Distribution

How to Compensate Sellers During Supply Chain Chaos

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Distribution can look to high-tech hardware sales teams for insights.

In distribution, most sales compensation decisions have historically centered on measures and mechanics. Regarding measures, 70% of distributors use gross profit dollars (GP$) as the primary measure, while 30% pay on sales, according to Alexander Group benchmarks. Some distributors differentiate GP$ (e.g., core vs. growth, product vs. services, new customer vs. existing) but most do not. For mechanics, distributors with sophisticated target-setting approaches prefer to use a bonus formula, while others pay commission.

Whatever your preferred approach is to sales compensation, one basic requirement exists – your reps must have product to sell! The global supply chain crisis has resulted in backordered product, empty warehouses and frustrated customers. Organizations are being forced to produce a temporary comp fix to keep associates from bearing the brunt of a macro disruption far beyond their control.

Fortunately, distribution can look to high-tech hardware sales teams for insights. Tech has a reputation for quickly adapting sales coverage and compensation practices to external shocks. When the chip shortage hit early in the pandemic, suppliers of networking hardware products, servers, computers and other physical products had to swiftly change the way they paid salespeople.

Organizations looked to two levers to adapt plans: crediting and measures. Crediting refers to the point at which sellers are awarded sales credit, either for a commission payment or as progress against a quota. Prior to the upheaval, half of tech hardware firms paid on bookings/orders. These firms had less of a need to change plans, since firms without product can still award credit when a customer places an order, regardless of when it will be shipped.

Sales Comp Crediting Event (pre-2022) graph

The half of companies that paid on shipment or revenue (“pay on paid”) is most relevant to distributors, because most distribution sales comp plans credit reps on invoice or shipment. The non-bookings tech firms implemented was one of three solutions:

Change crediting
- Move to 100% bookings (assuming limited de-booking risks)
- Split credit – 60% at booking, 40% at shipment
  - Weights should be set based on de-booking risk potential
Move to a 2-measure plan
- Measure 1: Bookings (60% of target incentive)
- Measure 2: Shipments (40% of target incentive)
  - Each measure requires a separate target
  - Again, weights should be set based on de-booking risk potential
Provide relief during this period
- Provide a recoverable draw up to 100% of target incentive
- Provide a recoverable draw up to 50% of total earnings
- Provide 60% payout at bookings

The good news for distributors is that all these options are relevant. The challenge is that each option creates specific risks that may or may not be tolerable to leadership. The right solution considers your organization’s people management strategy, sales management capabilities, comp governance structure, data integrity, customer base and risk profile.

Graph of three solutions non-bookings tech firms implemented

Distributors need to move fast to shore up sales compensation plans. Using real world case examples from tech firms that have gone before them can help guide sales leaders as they navigate through yet another macro shock.

For more information on best practices for sales compensation, please contact an Alexander Group Distribution practice lead.

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