Everyone knows their own salary. But have you given much thought to your compensation structure for your distributor partners? Distributor compensation is often a “murky” issue, buried in a calculation created years ago focused on a combination of distributor margin plus other income for services rendered. Brand leaders periodically review their distributor compensation structure and compare it to the requirements to service their business in 2016. Listed below are Export Solutions “Ten Tips” for analyzing your distributor compensation model.
1. Convert Distributor Margin to Gross Dollars Earned: Margins percentages are important, but another critical measure is absolute income derived from representing your brand. This simple calculation of gross margin multiplied by invoiced sales provides a baseline number. In some cases, manufacturers should add bonuses or other payments and incentives to develop a rough number of distributor compensation for a market. This is the first step to understanding your true distributor compensation.
2. Shared Service Model: Typical distributor services may include importation, warehousing, delivery, selling, merchandising, invoicing, and collections. In some cases distributors reinvest a portion of their margin in trade discounts or in store marketing activities. Another major distributor expense is people, including senior management and a brand management team. Income from your brand margin buys your company a share of total distributor resources.
3. Value Equation: Distributor vs. Local Subsidiary: An important exercise is to evaluate the services received from the distributor relative to what they would cost if you needed to create your own independent subsidiary in a country. Your analysis should include subsidiary allocations for buildings, information technology, telecommunications, travel, and entertainment. Normally, the result demonstrates that the distributor model is an efficient outsourcing alternative. The key is to balance your brand objectives versus the requirement to function in a “shared services” environment where you are “buying” only part of the distributors time.
4. Pay For Performance: Most food and consumer goods industry executives operate in a compensation structure which includes a bonus incentive for achieving and exceeding assigned goals. Some brand owners have extended this approach to distributors so that the entire team is aligned on a common mission. All distributor bonus schemes should reward cases moved into consumption versus warehouse inventory.
5. Price Increases means Distributor Pay Raise: Many suppliers were fortunate enough to execute price increases in 2015. In a margin driven structure, this often translates to a pay raise for the distributor, with little incremental effort other than implementing the price increase. On the other hand, a price decline means a reduction in distributor compensation and the distributor needs to execute his own “salary” reduction!
6. Contracts and Margins from the 1990’s: Many distributor contracts and margin calculations date back to the 1990’s or many years earlier. These agreements are rarely revised or reviewed based upon the realities of competing in today’s marketplace. When was the last time that you reviewed your Distributor contract, margin, and service requirements? Does it still make sense?
7. I don’t know my distributor’s margin: This happens more frequently than you might imagine. In many arrangements, the distributor buys your brand at a dead net price and applies their own internal methodology for margin development. Some distributors are protective of this practice with a rationale that manufacturers should not “pry” as long as shipments maintain a positive trajectory.
8. Best in Class Distributor Compensation: Leading Distributors offer an open book approach based upon a cost to serve model. Financially astute distributors provide new suppliers a detailed template identifying key services and manufacturers requirements to operate the business. Smart manufacturers will benchmark their distributor margin versus similar brands in the market. Key inputs include complexity of your product line, logistics inputs ( temperature controlled, case weight) and size of your business.
9. Total Compensation: More than Gross Margin: Examine every line item in your market price calculation to understand total distributor revenue sourced from your brand. Distributor may increase his income by through promotional funds, added margin for logistics services, or periodic bill-backs.
10. Distributors have Profit Targets Too !: Distributors are in business to make money too ! It is quite reasonable to expect that the distributor should realize a net profit of 3-5 percent. Everyone hopes to grow their salary base and receive bonuses for excellent performance. Winning long term relationships exist when both parties profit from business success.