Three Sales Compensation Lessons COVID-19 Has Taught Distributors
COVID-19 has changed the way distributors think about sales models.
Remote selling has become the norm, forecasting at the account level has become a guessing game for some end-markets, and talent acquisition and development has been complicated due to dispersion of people.
One element of the sales model that has been particularly impacted is sales compensation. Alexander Group ran several surveys at points throughout COVID-19, and the responses to questions about the health of sales compensation programs were wildly divergent. Medical device manufacturers had trouble with overpayment due to record sales years, while suppliers into the hospitality space and other severely impacted end-markets implemented quota relief. No matter the organization or end-market, the disruption caused by COVID-19 has highlighted three key sales compensation elements that distributors should immediately address before launching 2021 plans.
- Sales Volume Differentiation
- Individual Sales Target Assignment
- Adjustment of Measurement & Pay Periods
Sales Volume Differentiation
Sales compensation plans provide the opportunity to prioritize certain revenue streams (services, high margin products) over others. Distributors have been somewhat slow to differentiate revenue; many still treat all dollars equally and differentiate pay on margin level and order size instead.
In a longer-term strategic sense, the need to pay comparatively more for growth products and services is a must for distributors seeking to avoid the commodity trap. In the short-term tactical sense, differentiation will help distributors avoid paying exorbitant amounts for products that do not require sales effort or come as a windfall (e.g., PPE).
Individual Sales Target Assignment
Similar to volume differentiation, distributors have been slow to embrace individualized sales targets or quotas. Many legacy commission plans with flat rates include “soft” targets that earn sellers a small spot bonus or other recognition (e.g., President’s Club). Some ramped commission plans feature an accelerator that pays more for above-target performance, but most goals are “peanut butter spread,” meaning all sellers have the same percentage growth goal. COVID-19 has shown the need for individualized sales goals that reflect the potential of a sales rep’s territory, account list and segment/end-market.
Consider an organization that sells into the industrial manufacturing and hospitality end-markets. Sellers heavy in industrials have seen record years because of safety and PPE demands, rarely driven by the seller. Those with restaurants and hotels in their portfolios have struggled to sell the bare minimum. Overall, however, the organization may have weathered the COVID-19 storm and even grown.
There was no way to forecast the extreme differences in performance levels going into 2020, but organizations that want to equalize earning opportunity across sellers and teams should move towards a more rigorous quota allocation process right away.
Adjustment of Measurement & Pay Periods
Measurement period refers to the duration that a sales quota covers. Pay periods refer to how often sellers are paid variable compensation. Historically, most distributor compensation plans featured monthly performance and pay periods. Sellers were paid monthly on performance against the prior month’s discrete goal. Payouts were subject to monthly multipliers so sellers could make significant upside from a hot month. Recently, distributors have extended measurement periods from monthly to quarterly or annual. The logic is that if the company is measured on the full year performance, so should the sellers. Payout periods have remained largely monthly with payment calculated based on year-to-date progress against an annual goal.
The need for broader pay periods has been exacerbated by COVID-19. Consider a seller with customers in an end-market that was paused, not totally shut down, at the onset of the pandemic. The seller likely had slow months in April, May and June due to uncertainty and budget cuts. However, as the virus subsided over the summer in some markets, customers may have accelerated purchases based on pent up demand, a government cash infusion or other factors. The seller may have significantly under-performed in the lean times and over-performed in the rebound, but their year-to-date sales performance may be well under goal. If the seller’s plan featured above-goal accelerators, they may be at or ahead of on-target earnings despite being below plan for the year.
Landing on the right combination of measurement and pay periods helps to align effort and pay, protects against over-payment and limits the impact of boom/bust performance – all while providing cash flow for sellers. COVID-19 may be an extreme instance of the risks of misaligned timing, but risks have and will continue to exist in the years ahead.
For more information on how to manage your sales compensation plan, please contact an Alexander Group Distribution practice lead.