Commission Policies in the Automation and High Tech Electrical Industry

We are gathering information and building a list of frequently asked questions.  

I am often asked about commission structures within the Automation, Electrical Distribution Industry and other knowledge-based distributor operations (Power Transmission Distributors PTDA, Fluid Power Distributors FPDA and Industrial Distributors). Considering the frequency of the question (from potential salespeople, experienced seller, managers and others,) I feel it appropriate to post some thoughts on the practice. While this is not our typical kind of post, I wanted to create a forum for discussion.

Commissions based on Gross Margin are one of the most commonly used incentive practices on the channel side of the business. On the manufacturing side, many people are still paid based on their gross sales numbers. Often you will hear distributors refer to this practice as paying on “tonnage” because sales professionals compensated in this matter really aren’t required to worry about whether their company makes a profit or not. Distributors must produce gross margin to survive. Further, the gross margin does not flow straight to the bottom line. Instead, gross margin dollars pay for everything from the light bill, insurance and rent on to the cost of the distributor’s employees (which typically account for 60 percent of the total gross margin).

In nearly four decades of involvement in the industry (which includes service as a sales manager at a major manufacturer, C-Level executive in a regionally based distributor, President of the North American trade association dedicated to the automation channel (The Association for High Tech Distribution) and, over a decade, as a consultant to the industry,) I have seen literally hundreds of commission models. These range all the way from commissions accounting for only 10 percent of the salesman’s total compensation to structures which comprise 100 percent of the salesperson’s monetary package.

I typically recommend a compensation plan which is comprised of a base-salary and a commission. For the record, I find deep fault with both straight commission and straight base salary plans. The exact percentage must be fine-tuned based on the company and conditions in the seller’s territory.

The most common industry practices on payment of commission are:
• Monthly draws on commission which are settled at the end of each year.
These packages are designed to “smooth out” the monthly variations in commission amounts. Draws give the seller some consistency over the year, but often lead to conflict when the total commission for the year is not met and the seller ends up owing money from surplus commission draw.

• Commissions which are paid quarterly, semi-annually (every six months) or annually.
Most companies have discovered the accounting required to provide accurate monthly commission payments are too time consuming to justify payment on a monthly basis; hence the quarterly, semi-annual or annual payments.

As stated before, well over 90 percent of commission plans are paid based on Gross Margin generated by the sale.
Gross Margin is defined using the formula (Sell Price) – (Cost of Goods Sold)

This number does not include incentives to the distributor from manufacturers, buying group rebates, special buys, mark-ups on freight, special handling fees or other income generated by the sale.

Further, distributors do not typically pay commissions on the following:
• Sales made which are not paid in full by the customer due to disputes or other issue.
• Sales made which remain unpaid because of credit/collection issues by the distributor
• Sales made which are turned over to collection agencies.
• Sales which are paid well outside of the distributor’s terms (i.e. paid 60, 90 or more days after the normally extended terms.

Sales are not one time events
It is important to note, sales generated in this industry are not one time events. Instead, the distributor/customer sales cycle is a long continuing relationship where no sale is ever considered final. Distributors are called on to provide after-the-sale service for many years after payment is made and money has changed hands. The unwritten agreement with the customer can be summarized in this manner: If the distributor customer continues to grow the business relationship with the distributor, the distributor will extend follow-up services in perpetuity.

In Knowledge-based distribution commissions serve as a plan to compensate the salesperson for more than just “closing the order,” they also serve as payment for continued support. With this in mind, it is considered an industry norm to not pay commissions for salespeople who leave the company. For instance, when commissions are issued on February 15th for the quarter ending December 31st, and a salesperson resigns on February 1st, commissions are forfeited.

Conversely, it is not uncommon for distributor salespeople to benefit from the work done by their predecessor at the account. Most customers come with a level of “flow business” which once started continues on for many years. The new seller assumes the role of service champion and is rewarded with commissions on sales they had nothing to do with initially generating.

In the world of knowledge-based distribution, sellers are judged on their ability to not only close the sale but to provide the kind of service which causes the customer to buy more from their employer. Distributor salespeople are judged on their ability to grow the relationship as opposed to garnering one time orders.

As stated earlier, this post is in response to the dozen phone calls or emails we get from all levels of the distribution world each month and is by no means a full report on the state of commission (or commission rates) in our industry. Instead, we thought it appropriate to answer many of the common questions asked.


Here are a few random comments:

On Commission starting and end dates
• Typically distributor salespeople in our industry benefit from the past work of others at their accounts. This comes by way of business flow which was developed prior to their assignment to the accounts under their charge. Typically, new salespeople start with some commission based on the work of others.

• When salespeople leave other resources must be assigned to their accounts to maintain the service level at the accounts developed. These resources must be continued whether they are provided by a new salesperson or through resources such as inside sales, customer service, product specialists or others. It should be noted this practice extends not only through the ranks of distributors, but also applies to many other members of the supply chain: supply-partner manufacturers, manufacturer’s rep agencies and others.

• Policies on being currently employed in order to receive commissions have remained unchanged for many years. Recently, we spoke with a gentleman who resigned his post in the late 1960s. He indicated his commission plan was very similar to those of today. When thinking about leaving his (then) current employer, he waited until the week following the issuance of commission checks. He went on to form a company of his own and has no hard feelings on the potential commission left behind.

• Do policies like this favor the person who stays in position for a long time? I believe long duration salespeople do better in the distributor world because they learn more about their accounts and build layer after layer of flow business. This is typically good for seller and employer alike.


Why don’t distributors pay commission on sales volume?
• Typically, manufacturers pay a commission based on total sales volume. Some distributors call this being paid on tonnage. The average manufacturer salesperson is not privy to the internal cost of the product. Sell prices are very likely to be set by others. In addition, the margins for manufacturers is higher than distributors. Distributor salespeople often know their company’s cost of the product and are paid to capture as much gross margin as possible. For the sake of those outside the industry who may be reading this article, the typical distributor ends up with a profit before taxes and interest of between 2-4 percent. They are not working on a gigantic margin.

Different commission rates?
• Is it reasonable to have a different commission rate for various products sold within the distributor organization? Yes. Here is why: The cost associated with doing business with many supply-partners (some distributors have as many as 500) varies. Some provide incoming freight, some are easy to business with and others have mounds of paperwork associated with each order. Fluctuating the commission rate based on the type of product sold is common.

• Can a distributor have different commission rates based on the sales territory? Again, the answer is yes. Size and type of customer play a role in how easy or difficult it might be to create a relationship. Geography plays a part as well. The salesperson responsible for a large urban territory might may discover the sheer number of potential customers to be larger than the more rural based territory.

Commission rate changes?
• How often can commission rates be changed? Business is a fluid thing. Conditions ebb and flow. Product lines become obsolete. Economies rise then fall into recession. The one mistake either seller or employer make is to assume what works today will always work. While I am definitely not in favor of change for change sake, I do believe business conditions warrant changes in commission rates. As a rule of thumb, any commission plan which has not been tweaked for over five years is probably in need of some examination.

Finally….
I am building a repository of questions, comments and background information around commission plans. I would invite your comments be they anonymous or sent via email and posted at this end.

Marketing the Last Frontier

Marketing the Last Frontier

Marketing plays an important role in business. By definition, marketing works to

inform customers of the value created by an organization. Extending further, marketing also complements the sales department by acting as the mechanism for collecting customer data, determining why customers buy, developing a comprehensive value message and matching a company’s product/services to various customer groups.

In years gone by, Distributors sorely lacked marketing knowhow. When a marketing person was on staff, they were most generally described as event coordinators and keepers of the trinkets. I’m not saying they didn’t work hard. Nor, am I implying these early marketing folks weren’t an asset. But they certainly did little to actively direct the Distributor to higher sales or greater gross margin.

Happily, those days are gone.

Last week, I attended the National Association of Electrical Distributors (NAED) AdVenture Marketing Conference in Chicago. The event was a gathering of 200 plus professionals from the marketing departments of both Distributors and Manufacturers. And, these folks had a purpose: generate growth in the industry.

Top speakers covered topics ranging from Social Media to Amazon to going digital. My own presentation covered building a killer loyalty program. Without taking away from the speakers, the most exciting part of the whole gathering came via networking. I couldn’t help but notice the sharing of best practices. And, I noticed supplier marketing teams and their Distributor counterparts sharing ideas for future efforts.

Distributor Marketing is Accelerating
Failure to get your marketing effort off dead center will be harmful to your financial health. Just like the medical field of the 1800s, snake oil toting experts are beating the drum and passing themselves off as “Dr. Marketing.” There is no elixir of life or ancient cure-all remedy. Despite the bark of these later day charlatans, social media, search engine optimization, email marketing and CRM systems won’t magically heal your bottom line and cause your warts to vanish. It takes commitment, hard work and some planning for the future.

Here is a short marketing checklist:
• Customer segmentation – A lot of distributors break their customers down into a few categories for pricing, but put little thought into the basic differences in business operation. Thought must go into customer values, motivations and what the customer looks for in a supplier.
• Contact segmentation – Engineers think differently than maintenance people. Business owners respond to different messages than project managers. Provide the wrong information to a person and they are likely to tune you out.
• Branding message – Distributors used to rely solely on their supply partners for brand recognition. What do you want to be known for?
• Consistency of message – We just spoke to a Distributor who found themselves with 4 different versions of their logo. Another, Distributor has a different tag line on their line card than their website.
• Plan your programs – What happens when programs overlap? Customers are confused. Even your sales team has a hard time understanding which program carries the priority.
• Coordinate your programs with supply partners – When the distributor and their key suppliers work together it’s a thing of beauty. There should be ongoing meetings to understand how you can build synergy.
Finally…
• Website – We used to be able to build a website and then say we had one. But that’s not good enough anymore. If you website hasn’t been updated, overhauled or added to in the past 3-4 years you may be in trouble.

A Woman's Place is...

Women in Industry- the New Trailblazers

I squint my eyes and let my mind wander back to those days spent inside the ivy covered walls of the Illinois Engineering campus.  Drab colors, institutional sanitizer and well-worn army surplus furniture stood against the backdrop of overly caffeinated students hustling, bustling and shuffling off to the next class.  And, those students came from every continent, every culture; literally every walk of life.  Except one thing was missing: women. 

Actually, my own graduating class was small, around 50 students.  And, only two of them were female.  That’s a whopping 4 percent.  Now fast forward to interviews, job offers and graduation.  Based on my college experience, it didn’t shock me when I discovered zero female presence in the sales training program of my new employer.  Thinking about the whole thing in today’s terms is mind boggling.

A common misconception in the past of
women in male dominated fields.

Along the way, some of my contemporaries explained away the issue with, “Female students don’t want to waste their Engineering degree with a sales role.”  At least a couple of my bosses (great guys but from another generation) dismissed the whole idea of women in “our business” by saying, “Even if qualified women could be hired, our customers just aren’t ready for the women sellers, or managers or... anything else.”

A few years later, I was blessed with a wife who was breaking ground as a sales woman in a different male dominated industry.  I saw the issues she faced and admired the way she broke down barriers.  I noticed how her approach differed from my own.  I also couldn’t help but notice how she was forced to jump through higher hoops to meet her goals.  Yet she still managed to make it look easy.

Over the course of the past couple of decades, I have seen women break in to all levels of Distribution.  The best of these fine people demonstrated valuable traits like organization and ability to listen.  There also seemed to be bonus characteristics not shared by my male contemporaries: a gift for checking their egos at the door and working well with teams.

I am happy to say, I see breakthroughs across all areas of distribution (and supply-partners.)  Part of this could be tied to the ongoing difficulty companies in our industry face in finding qualified people of any kind.  Basically, it makes business sense to expand the field of candidates.  Secondly, a good many companies are seeing the results of women in adjoining fields of business.  Additionally, women are coming out of school with the technical backgrounds our organizations need.  For instance, Women graduating in science related fields has risen to nearly 50% in math and science areas, even stogie old Engineering degrees like mine now see women with about 20% of the jobs.

On an anecdotal note, I spoke at a distribution group where the ratio of males to females was about equal.  I couldn’t help but observe some of the new types of questions coming from the group.  Even though the topic under discussion was sales process, questions covering the interaction of sales, customer service and group interaction were deeper and more pronounced. 

One participant was keenly interested in how to best win over workers and managers who didn’t understand the importance of the process.  In most male dominated meetings, this topic is generally overlooked and an assumption made that change can be driven by sheer force of will at the leadership level.

The main point of all this is simple.  Women think and drive change differently than men.  Women do business differently than men.  And, women sell differently than men. 

Pulling from a recent opinion piece in Forbes Magazine: 

Credit: David Cutler

If you and the people around you see the world in exactly the same way, then the ideas you are going to come up with are going to be remarkably similar.

And that isn’t good.

What we need today is as many good DIFFERENT ideas as possible so we can pick the absolute best one. And that means coming up with different perspectives and different ways of approaching and solving market needs.

I believe it’s high time for our world to take advantage of a great source of diversity in approaching and solving market needs.  And with this in mind, I want to call attention to the work being done by the National Association of ElectricalDistributors and specifically the NAED Women in Industry Forum.

This group regularly honors a woman who has blazed the trail for others.  The award given is called the Industry Trailblazer Award.

This year’s honor went to Tammy Livers, Vice President of Sales with Eaton’s Residential and Wiring Device Division.  Tammy joins a host of women who are changing the face of our industry for the better.  Congratulations and our regards to Tammy.

For the rest of us, perhaps it’s time for some soul searching…