Designing a Sales Compensation Plan Based on an Unusual Metric
A supply company that derived significant revenue from vendor discounts and rebates made key changes to capture more revenue from that source.
A series of acquisitions had left a large multicategory supplier with more than 10 divisions, each with an autonomous sales organization and unique sales incentive structure. In just five weeks we helped SupplyCo* design a unified new compensation structure that aligned with the company’s profitability goals while holding overall commission costs constant.
Our first step was to assess the performance of SupplyCo’s salesforce, a vast web of people with varying roles, titles and reporting structures. Using compensation data and interviews, we built a fact base to evaluate the existing commission structures and compensation levels across every division. Our analysis drilled down on the relationship between an individual’s compensation and their profit contributions to SupplyCo. We also assessed each business unit’s enabling processes, technology and readiness for change.
It was quickly revealed that vendor discounts and rebates had a significant impact on SupplyCo’s EBITDA; however, the salesforce was neither measured nor incented on these. This created a misalignment between sales rep behaviors and company goals. Even divisions that closely tracked profitability after discounts and rebates rarely offered salespeople visibility on this measure, making it difficult to support the desired behaviors.
To identify possible solutions, we gathered input on current and potential compensation models. Several merited further evaluation, and for each of those we modeled the financial impact they would have on SupplyCo and its divisions. Modeling was done at an individual level to understand granular impact and anticipate changes in compensation for highly productive reps.
As part of the new global compensation plan and rate structure we recommended for SupplyCo, we incorporated the use of gross-margin metrics in the near term, as well as a plan that would “tier” vendors based on full gross margin after discounts and rebates, to encourage a shift toward more profitable vendors. The new design was closely aligned with SupplyCo’s objectives, its systems and its ability to change. We prepared SupplyCo for that change, mapping out the implementation, assessing the risks and identifying the key stakeholders required to enable the change.