The Fate of the Traveling Salesperson

By: Bart Jackson

Are soaring gas prices signaling the end of the venerable traveling salesperson?  Don’t unplug your doorbell yet.  But many companies are finding a whole new way to evaluate and remunerate their sales reps to ensure the survival of this aged, effective tradition.

In spring of 2008 Compensation Resources, Inc. of Upper Saddle River ran a survey of 100 companies, each of whom had a substantial percentage of their sales force on the road.  For years Compensation Resources has run industry-standard remuneration surveys, but in presenting these results, CEO Paul Dorf gave one caveat.  All the survey forms had been returned by June 20, just a few days before the IRS announced its gigantic jump in the automobile standard deductible rate, from a 50.5 cents per mile to 58.5 cents, effective July 1.  “We’re not sure how many responders knew of the rate hike, nor what effect it might have on their policies and responses,” noted Dorf.

What was certain was that companies’ sales structure had remained under very close scrutiny by everyone, ever since the 2001 recession.

* Travel Pay.  Every company surveyed provided employees some sort of reimbursement for business travel.  Of these, 32 percent paid less than the IRS deductible rate of 50.5 cents.  One percent paid more.  “It is not clear if they were being magnanimous, or unknowing,” says Dorf.  The remainder who reimbursed per mile, traditionally followed the government rate.

Looking toward the future, 68 percent said they would increase the mileage rate.  A few more cautious souls, said they would increase for now, but watch the trends.  Of those who did not reimburse per mile, but instead either gave the employee a car or flat car allowance, 56 percent said they would switch to per-mile reimbursement.  One respondent noted that he was receiving a great deal of push back from employees asked to drive to far out locales.

* Quick Fixes.  Until the electric car drops to a competitive price range or hydrogen fuel is sold cheaply in every hamlet, we will run our vehicles on ever-more costly oil.  While most experts agree that the alternatively fueled auto is closer than we think, business needs solutions today.  “Overall, the survey showed that businesses have been getting smarter and leaner about sending folks out on the road,” says Dorf.  “For the last eight years, companies have been analyzing the rewards gleaned from individual trips.”

The survey found that many firms have retrenched to the old 80 - 20 rule.  The well known maxim that 20 percent of one’s customers deliver 80 percent of the profits has become a traveling demarkation.  Those 20 percent major spenders still receive regular sales calls.  The remaining four fifths of the customers are handled by phone, various telecommunications, or in some cases just forgotten until they place their next order.  In many cases, the lesser customers ordering a certain dollar amount annually retain a non-visiting, inside sales representative who personally handles their account, but from his office.

“American salespeople for years have been experts at negotiating down the price.  The seller returns to his office and fights his own management to reduce the sales price to please a customer,” says Dorf.  “Now they are being encouraged to negotiate up.”  Recently, many surveyed companies have taken to paying their sales commissions based on the company’s profit share, rather than the usual flat percentage of the total price.  This means if the salesperson sells an item at a price which includes the standard 10 percent company profit, he gets the regular commission.  But if he can achieve a 12 percent markup price, he gets a larger commission. This way the salesperson becomes a partner with his company, as he should be.

* Total Remuneration Restructure.  “The idea is simple and spreading,” says Dorf.  “The company looks at the total  cost of the individual sales person, then determines how much he must sell to make him an asset to the company.”

Sales force remuneration runs along a continuum.  At one end are the 100 percent salaried sellers, who have ultimate security, but alas, no incentive.  On the other end are the 100 percent commission sellers.  “These include the three most hated groups of sales people - those selling real estate, insurance, and cars,” notes Dorf.  “Their incentive is getting food and shelter, and you can smell the desperation.”  Most companies fall somewhere in the middle of the continuum, with various splits of commission and salary.

Typically, these salary and commission sales people receive commission on the first dollar of their first sale.  But increasingly companies are taking another look.  If a salesperson receives a $60,000 salary annually, his benefits package will cost his firm another 25 - 35 percent, adding $15,000 more a year to his cost.  Add to this $1000 a month in travel expenses (gas, parking etc.,) plus $3000 monthly in general administrative costs (secretarial, office use, display materials, brochures, etc.)  That means another $48,000 a year to his debit side.  Thus, this sales person is costing his firm $123,000 a year.  If he operates on a 10 percent commission, he must bring in $1,230,000 annually for the company to just break even on his presence.

Responding to this overall employee cost, the company may now set a threshold for the salesperson.  For the first $100,000 of sales each month (corresponding to his cost to the firm,) the seller receives no commission.  But once he crosses over his cost threshold, he receives an ample commission on all sales thereafter.

How are the sales people responding to this change?  “Well I don’t think thrilled is the right word,” says Dorf,  “but most all of them feel it is fair.  It is a consistent methodology.”  Many salespeople feel the that the old quotas were arbitrarily set.  At least with this system, their remuneration becomes based  on their actual worth to the company.

There is no doubt that we are facing hard times.  One could certainly sympathize with companies pulling in their horns and reluctantly letting salespeople go.  But laudably, that does not seem the trend. Instead, business is choosing to have its people all pull together and share in both the profits and the belt tightening. In short, our lean times are making firms realize what they, really are - a company of individuals all interdependent on each other.

Paul Dorf, has developed an uncanny sense of exactly how to reward individuals at all levels of employment.   A native of New York, Dorf earned his bachelor’s in business administration and labor relations from Hofstra University in l961.  Upon graduation, he joined the U.S. Marines, going from Private to Captain in barely four years.  “It was here that I really learned what motivated people,” he recalls.

Dorf then studied law at La Salle University in Philadelphia and later gained his MBA  in Industrial Relations from the University of Bridgeport and the College of William and Mary, and a Ph.D. in Management Analysis from Cambridge International University and Walden University.

From l965 on, Dorf served several corporations as human resource and compensation expert.  In 1983, he took the entrepreneurial leap and founded the first version of what is now Compensation Resources, Inc.  He sold the company in l985, then bought it back in l989 and has served as managing director ever since.

For the past 27 years, he has been on the faculty and taught  human resource and compensation courses at various universities, including Boston University, Temple University, and Rider University.  For the last eight years he has taught at Seton Hall.