ASK ALISON: Motivating Reps - June/July 2023

Question: How do I Motivate My Reps?

Ask Alison Intro Video by Melissa Greenwald, President, Greenwald Sales & Marketing, LLC and MAFSI Membership and Marketing Committee Co-Chair

Answer:

Fortunately, I have the answer that will solve all your rep motivation issues. It was shared with me many years ago by longtime rep and manufacturer CPA, and MAFSI friend, Melvin H. Daskal, CPA, MBA. Mel is no longer with us, but his wisdom lives on and it is my privilege to share his wisdom with you.

In truth, how to motivate a sales representative is so simple: Win-Win Incentivized Commission Plans

Unfortunately, many very successful principals got that way by being very skilled in the manufacturing process. Some of them understand little about the selling process and marketing, and they rely on their sales managers to supply that expertise. And, to repeat, some sales managers, unfortunately, have the conceptions just expressed

Incentive Commissions

SALES TIP: To increase factory sales, the simple key to getting any representative to kill himself/herself selling is to offer a higher percentage commission for higher sales. It's as easy as that, and you just learned one of the deep, dark secrets of the (sales) universe! For example:

"On annual sales in your territory of up to $2 million, we pay a 5 percent commission. On all annual sales above $2 million, we pay 6 percent." There can even be a sliding scale of 5, 6, 7, 8 percent, as sales get higher and higher. There is absolutely no better sales motivation in the world than one that offers the representative higher and higher commissions, with higher and higher sales! It always works, with the right person and the right line. What line do you think the representative will concentrate on selling--the one that just dropped to 3 percent or the one that just increased to 7 percent? It's as simple as that.

The Principal's Costs

In very simple terms, there are two kinds of costs in the manufacturing business: fixed and variable. The fixed costs (e.g., expenses such as rent) are the same, whether the company manufactures 100,000 gizmos or 1,000,000. The variable costs are about the same for each gizmo produced, so they only increase with greater production of the factory product.

Now relate that to an incentive commission program for the representatives selling the gizmos. Let's assume that the fixed costs are 5 percent of the selling price of each gizmo and that those costs are spread ("absorbed") over "normal" production of 500,000 gizmos. Further assume the factory is paying a 5 percent commission to its representatives. Now the principal puts in an incentive commission plan for all the representatives, in which representatives will be paid a 6 percent commission on all sales over their normal share of the total 500,000 of standard gizmo production. The representatives make 1 percent more and "sell like hell", but the factory, with all fixed costs already covered, makes at least another 4 percent (5 percent fixed cost saving, less 1 percent additional commission)! Further, as production increases, there is usually a drop in per unit costs as a result of manufacturing economies, learning curves, volume buying and dozens of similar factors.

The principal may well end up earning an additional 10 percent on those "extra" sales—at an added commission cost of 1 percent for the representatives. How can the factory lose? If the principals would talk to their own CPAs about this idea, instead of their marketing departments, they would be quickly convinced!

Said another way, virtually every manufacturing operation makes a much greater profit on any increased unit sales, over the standard ("normal") number of units of production. Any accountant or other financial consultant will confirm these facts. It's a "win win" arrangement for both principals and their sales agents, yet one that is unfortunately ignored by many principals who only consult their marketing experts about how to motivate representatives.

Commission  Philosophy

Years ago I met a successful manufacturer who owned two manufacturing companies in the Chicago area. He always used sales representatives for both companies, and his favorite line was: "I wish I could find a representative who would earn $1 million a year in commissions from my companies." When people would look at him as if he was crazy, his next lines were: "That would mean that the representative brought in $20 million in annual sales for our companies! In fact, I really wish I had 10 representatives who each earned $1 million a year in commissions!" He was a very smart man ... and a very rich man.

However, it's very rare to hear such comments from principals (or their sales manager). You very well might hear it, however, if you asked the company's CPA.

Retroactive Incentive Commissions

SALES TIP: This is absolutely the best way in the world to compensate representatives! Not only does the commission percentage increase with sales, but it also increases retroactively to the first dollar of sales, if the sales target is reached.

Here is an actual case, from a manufacturer. (Don't get hung up with the particular figures involved. Just understand the wonderful idea behind it.) A rep got a new line, in which the previous representative (who was terminated for disappointing performance) did $700,000 in sales in the previous year. It was a 6 percent line. The principal felt that there was a much greater sales potential in the territory, and the new representative agreed. Here is the smart deal offered by the factory: The same 6 percent commission will be paid on all sales.  However, if the representative can increase annual sales from $700,000 to $1.2 million or greater, a 10 percent commission will be paid retroactively, to the first dollar in sales!

In other words, if the representative hits $1.2 million in sales, they will be paid $120,000 in commissions (10 percent) on all the sales. If they only hits $1 million in sales, they will be paid $60,000 in commissions (6 percent). So, at $1 million in sales, they have a chance to double the total commissions (from $60,000 to $120,000) by selling just $200,000 more (from a total of $1 million, to $1.2 million). How about that for sales motivation?

They will sell that last $200,000. It's very likely that they are going to sell so much for that principal that the factory will probably have to add a second shift to its assembly line. How does the principal make out? That extra 4 percent commission will probably result in sales doubling in the territory. As mentioned earlier, the principal might be netting an extra 10 percent or so on those increased sales. Win win!

Have a question for Ask Alison? Email Alison at acody@mafsi.org.