Steve Braccini, the Austin-based president of Pro Fasteners, wrestled with a thorny issue snagging many managers: how to fairly compensate salespeople for bigger, long-term deals.
Until 1990 Pro Fasteners sold industrial hardware. Period. But spurred on by its biggest clients, the $7.5-million distributor began inking contracts not only to supply nuts and bolts but to manage the inventory of hundreds of parts for its customers. (See "Quality with Tears," June 1992, [Article link].)
The arrangement is more profitable for both parties. However, converting a customer from purchase orders to long-term contract takes more of the 10 salespeople's time. And it's more stressful to sell to the client's management.
Often, the excitement of landing a new contract would quickly fade when salespeople had to wait months for commissions to kick in. "I could never figure out why salespeople never smiled when they got their commission checks," confesses Braccini.
He thinks he's got a good solution now. Instead of making salespeople wait until the revenues roll in, Braccini pays a fat commission check up front when a customer switches to a contract.
Within a week or so, the salesperson receives a check good for six months' commissions on the contract. To estimate the contract's worth, Braccini and the sales rep consider the customer's last six months of purchases and projections for the next six. Say a one-year contract is valued at $50,000: the rep would get $1,250, or half of the 5% commissions he or she would have earned during the year. The check is like a signing bonus, "a reward for converting the account," says Braccini. "There's instant gratification."
Braccini's plan won't work for everyone; salespeople who also handle service and support, for example, should have incentives to keep in close contact with clients. But Braccini's system, instituted a year ago, works well because his salespeople play a lesser role after the contract is signed. Pro Fasteners' contract administrators service and grow the accounts. So the signing bonus frees reps to move on to the next potential long-term deal -- which is what Braccini wants. On top of base pay and commissions on purchase orders, salespeople net an average of $2,500 extra in monthly bonuses.
The pay-policy change has boosted Pro Fasteners' ongoing efforts to convert customers to contracts. Three years ago about 20% of clients were on a contract; today about half of Braccini's business is done that way.* * *