Release the Sales Force Superpower

The creation of a brand is usually the first stage that leads to success. At the same time it is a condition that must be fulfilled if there is to be any hope of growth. But even the best brand positioning and awareness of growth is not sufficient, especially in mature markets. To secure the distribution of products, their availability in retail and high visibility with the desired appeal, the brand owners (usually the manufacturers) need to hire brand and product ambassadors who set up agreements with customers and make sure that the defined programmes are executed. It’s the only way to sell and it’s the only way to generate profit. Hence the Sales Force is actually as important as the best brand positioning and advertising. At least in theory.

In practice, the Sales Force often acts against the brand and in the long-term can be the most margin-eroding power in the business. This is not because Sales employees are poor employees. Actually, the best sellers in the world can cause the most harm to their own company. The reason is that the Sales Force is the most pragmatic group of employees I’ve ever had the chance to work with. And the authors of the Sales Force motivation and compensation systems sometimes fail to recognize this.

While the Board focuses on business strategy and hopes everyone in the company will support it, the Sales Force spends hours with customers. They are as much exposed to their customers’ strategy and goals as to those of their employer. The fundamental Vision-Mission-Values are simply not clearly heard in the field. So the Sales Force executes exactly what their company asks them to and there is not much room for interpretation. If they are to sell a truck of sand in a desert, they will hit the target. How come this can be damaging?

I've had the chance to see and think about a couple of compensation systems for the Sales Force. Some of them have been volume based, other (sales) value based, i.e. the bonus is paid in relation to the sales level vs. target. The common advantage of these systems is that they are simple and easy to understand. And this is actually the only advantage. The simpler the compensation system, the more assumptions behind how the Sales Force is going to act there are. And all these assumptions are just wishful thinking. Let us consider the three interest groups involved, and try to illustrate their motivation (see Figure 1):

• Manufacturer (or in general, the brand owner). The goal is to generate profitable revenue growth by increasing market share without compromising profitability. In Fig. 1. the direction desired by the Manufacturer is marked by the red arrows. The manufacturer hires and sets targets for the Sales Force. In a purely sales-based compensation system the manufacturer also assumes that the Sales Force is going to head in the “right” direction (and this is wishful thinking).
• Customer. Usually retailers or distributors. The goal is to generate profitable revenue growth by increasing market share without compromising profitability. In Fig. 1. the direction desired by the Customer B is marked by the light green arrows.
• Sales Force, formally hired by the Manufacturer. Usually sellers working with a specific customer or customers. In practice they work with the manufacturer’s products at the customers’ side. The goal is to hit the target to earn the maximum possible annual bonus from the Manufacturer.

 

The goals of the manufacturer and customers sound the same, i.e. to increase market share without compromising margins, but they are not aligned at all (they are not really opposite, but at least perpendicular, i.e. they have nothing in common). The manufacturer fights for a share of each customer’s sales, the customers are willing to extend their share in the manufacturers’ overall product sales. The Sales Force goal then greatly depends on the compensation system.

If it is volume/value based, the sellers’ goal is to expand the sales of the manufacturer’s products to their customer(s). Whoever – the manufacturer or the customer – realizes their goal, the chance to get a fat annual bonus gets higher. So the seller should support both expansion directions and push the red and green arrows forward. As a result, the seller ends up negotiating both with the customer on behalf of the brand owner, and internally on behalf of the customer to get the tools enabling the customer’s expansion. There is, however, a big difference in who to negotiate with:

• In negotiating with the customer, the seller meets with the store owner, manager, or well-trained, qualified buyers who are determined to get the lowest possible buying price, and in any case a better price than the competition. They look after their own business interests, and they act, well, like customers, demanding and expecting.
• In negotiating with their own company, the seller talks to their superior (also a seller) to get them on board and earn support in the battle for extra funds, to the Finance team to convince them that without an extra budget the sales targets have no chance of being met, to the Trade Marketing team to pull out as much BTL support for this particular customer as possible.

Internally negotiating on behalf of the customer can actually be simpler than negotiating with the customer. Moreover, with extra funds negotiated internally, it’s much easier to negotiate anything with the customer. The sellers have an incentive to manoeuvre between their employer and customer and secure the sales level necessary to hit the target.

Needless to say, the customer does not expand that easily with this support. All the other customers also get this support from their sellers hoping to hit their targets, so the major trend is to maintain a status quo while getting more and more funding from the manufacturers. The sellers representing the same company help their customers compete with each other and end up competing with one another for the Sales Director's attention and a fat chunk of funding.

The overall effect is of course not simply neutral. Usually, increasingly deeper support is given to the biggest customers, who are the biggest because they have already negotiated the best buying prices at some point in the past. So, the best-paid, “best-performing” sellers are also the most effective in eroding margins, helping the least profitable customers to expand. Even if there is some market share growth, the cost is extremely high, and in the long-term, the business profit is given away.

To drive business performance in a profitable manner it is therefore necessary to sacrifice some of the compensation system's simplicity. The reaction of Sales is going to be defensive, but it’s also part of the internal negotiation they do to increase their chances of getting a juicy bonus. For the business, it’s time to say “no” to the sellers who aren't playing the game. Because good sellers will be able to understand more complex systems if they are incentivized to do so. And they will deliver exactly what is desired. There are a couple of principles that should be applied while preparing a long-term-profit-friendly motivation programme for the Sales Force:

1. Make sure that revenue constitutes an important part. Yes, sales levels alone are not the right solution, but to run a business sustainably it is necessary to keep sales at a healthy level or growing. If measurable – include the market share as a target.
2. Make sure profitability is an important part. Of course! Encourage the sellers to look at the business as the Board does. However, the inclusion of profitability is still not enough – leaving only sales and profit levels continues to drive internal competition with other sellers and helps the customer grow.
3. Make sure the overall customer profitability target is related both to the previous period and to other customers. This is the tricky part, but necessary in order to reduce the incentive to negotiate mainly internally. How this might be done:
   1. An increase in customer investment levels (as a % of revenue), irrespective of the cost category (price, discount, promotional support, BTL…), should be paid in part from the seller's pocket. E.g. an increase of 1p.p. leads to a reduction of the possible available bonus by 50%, in turn 2p.p. kills the bonus completely. How about an improvement of 1p.p. paying a 50% higher bonus?
   2. An increase in customer investment levels (as a % of revenue) would be most painful if the customer already has a high investment level as compared to other customers. So the steepness of the relation in the previous point would depend on the customer vs. the average level in the previous period.
4. Do not add up factors, multiply. If the factors in points 1-3 above had a 33.(3)% weighting each, heavily compromising profit to deliver revenue would still result in a non-zero bonus. This should not be the case. Set factors for achieving each of them, and multiply. If any of the factors is zero – no bonus is paid out.
5. Be generous. If you want to succeed, make sure you attract the best sellers by introducing a superb compensation system. If the excellent performance of a seller gives the company 1M EUR incrementally why not pay out a 100k EUR annual bonus? Having the opportunity to earn big bucks is really empowering. The sellers doing great job for themselves, do an even better job for the business.

If you fail to include any of these – the compensation system is not going to work for you. Either the sellers will find a way around it, or they will not have enough incentive to try hard.

The best Sales Force selling strong brands makes you the best player in the market. You cannot afford to use an ineffective compensation system just because it’s simple. Apply the right one and release the superpower of your sellers.

Image source: STAR WARS Stormtrooper by Akira Hsu