Are compensation models reflective of expectations? Services?

Twenty-five years ago, a CEO and President who had created one of the first electrical industry platforms told me manufacturer representatives should be compensated via monthly salaries rather than commissions as it was a more equitable system.

What are Salespeople / Reps Compensated for?

He complained that efforts to manage POS and specification efforts were too costly and inefficient. He also stated his reps were his sales force with more stability and better long-term relations with distributors and users than his direct sales force.

His objective was to have his reps continue to increase their efforts with his products on a long- term basis, and he clearly foresaw that the representative’s costs would continue to escalate and if so, be averse to his company’s goals as they would need to increase their sales which inevitably would lead to them needing to carry other products … that he did not manufacturer. Hence, there would be more competition for “his” reps’ time.

Around the same time, I was approached by a distributor salesperson for a job at our company. He was a very successful and well thought of individual, so it surprised me. I asked what he was looking to accomplish, and why he was considering leaving his company. His response was “stability.”  He stated his compensation was 100% commission on profitability and that it was “fair” when compared to like distributor salespeople. When business was good, he made good money, however, when the economy slowed or his contractors were not successful bidding jobs, he had difficulty meeting his financial obligations. He also related that his expenses were deducted from his commissions. These expenses were health insurance, taxes, car, and anything else necessary for his efforts. Sometimes it even included compensation on promotions for inside people who worked his accounts.

These two conversations led me to research various methods available with the goal to find fair and equitable compensation systems that would enable our company to retain and expand key employees while growing our business and profitability.

Today, staffing in the electrical industry is changing. Retirements, people moving amongst companies, people leaving the industry, new (and yes younger) talent entering the industry. And we’re now competing for talent versus other industries. Channel Marketing Group has conducted research that shows that companies cannot be married to their compensation methods of old. The market has changed. People change. The research has shown, in many cases, that recruitment is the #1 issue faced by our industry, specifically as the people leaving in many cases are seasoned, experienced individuals who have developed relationships and strategies that are often very difficult to replace.

And recruiting these people, which hopefully will result in stability, is an effective compensation plan. And in today’s economy, people want a balance between stable workplace, stable compensation but growth potential in both areas. Yes, they want it all!

Obviously, there is no single method that will satisfy everyone. Many companies do not have a firm procedure on their compensation, and they are willing to utilize methods that might fit the individual being sought, rather than a system their company has been utilizing for an extended time. I am sure we all recognize people, like times, change, and those less willing to change are often those left behind. This seemingly is an industry issue and not just one for manufacturers, distributors, or reps. One only has to analyze where their key people are moving to to understand those staying within the industry are still moving from manufacturer to rep or rep to distributor.

Distributor Sales Compensation

In interviews I recently conducted, I found that the older model of straight commissions is being utilized more by distributors than reps or manufacturers. Certain adjustments, generally with higher rates for more profitable products, are often advocated but poorly managed, communicated and executed against. Field people frequently say “the comp model is complicated and I have no idea how it works. I respond to the customer.” A few distributors do not pay commissions on the wire and conduit items suggesting that their lower costs enable salespeople to make additional profit on those products used with the wire and conduit on jobs starting the purchase orders. Speaking to a few distributor salespeople under this system revealed them to be far less enthralled, suggesting they should be responsible for the proper mix of product and not management. They ve suggested they do not promote stock or supply products, and they favor either gear or lighting packages where they are compensated, thus causing slower thru stock sales and less available business.

Manufacturer Regional Sales Compensation

Manufacturers are more often salary & bonus depending on attaining specific objectives in volume, profitability, sales of new products or market share. Their people complained that if they were not flexible in the goals than they are often adversely affected by the economy, production, availability, or sales structure changes rather than their efforts. They often complain about market share goals as to the question how the numbers are generated, and often what share in the market is from their area of specific responsibility. If as an example, they are responsible for local distribution, how much of the share might be from international, national, or non-electrical distribution and how is POS being directed by distributors and managed by “corporate?” Just like reps, the question the accuracy of POS reporting and administration. This is manifested for representatives where POS is often not given properly if at all, and the manufacturer’s field personnel recognize the issue as it affects them too.

Rep Sales Compensation

Representatives have a unique situation since they are only compensated, often, after the customer has paid the invoice. Many reps argue that since most manufacturers control who may be sold based on payments and credit history (or line), why are they being delayed payment? Many state that manufacturer’s expectations exceed their compensation intentions. A recent example came from a representative who was asked to get specifications for their product from a user purchasing from a distributor the rep did not receive credit. The user was in their geography, the distributor’s branch was also, however, the manufacturer had refused to utilize POS to pay the agency. The rep refused and suggested they either do it themselves or get the distributor to step up. Another area shared by reps was the issue of increasing responsibility with decreasing commissions was a complaint by 100% of those representatives interviewed.

When I ask reps how they continue to expand with specification efforts, intelligent systems, marketing, specialization while growing their staffs as expected in the findings for “NEMRA Rep of the Future, Vision 2030,” most responded that they can only fund their business, and growth by either adding manufacturers or growing geographies.

This is certainly not new and was the concern from the manufacturer I referenced in the beginning, from 25 years ago. If a rep needs to cover more expenses, they need more sales. Some come organically from existing manufacturers. Some may need to come from new manufacturers.

Are you paid for paperwork?

Manufacturers and distributors have been doing this for years. Have you noticed that there are few private doctors any longer and most are now part of larger groups either regionally or nationally? A friend of mine who is a cardiologist said for them to accept compensation from insurance companies and to keep up with the paperwork, it is no longer feasible for private practices. They cannot see enough patients to pay for the added cost and decreased income.

Why are so many reps leaving manufacturers they have represented for so many years? The negotiations are often now based on the compensation model, the geographies available and guarantees available for mutual benefit. They, like other businesses, were founded on mutual interest, trust, and relationships. The rep of today is a growing business often growing faster than the manufacturer and distributor. We all need to understand and commit to mutual successes if we truly believe that relationships are significant and we need each other.

Going back to my manufacturer from 25 years ago. While he wanted stability at that time, he also wanted to financial flexibility for “tough times”, and he did not want an embedded cost nor to have a need to invest to grow local business. He wanted someone else (the reps) to make the investments and take the financial risk. Unfortunately, he could not have it both ways.

Tomorrow’s Compensation Models?

The question becomes, is the rep commission model of yesteryear the right model, in all cases, for the future? If manufacturers want reps to manage their line cards, how do they expect investments / expenses to get funded? Perhaps different models could be conceived, and it ties to the level of mutual commitment, and opportunity, in the market. Now that would be true commitment and require planning.

Thoughts?

Reach out to me or leave input in the comments.