discounting can cause strong salespeople to become dependent and weak by using low-price strategies. Also, salespeople are increasingly apt to give away services to secure the product sale.

Dating terms, specialized delivery and account-specific inventory are only part of the services that salespeople “give” away to secure sales. Margin dollar compensation systems don’t track and penalize salespeople for promising services, because the financial cost of service is found in the operating expense section of the income statement.

Without a defined and measured performance cycle and balanced compensation measures, salespeople will use any means necessary to reach their sales goals. In short, without defined controls on pricing and service promises, the sales function is out of control and the organization literally pays the price in reduced pre-tax profits.

The performance cycle is a simple concept for managing the soft factors of performance to get sales results. It is outlined in Exhibit 1. Reading the exhibit from the top down, the following stages of the cycle are:

• Key job success factors – These are the minimum skill levels required to get the job done and include sufficient experience, a minimum set of verifiable skills, and prior training to assume the job. This includes classic sales skills of prospecting, probing, identifying needs, developing proposals and following up, plus skills specific to the industry.

• Knowledge – As most sales jobs require advanced knowledge, the salesperson should demonstrate a capacity for new learning in addition to the required product/application knowledge. This stage also requires sales management to actively plan new knowledge and test the salesperson for knowledge gained.

• Training – Training includes various events that demonstrate use of knowledge. It’s often done by corporate trainers and manufacturers on product/application procedures. In addition, sales managers should develop annual training events for their salespeople and keep a track record of these events.

• Tasks – Tasks are the visible evidence of using the training. The difficult part is verifying when tasks have been completed. Role playing is useful to develop task skills, and tasks can be put into the call schedule. But the best way to review compliance is to travel with the salesperson and review their completion of the work.

Properly done, completing the performance cycle leads to results. The biggest hiccup to the performance cycle is that the sales manager must plan the different stages and follow up with salespeople on their progress through the cycle. Creating knowledge, task events and follow-up requires a tremendous amount of effort. If the sales manager does not understand the needs of the market and the company’s ability to serve the market, the performance cycle is wasted effort. Why? Simply put, if the firm can’t compete with the operations (service) requirements for the target market or wrongly identifies the marketing mix to secure the sale, they will goof up the elements of the performance cycle with bad assumptions on market needs.

Filling in the performance cycle
Following is a checklist of common events used to manage the performance cycle. The list is by no means exhaustive, but it is a quick check to help sales managers come to grips with managing the soft factors to get results.

Key job success factors
• Is there a written job description? Is it up to date and pertinent to the job at hand?
• What are the personality characteristics for the job? Can outside testing of the salesperson’s comfort zone and personality type help in slotting the right person in the job?
• Has the salesperson passed through the customary stages to get to the position or is he or she a direct hire to the position? If a direct hire, what do salespeople need to know about your services and marketing mix in order to effectively sell?

Knowledge
• Does the candidate have the necessary product/application knowledge skills? If not, what training is available to develop them?
• What new knowledge is needed in the position? Has the salesperson demonstrated the necessary capacity to learn the knowledge?
• Is there an ongoing training plan to assess and develop basic sales skills?
• If the salesperson is a candidate for management, is he or she being groomed with proper management knowledge and training?

Training
• What are the key training events needed by the seller?
• Have these events been planned? When will they occur and what is the expected output?
• What is the training budget? Can co-op funds offset some of the training costs?
• Can self-study be used or is classroom work needed?
• Does the plan include training for basic sales skills?

Tasks
• What are the key tasks that result from the training events?
• How will these tasks be measured?
• Can task compliance be inspected in the field?
• What are the expected outcomes of task compliance and how will we measure success for task implementation?

The next installment in this series will review the concept of balancing and how to use the performance cycle in a balanced control and compensation system.

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