HOW TO RE-THINK REP TERRITORIES AND
The question – “What is the
best incentive plan for reps?” – always generates heated debate amongst execs
(and reps!), because of the many existing drawbacks. After the debate, however,
“commission plans” ― centered on either sales or margin dollars ―
are often only tweaked, or left unchanged.
Why the heat, noise and yet persistent
status quo? I think you’re asking the wrong question to solve the wrong problem,
· dated, unspoken, marketing life-cycle assumptions; and,
net-profitability tools that reveal big channel-activity waste between
distributors and both their customers and suppliers.
In mature, consolidating
industries, better comp plans come when you vary and tune them to different pools
of customers. There’s no longer a one-plan-fits-all-reps solution just as there
aren’t solutions for: a national, affordable, health plan for all citizens that
won’t bankrupt the country; or a one-size-fits-all public school system that
will serve all kids whose one common aspect is biological age.
Big, seemingly insolvable “problems”
must be broken into smaller strategically sensible problems so that end-user-centric
solutions can be designed. We can’t individually do much about our national
healthcare and public school messes, but you can immediately make some effective changes in both our territory
and compensation designs.
Let’s dig deeper into my
assumptions about your assumptions by reviewing the ten possible
compensation-plan drawbacks your system might currently have. Do you have any
of them? If so, how measurably critical are they ― really? What are the
root causes for why they exist? What are our underlying (usually-unspoken and
somewhat-dated) assumptions and deficient measuring tools that have let the
problems exist and grow?
We pay the same commission
rate to a rep who’s only maintaining an established margin dollar flow from an
established account as to a rep who wins profitable new sales (from new or
existing accounts). Some of these cash-cow customers may be so loyal to the
company that any rep could do the same maintenance function if given the chance.
And the account could still have more upside potential. But the rep who’s
making big income from the account is afraid to “rock the boat” by pushing for
more. Or, they ignorantly may believe that they’re getting all (or the lion’s
share) of the business and don’t want to be “greedy”. If profitable penetration
work is under-rewarded and easy maintenance selling is over-rewarded, then creative
digging power from mature reps in mature territories will fade away. Reps working
for best-service-value firms who got lucky with established account inheritance
can become: too well fed; too set in their ways; and less energetic with age
and declining, empty-nest, income needs.
How much key
account upside potential is being ignored by complacent vets? Make a list of your
top five or ten opportunities.
How do you move
to plans that pay more to creative and aggressive “hunters” for generating positive
increases in real customer profits (not empty or losing margin dollars)?
How do you pay less
for high empathy, low-ego-drive “farmers” who can sufficiently maintain core accounts which the
team cracked and continues to support with extra services?
In mature firms in
mature channels, all of the best (upside potential) accounts have long been
assigned to veteran reps who often inherited them by being at the right place
at the right time. Commission plans that
over-compensate vets for core accounts will also encourage reps to milk the
accounts as they head into (unannounced) partial retirement ― if the company will let them.
What are the top
few “harvest” jobs currently going on within the firm’s customer portfolio?
Because of #2,
promising younger reps are left to pursue “training territory” accounts. These small,
remote and/or non-growing accounts no longer have the margin-dollar-per-order
potential to cover traditional wholesale service costs, even before sales comp costs
are included. (When I do the math in distributor workshops, we always find that
accounts need to generate at least $400 in monthly gross profit to financially support
an outside sales rep.)
Should you have
trainees pursue small, historically-not-growing-with-no-promise-to-do-so
accounts with a service model that guarantees losses?
What’s a better service
model that you can create to profitably serve the chronic small-order small
accounts you’ve accumulated over the years?
How can you
attract and keep better next-generation reps who won’t want to wait a lifetime
to inherit what’s left of harvested, gravy-train territories?
You cannot easily reassign accounts amongst reps, or move chronically small ones to the house
without creating compensation issues with vets ― even when an account is not thrilled with their assigned rep. For a
look-in-the-mirror test: how many factory reps calling on your company are
actually worth seeing? Are they working to help grow your profits? Are they
worth their cost, as built into your purchase prices? Then, in a similar line
of logic, how many of your best customers
feel the same about your reps?
So, why can’t you
have only super-reps call on: core accounts, target accounts and super-loser
What new comp
plan(s) would allow this?
problems 1-4, the upside incentive that “gross-profit-based commission” is
supposed to provide doesn’t work for:
rookies with no access to viable, profitable upside account potential; or for:
reps who were
never money-motivated to begin with.
Here are some
questions to consider:
Are you guilty of
projecting our own money-motivation emotions on all reps?
If reps were
truly money-motivated, wouldn’t they have self-selected themselves into some
form of more lucrative selling?
How many of your
reps rose to their present station because they knew someone in your industry
to get a lower-level job and didn’t say no to promotions and being paid more money
by some plan?
specifically, how many former inside sales reps, who valued pleasing the
customer over asking for anything more from an account that “might rock the
boat” are currently outside sales reps?
how many reps are guilty of too much ego-drive and incentive greed, but too
little empathy so that you see customers pushing back?
Rep turnover in
distribution channels is suspiciously low versus cold call environments ―
what does this suggest about stress levels, compensation levels and trends? Is
high-maintenance, repeat selling to customers who’ve become friends?
good pay that is indexed
to the inflation in the product line; the growth rate of the industry; and the
quality of the service horse that they’re riding?
Not all margin dollars from all accounts are equally
profitable. When distributors get good
net-profitability numbers for customers, they’re stunned to discover that supposedly
“good” accounts earning “good” commissions for reps are actually big losers for
the company. The money-losing reality is frequently hidden due to a lack of
good account-level profitability analysis, which could be easily rectified if
it could be identified. With the dysfunctional account generating good
commission levels, there’s actually a perverse incentive for the rep to protect
the status quo.
Why should the
company keep paying reps to go after both new and old business for which the Cost
to Serve exceeds the margin dollars?
Why should the
company maintain a plan that encourages reps to resist transforming big losers
to big winners (especially when both the company and the customer would
Why not pay
incentives for “improvement in net profit per customer”?
incentives are like most distributors, you may find that you’re actually paying
your reps to advocate for: looser credit; just-in-case special stock; more
hot-shot services (without any fees for service). With Gross Profit incentive
plans, reducing company profits and ballooning the balance sheet helps reps win
more commissionable income. If you paid reps on all-costs-in, net profitability
for customers, then they’d be in total alignment with company management. They’d
also be keen to work with super-losing accounts to consolidate heretofore
unseen activity costs on both sides of the relationship.
Most reps may have
some accounts that are more loyal to the rep than to the company. The big anxiety is that if you confront a
rep about any of problems 1-7 above, they might defect to a competitor and
take their loyal business with them. How can you quantify and then minimize
this risk before any confrontational, intervention moves? (Do new plans in baby
steps, not big, universal leaps.)
How many specific
accounts might defect to what degree and odds?
How much net profit (not margin dollars) do the very,
loyal accounts currently generate? What if their best accounts are actually big money
losers? (Let them go?) Or winners? (Don’t change?) The true, net profit stories will guide each
case, especially if you remember that “volume is vanity, profit is sanity” and
free cash-flow is best of all.
If you team sell
the key profitable customers thoroughly before creating a confrontational moment,
could estimated defection-scenario losses be reduced along with our anxiety
about implementing necessary changes? By how much? Risk anxiety, when measured and pre-managed is always much less than you
SOLVING THE PROBLEM:
Dysfunctional commission plans have been in the way of
best customers’ supply-chain, process improvement agendas in many channels since Sam Walton helped to jump-start
a trend in 1988. He announced back then that Wal-Mart would no longer see or
pay for reps’ commissions, which, for Arkansas
reps, were skyrocketing. Wal-Mart would, instead, do business only with
suppliers that were willing to assign management-led teams to co-creating with Wal-Mart
an “integrated, automated replenishment system”. The
rep associations protested vehemently, with no success. And, the trend to improve
inter-business buy-sell processes to both lower total procurement costs and
improve the consistency of fill-rates, up-time and on-time productivity metrics
is still spreading through all distribution channels.
eventually work with key accounts on supply chain opportunities - proactively
or reactively ― how should the rep be re-compensated for their different
role in a team-to-team relationship?
At the other
extreme, why should you pay a rep a standard commission rate on sales or margin
for bid business which happens to come from their territory? Don’t you need
different levels of incentives for different levels of service intensity if you
want a shot at winning net-profitable business from buyers with a wide range of
If reps are
incented by a percent of the customer’s net profits, then they will have to
think about supply-chain activity costs at least on your side of the fence if
not also on the customer’s. Isn’t that a higher-level of value-added thinking
in line with best customers’ supply-chain ambitions? Sales rep “product
knowledge” ― on 90% of our sales volume that have become commodities ―
is not as valued by experienced repeat buyers as it was at the beginning of
product life-cycles. Being a catalyst for buy-sell process improvements is the
next-level value-added opportunity.
on product sales or gross margin dollars reinforces selling products at almost
any price, because all incremental margin dollars are profitable to the rep
even if after total service costs are deducted, the company loses money. Getting
last look to meet the price in de facto reverse auctions by the customer puts
no value on the reps own, individual value, but they still get income. If a rep
were to be paid on net profitability of the customer, don’t you think that:
They would work
harder to justify “last-look plus a point for my own value-added to your (the
customer’s) bottom line”? And: “Price?! Why stop there, why don’t you work together
to reduce ALL elements of total procurement cost and boost on-premise
availability productivity metrics. All you have to do is re-tune our shared
Many of the status
quo, coasting reps will fear and resist management and team members interacting
more deeply with (their/your) three types of key accounts: most profitable; most
unprofitable (to transform them); and most potentially profitable target
- The accounts may become more loyal to the
company which will undermine the rep’s “magic act”, over-compensation benefits
and defection-threat power.
- The team will most likely uncover and develop
even more volume discrediting past rep claims that: “We are already
getting all of the business”. (The best reps don’t know ― yet―
that there are new territory and incentive strategies that you can
co-create with them that will allow them to be part of the positive
changes to create more value for customers, more profits for the firm and
more compensation for them!)
WHAT BIGGER PATTERNS ARE
BEHIND THESE DRAWBACK DOTS?
In an executive round-table discussion,
if every participant is like one of the blind experts trying to describe an
elephant by touching only one part of it, then there will be a lot of debate
and talking past one another. If, instead, they would discuss:
all of the issues
above; combined with
where their industry
(the elephant) is on the life-cycle map; and
referred to the powerful
insights from net profit customer analysis
Then, quick, strong
agreements would be:
commission plans lock you into a static past preventing you from implementing the
necessary changes that a maturing channel requires..
In a mature,
consolidating channel, there is no one universal plan that can be applied to
all reps and customer types.
profit analysis is a key tool for rethinking:
should be targeted with new and better service models?
How many reps are
needed to cover accounts with sufficient profit to fund the cost of the reps?
How to re-educate
and re-compensate reps with incentives being geared to win-win-win
(company-rep-customer) supply chain economics, instead of trying to just push
more product volume to any and all customers whether they are profitable or not.
HOW SHOULD WE MOVE FORWARD
ON REP COMPENSATION?
The short answer is ― “it
depends” ― every distribution channel and distributor location is
different. Some firms may be in the early part of a product category life-cycle.
If a company is a start-up with exclusive supply lines to sell goods that are
the equivalent of videotapes for newly opening video rental stores in 1980,
then “old school” thinking may work like it did in the Oklahoma land rush. Hire more reps on
straight commission to get there sooner with all cold calling on just-opening,
independent, entrepreneurial video-rental dealers.
If your channel has matured
and consolidated at all levels as it has for today’s DVD distributors, then a
straight-commission, do-it-all rep will not be in the mix for the national
contracts with Wall-Mart, Best Buy, Blockbuster, etc.
If your channel is mature and
consolidating and biggest most aggressive customers have “VPs of Supply Chain”
(not “purchasing”), then general guidelines that will apply are:
More growth in
bottom line profits will come from selling fewer consolidating customers more deeply
on an integrated win-win, buy-sell process basis.
You don’t need
more reps to go after smaller and more remote accounts for which the total
service costs are increasingly greater than the decreasing margin flow that the
accounts have. Smaller accounts need to be sold, instead, through a different
service model centered around:
catalog and web-orders.
When you have
customer net profitability analysis, tracking and compensation reports, you’ll
have the informational insights to:
territory sales model―only A-sized accounts get the best caliber rep
decrease the number
reps―keeping and upgrading the best with supply-chain skills.
compensation to reward growth in account net profit, rather than maintenance of
gross profit. You may set different percentages and targets for accounts where
different service-intensity is warranted.
use as a
holistic, change-management tool, my “Kinetic Chain of Profit Power” which lays
out the necessary preliminary steps that lead up to an effective and successful
incentive plan implementation.
implement change by
experimenting in well-measured, incremental steps. “Think Big, Act Small, and
Fail Forward Brilliantly” with precision, net-profit tools.
© Merrifield Consulting Group, Inc., Article 4.13
D. Bruce Merrifield, Jr.