Let’s say your name is Jack. If your boss were bragging about you to someone else, which of these would you rather hear come out of her mouth:
A: “Jack is one of our best and brightest, a true pleasure to work with, and is deservedly rising fast.”
B: “Jack consistently hits deadlines and targets, and will likely get the maximum available bonus this year.”
The first form of praise speaks to reputation and identity. The second speaks to concrete performance and monetary reward. Most of us would be delighted to hear either one but might say there is a special motivational ring to the first. Good managers understand that both are important; well-motivated employees feel fairly compensated as well as recognized and appreciated.
Frequently, when it comes to managing distributors rather than direct employees, we focus on the monetary reward portion of the equation. But leading multinational corporations are experimenting (successfully) with applying this dual-reward principle to managing their partnerships. We are witnessing a climbing ladder of incentives sophistication, as follows:
Distributor Incentives Structures
- Typical: Sell more to make more. The distributor makes money on its buy-and-resell mark-up, plus volume-based performance incentives like rebates or bonuses when it crosses a certain sales volume threshold. A drawback of this approach is that volume targets can be hit in ways that undermine future performance rather than sustain growth.
- Better: Sell more and develop capabilities to make more. The distributor makes its base money in the typical fashion, but its performance-based compensation is not just tied to volume; it is tied to a combination of commercial outcome metrics and capability-development metrics, which can be expressed as a single score via a weighted-average scorecard. A drawback of this approach is that if the scorecard is not kept simple, the compensation algorithm is too clunky to actually motivate the desired changes in behavior.
- Best: Sell more and develop capabilities to make more and enjoy promotion to higher status. The distributor’s performance-based compensation is tied to both outcome and capability metrics as in the case above. In addition, however, the distributor can rise or fall in a clearly delineated status hierarchy with several levels, ranging in spirit from “strategic partner” to “on probation,” with associated privileges or consequences.
Promotion to higher status can mean deeper rebates, but it can also mean more territory coverage; more involvement in joint strategizing; more consultation on marketing and product decisions; more access to financial assistance or investment; more access to internal systems and resources; and higher-level coaching and training.
There are at least three significant advantages to building a meaningful status component into your distributor incentives program:
- It offers a shorthand for the overall health of the relationship.
- The partner has something to strive for that is related to the strength of the relationship, not just the strength of their balance sheet.
- It comes as no surprise to a partner, if they fall sufficiently in status, that you will start to look for alternatives.
We have now completed our three parts to an effective distributor performance management system. “Measuring inputs, not just outputs” provides partners with effective guidance and expectation-setting. “Scheduling collaboration, not just accountability” provides necessary support and builds the relationship momentum over time. And rewarding with status, not just margin, energizes partners to rise to the challenge you set for them. Check back soon for my next post as I begin explaining the three rules of Transition Management.
If you would like to learn more about FSG’s Channel Management support, please don’t hesitate to contact us at email@example.com.