Sales Compensation Considerations for Key Manufacturing Roles

Sales compensation in the manufacturing sector has unique characteristics due to multiple routes by which companies deliver products to market–through both direct and indirect channels (distributors). While manufacturers are aware of what their direct channel accounts are selling, they have limited insight into end-user data when a distributor makes the sale. In an environment where obtaining true end-user customer data is a common challenge, sales leadership should pay particular attention to two core plan components, pay mix and plan measures, to ensure that the sales compensation plan still pays for sales performance. To demonstrate the impact of data limitations on these plan components, two core sales roles in the manufacturing industry, territory sellers and corporate account managers, will be used as examples.

Pay Mix

Pay mix is defined as the percentage of total target compensation expressed in the form of base pay/incentive pay, e.g., $60K base with a $40K target incentive results in a 60/40 pay mix. Pay mix reflects the job’s degree of individual customer or business partner persuasion. New factors that influence pay mix are a role’s level of revenue influence and the job role’s strategic focus.

Both territory sellers and corporate account managers tend to have a more conservative pay mix due to the nature of the job roles and limitations of data. Territory sellers have a less aggressive pay mix when aligned to an indirect channel as a result of limitations in obtaining actual point of sale data. Since corporate account managers typically work on accounts/opportunities with longer sales cycles, they also tend to have a conservative pay mix. Typically pay mix for these roles falls between 70/30 and 85/15. A pay mix in this range will allow the sellers to have some portion of their pay at risk; however, it does account for the fact that actual end-user sales data is limited.

Plan Measures

The next challenge when designing plans where point of sale data is lacking is deciding on what measure to use in the plan. With the inclusion of a distributor, receiving end-user customer data is challenging, which impacts how to “measure” sellers. Typically, measures for these roles fall into two categories: (1) sales measures and (2) Management by Objectives (MBOs). MBOs drive business outcomes, but companies are unable to track them without sales-related data.

Territory sellers are removed from the end-user, so it is difficult to tie sales efforts to results. A common option for compensating this type of sales role is to tie incentive solely to sales growth in the territory rather than trying to gather end-user account level sales data. While point of sale data would provide insight to the end-user, sales within the territory can serve as a proxy. This plan measure rewards sellers by aligning their efforts with the distributors to generate sales with end-users.

Sales management can also elect to include an MBO in a territory seller’s compensation plan as a secondary measure. Including an MBO provides another avenue for sales leadership to put focus on areas that are unrelated to sales results. MBOs drive business outcomes that cannot be tracked with revenue.

For the corporate account manager roles, plan metrics can vary depending on the ability to get accurate point-of-sale data from the corporate account. If the manufacturer can obtain sales data on corporate accounts, they can elect to compensate sellers on this number. At times, even though corporate accounts do buy through an indirect channel, a manufacturer can get more granular data due to the corporate relationship. This gives sellers direct line-of-sight to the performance measure on which companies compensate them. There is a direct correlation between sales results and incentive compensation earned.

Similar to the territory seller role, corporate account manager plans can include MBOs. The MBOs can provide sales incentive for items, such as sales process milestones, that are critical steps in a long sales process. However, using a plan based solely on MBOs does not align with the concept of tying sales results to incentive payments. Ideally, a revenue-/sales-based measure should be the primary measure in a corporate account manager plan.

Regardless of which channels a manufacturer uses, understanding the limitations of data is critical in designing the right sales compensation plan. Sales data might not be readily available, but sellers will still need to have some metric for measurement for sales incentive compensation. Therefore, the absence of end-user point-of-sales data does not mean manufacturers cannot create an effective and motivating sales compensation plan.

Contact an Alexander Group Manufacturing practice leader to discuss your company’s unique sales compensation challenges.

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