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Sales compensation mix.

Tying compensation to your market plan.

Over the past 10 years, we have received many requests for assistance in the area of compensation. Beverage distributors have looked at compensation as a substitute for management. As we have counseled distributors, we have explained that compensation is a management tool, not a substitute for good management.

This article will focus on sales compensation. The underlying purposes of sales compensation will be discussed as well as how traditional compensation systems meet the current and future needs of the wholesaler. We will also discuss how to tie the sales compensation system to the needs of the market and the wholesaler.

Purpose of sales compensation

You cannot discuss the purpose of sales compensation without discussing the mission of the sales effort. The mission of the sales force is to execute the plans of management and attain the company's short- and long-term objectives.

The underlying problem the wholesaler faces with his sales planning and ultimately his sales compensation system is the improper balance of short and long-term objectives.

The beverage industry has become too focused on a 30-day planning horizon. The sole objective of the distributor has focused on exceeding the previous year's monthly box sales.

While the industry has always been too "box" driven, the problem has become even more acute because of the 30-day rather than actual emphasis. The distributor has lost focus on his main goal of building quality, profitable market share that has some permanence. This change of focus we attribute in large part to supplier short-sightedness.

The best suppliers in the industry have lost sight of long-term quality goals and have become too focused on short-term results. The consequences are obvious and disturbing: increased discounting, excessive brand proliferation, wasted efforts pursuing the quantity rather than quality of results, decreases in wholesaler profitability and viability, and, eventually, attrition of wholesalers.

To counter this, the first strategy the distributor has to develop is how to balance his long-term and short-term objectives. Management must define what the sales force controls in the sales effort and how their overall job impacts sales results. The salesperson typically effects sales by increasing distribution and selling, doing, and/or managing merchandising. Also, the salesperson has an impact on sales through his relationship with the retailer. Thus, if a product is put into distribution and merchandising of the product is managed (P.O.S., shelf space, pricing and displays), then the salesperson has done everything he can to achieve sales. Therefore, sales compensation should be tied to distribution and merchandising as well as total volume.

Once a strategy for balancing short- and long-term objectives is developed, the purpose of the compensation program becomes very clear. First, the compensation system should be a tool to provide direction and focus to the sales force. It should help management achieve a more rifled approach to sales rather than the traditional shotgun approach. Second, the compensation system should help provide motivation to the sales force and reward them for helping the company achieve its short- and long-term objectives.

Most wholesalers need to make sure that their sales compensation system does not conflict with their sales strategy. Examples of this conflict include the following:

* Paying the same commission for all packages and brands, regardless of gross profit (i.e., Milwaukee's Best vs. Genuine Draft).

* Needing to increase physical distribution on-premise, but the sales compensation is 95 percent plus commission driven.

* Paying incentives for new placements without actively managing where these new placements are going.

* Your company's strategy for long-term growth focuses on the introduction of new brands, but your salespeople reach their financial comfort level by taking orders for mature products.

Traditional sales compensation

The traditional sales compensation plan is heavily weighted towards commissions (95 percent of total compensation). Many wholesalers think that salespeople are making a meaningful amount of incentive pay. Upon closer review, in most cases, the salespeople are only realizing a nominal amount of money from incentives (five percent or less).

This type of compensation package worked fairly well when sales were increasing year to year. The wholesaler carried fewer packages, discounting was not significant, the focus was purely total box sales driven, and there were few new package introductions. However, this mix of commission and incentives (tied to placements, merchandising, displays, etc.) is no longer effective.

In a flat or declining market, a compensation package that is 95 percent commission can cause morale and motivation problems with the sales force. In this type of market, a high commission mix will cause sales costs to go down with sales and offer the company some expense relief. On the other hand, the salesperson in that environment is getting a pay cut. This reduction may repeat itself over two or three years if the market stays soft. What then happens is the company is forced to raise commissions or reduce the number of salespeople to allow the commission pie to be split among fewer people. In any of the above situations, the question must be asked: Does 95 percent commission motivate and focus the sales force towards the level of execution required to grow quality, profitable market share? Probably not.

When 95 percent of the salesperson's earnings come from commission, he is encouraged to concentrate only on the big accounts. While fishing where the fish are is a sound strategy, the salesperson should not "blow and go" in the small accounts. But from his viewpoint, a large account may contribute $100 a week to his paycheck and a small account may only contribute 50 cents a week.

The 95 percent of earnings coming from commissions also encourages favoritism toward sales of discounted products rather than selling live packages. If the wholesaler does not like the way his mix is changing, he can help himself by looking at his compensation mix.

Wholesalers have gone to a percentage of the ticket commissions to discourage pushing of price-promoted beer. This concept can have a small influence on the sales mix, but the bottom line is that the salesperson is still going to push what's on sale because it's easier to sell and because of the higher volume he will sell as compared to a package that's difficult to sell with lower earnings.

The industry, and its salespeople, are becoming too short-term oriented. Ninety-five percent commission does not encourage the salesperson to do the tasks that build quality, profitable market share that will have some permanence. High commission mix does not encourage new placements, improvement of the shelf or cold box for secondary or tertiary products, proper use of P.O.S., or the building of relationships with small- and medium-sized (full margin) customers.

The five percent of earnings coming from targeted incentives are not effective in driving overall execution, effectiveness, and the building of long-term, quality market share. One hundred twenty-five dollars out of $2,500 a month total earnings does not adequately get the salesperson's attention. If he misses all or part of it in a given month, the loss of income he experiences is not meaningful. If five percent of a $125 monthly incentive compensation is spread out evenly over five targeted tasks, each target carries a value of $25.00. If 10 talks a month are targeted, the value per task is only $12.50. In either case, if the salesperson decides not to participate in or pursue some of the monthly tasks, he sees very little negative impact on his paycheck. This defeats the purposes of the compensation program, namely motivation and focus.

The traditional 95 percent commission, five percent compensation mix is not an effective management tool if the goal is growing market share. It can be very effective if the distributor is only concerned with total boxes and sales, regardless of package mix or amount of boxes sold on discount.

Changing the compensation mix

Depending on the wholesaler's market strategy, he may have to change the sales compensation mix. If the market continues to show the same characteristics it has over the past couple of years (i.e. flat sales, more packages, big accounts getting bigger, small accounts getting smaller, more discounting, etc.), the majority of wholesalers will have to change their compensation mix.

If the wholesaler wants to make his sales compensation mix more effective, instead of five percent or $125 a month coming from targeted incentives, 25 percent or $625 a month will need to be earned through incentives. To make this affordable, the commission portion of sales compensation will have to be decreased from 95 percent or $2,375 a month in the first example, to 75 percent or $1,875 a month, as indicated in the second example.

There are some keys to making this solution work. The wholesaler can ease into this mix over two or three years rather than overnight. Also, if the wholesaler wants $625 a month earned in incentives and expects the salesperson to accomplish 65 percent to 75 percent of his incentive opportunities, then more than $625 has to be made available on a monthly basis. If $625 is the desired monthly earning, $830 to $950 needs to be made available with a 65 to 75 percent achievement rate expected. If the wholesaler expects 100 percent performance and only makes $625 available, two things are likely to happen: 1. The salesperson will not perform at 100 percent and will make less than what the company and the employee expects to earn, or 2. Sales management will feel compelled to develop easily achievable targets so the salespeople can earn their pay. This mentality reduces sales management's guilt and kills the effectiveness of the incentive package.

It is important to note that if sales management is not clearly focused on the marketing direction the company wants to pursue and if they are not thoroughly aware of what's going on in the accounts, they will be unable to establish effective incentive targets. If a wholesaler's sales management is this out of touch, trying a heavily-weighted incentive compensation can be devastating to sales morale and management credibility.

Management must also realize that all routes are not the same. Each route has its own unique make-up. This is influenced by demographics, the effectiveness of the salesperson on the route, the mix of stores, etc. An effective incentive program should be customized for each route. One route may need to improve shelf management in its top five accounts, while another route may need to improve Bud Light distribution in 20 targeted on-premise accounts.

If incentives are going to be effective in ensuring salespeople are expending great effort towards increasing quality, profitable market share, a more focused, rifled approach will be necessary to ensure success. An incentive target can no longer be to get 10 new Coors Dry placements in the salesperson's 80 accounts. Management must ask for 10 new placements from 25 specifically-targeted accounts where Coors Dry will help the company. Incentives should not be tied to getting 10 displays of a specific product. They should be tied to 10 displays of 50 cases or more in favorable store locations.

The emphasis must change from quantity of accomplished tasks to quality of accomplished tasks. This proposed change in the sales compensation mix will be a major change. It will affect your salespeople and create a burden on the sales management team. But, it will help you build your share profitably. As the wholesaler moves towards a more rifled sales strategy, increase incentive pay will be the bullet required to help hit the target.

Joseph J. Verno is a founder and managing partner of the Denver Management Group, Inc., of Englewood, CO, a nationally-recognized management consulting firm to the beer wholesaling industry. Verno has served as a consultant to brewers and wholesalers and is a speaker at seminars and workshops throughout the U.S.
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Title Annotation:beer distributors
Author:Verno, Joseph J.
Publication:Modern Brewery Age
Article Type:Industry Overview
Date:Jan 25, 1993
Previous Article:Building routes, building business.
Next Article:Sterile beverage filling.

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