The best way to draw a big crowd at a wholesale distributor convention is to get a speaker to talk about sales compensation. It’s such a hot topic that some sales compensation consultants never run out of clients because they just keep going back to the old ones with new plans.
It’s been said that distributors have one of two opinions about their current sales compensation plan:
– either they just made a change and still love their new plan, or
– they’re unhappy and are thinking of designing a new one.
In the old days, the companies who paid sales salaries wanted to change to straight commission, and vice-versa. Alas, the grass is always greener…
An Evergreen client asked us about the pros and cons of a “matrix” commission plan. Matrix compensation plans came on the scene decades ago as a way of placing importance on both margin percentage and order size. Think of a table with margin dollar ranges in the rows and margin percentage ranges in the columns. At the intersection of each dollar range and margin % range is the commission rate for the transaction.
There are four things we like about matrix compensation:
- They recognize the profound importance of order size on operating profit
- They allow the option for zero commission on unprofitable orders
- They better align sales compensation with company operating profits
- It is fairly easy to modify most ERP system modules to accommodate them
On the flip-side, there are four things we don’t like about matrix plans:
- It’s hard for sales reps to know how much commission they are earning (which is a big no-no!)
- They provide windfall commissions on many orders
- It’s much easier to add a gross margin dollar threshold to an existing plan
- Dramatic changes to plans are disruptive and often counterproductive
Sales behavior is affected by the compensation plan – but the plan isn’t the sales manager. Keep in mind when considering a change to your sales compensation plan that there is no substitute for an outstanding person leading “A-level” sales reps. The best sales compensation plan won’t make weak managers and “C-level” reps into superstars.