Salt & Pepper #7 - Industry Compensation Models
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Welcome to Salt & Pepper! Salt & Pepper is basically the PromoKitchen equivalent of debate team. The purpose of this monthly article is to open up discussion and conversation on different challenges facing the Promotional Products Industry. In this edition of Salt & Pepper, Chef Kirby Hasseman and industry veteran Bill Petrie discuss the current industry compensation model for distributors.
What are your opinions? We welcome your comments!
NOTE: Salt & Pepper is intended to foster intelligent dialogue between professionals. This is not a dagger throwing contest. Be honest and authentic, but please also be kind and keep it classy.
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Salt - Kirby Hasseman
Let’s face it - The debate of how to best compensate employees or sales team is not a new one, and it’s not unique to our industry. There is no magic recipe for the right way to do this. If there was, we would all be using it. I am also NOT a fan of doing things the way they always have been done just because they have been done that way. We need to constantly be looking for new and better ways to do all things in business…including how we compensate our employees.
Here is why I think the traditional gross profit split is the best way to compensate sales executives:
It’s Entrepreneurial: Being in any sales profession is a lot like being in business for yourself. I have heard many speakers talk about sales pros as being the CEO of ME. The current model is an entrepreneurial one. Yes there is risk, but there is risk in any business. There is a lot less risk in being a sales professional in promo! If you get with a great organization, you have training, infrastructure, and support that you don’t have when starting your own business. This allows you to grow a business for yourself and on your own terms.
It’s Fair to Both Sides: The fact is, the cost of running a distributorship is continually rising. There are more technology costs, software costs, etc. than ever before. Most of the time, the “company” pays for many of those costs. If you add a salary to your sales team as well, it can be a very steep hill to climb. So some smaller distributorships just won’t add to their team. On the other side, if the company pays a salary to a sales member there might be a “ceiling” on what they can earn, and that’s no good either. That leads nicely to this...
It Pays for Effort and Results: I believe in paying based on effort and results. If you have worked around straight commission sales professionals, you KNOW when they are working. You don’t need to check their hours. You know because of their sales results. I LOVE a profession where if I increase my effort, I can increase my pay. I am much more likely to work harder and longer if I get to see results at the end!
It Improves Customer Service: That’s right! How many times have you heard “Customer Service is dead?” In most instances that is because the person in “customer service” has no interest or investment into the customer being happy. That is NOT the case if you are a commissioned sales person. You have a vested interest in each order being done right! That leads to happy customers and long term success.
As I said, I have found no perfect model. And our traditional model makes it hard to recruit new team members. But those that fit, really fit. And with that model we can create long term team members that have no limit to what they can accomplish.
Pepper - Bill Petrie
For decades the conventional commission structure of equally splitting the gross profit on an order by order basis has been the industry norm. On the surface, it seems very simple: form a true partnership with the salesperson by paying 50% of the profit dollars while the company keeps the other half. However, when you peel back the layers of this compensation onion, you find that this type of commission structure heavily favors the salesperson over the business owner for the following reasons:
Business Environment: When the traditional 50/50 split was first instituted, the business environment was radically different. Business owners today have higher overhead expenses than they did even 15 years ago: computers, high-speed internet, and cell phones to name a few. These additional costs come out of the pockets of the owner and are generally not shared by the distributor salesperson.
Rewarding the Wrong Behavior: Distributors who pay 50% of the gross profit dollars are heavily rewarding top line revenue while minimizing the impact margins have on the overall health of the business. By not factoring in the bottom line they do both parts of the partnership a disservice. A “sales at any cost” strategy is a recipe for short term gain over long term success.
Partnership Illusion: The 50/50 commission split creates an imbalance that is far in favor of the distributor salesperson. When overhead and other aspects of owning a business are factored in, the actual “split” is more like 65/35 or 70/30 in favor of the distributor salesperson. That is not a partnership in any sense of the word.
I am all in favor of a commission-only model when it comes to sales, but not at the equal 50/50 split. Instead, I favor paying commission at a rate equal to the gross profit on each order. For example, an order written at a 45% margin would pay a commission rate of 45% of the gross profit dollars. This type of model – and others like them – encourage the correct behaviors and create a true partnership that can yield long lasting results for both sides.
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Salary? 50/50 Split? Splits based off of GP%? Should industry compensation for distributors change? If so, how?