Vested Interest
The incentive business is booming. One would think the promise of cash is generally incentive enough for competitive salespeople to cross quota finish lines each year. However, businesses invest approximately $1 trillion per year in sales teams, reported the Forum for People Performance Management and Measurement’s white paper: “Making the Case for Sales Incentives to the Tune of 10% ROI.” Incredibly, sales incentive industry research indicates motivational programs such as gifts and trips are more effective than monetary rewards when it comes to companies seeing returns on their collective trillion-dollar investment. In fact, a 2005 study by the Incentive Federation titled “A Study Among Current Users of Merchandise and Travel Items for Motivation / Incentive Applications” found four out of five participants named “travel awards and merchandise” as more memorable than cold, hard cash. Seventy-four percent of those surveyed noted the relative ease with which they were able to generate excitement around a program offering travel versus trying to hustle sales teams with dollars.
As two multimillion-dollar distributors, Glenwood, Minnesota’s American Solutions for Business (ASB) and Cleveland-based Proforma, are on alternate paths to incentivize their ranks—paths granting both companies tremendous success. Even so, Proforma’s founder and co-CEO Greg Muzzillo said: “Travel has a high[ly] perceived value because it incorporates luxury, relaxation and family time.” He also mentioned the popularity of “giveaway” incentive programs, including electronic prizes such as “laptops, iPods and stereos,” and a program offering the winning salesperson 30 seconds to grab what he or she can from warehouse shelves stacked with gifts.
Prizes and contests might push salespeople closer to their quotas, but ASB president and CEO Larry Zavadil believes the highest performance can be harnessed by offering employees a tangible stake in a company’s success. In lieu of dangling the cash carrot in exchange for a lucrative year, ASB has been 100 percent employee-owned since July 2000. And since its founding in 1981—then boasting a sales staff of three and revenue under $1 million—ASB is now an organization employing 550 sales associates, registering $249 million in 2006 sales. Company stock grew in value by 700 percent six years after Zavadil implemented his employee stock option plan (ESOP).
Zavadil reassessed the structure of the company’s ownership when two of his top salespeople passed away—events leading him to wonder about the company’s fate should something happen to him. He was hesitant to keep it in the family, yet also realized the company culture he had cultivated would dissipate if it were sold. “Doing the ESOP ... situation was the best alternative and the best outcome,” Zavadil recalled, “because we could keep our culture, keep our structure and it kind of answered some of the top salespeople who’d been with us forever, [who] said, ‘Well, how do we get a piece of the rock?’ and well, [ESOP] was our way.”
He went on to discuss the benefits of implementing such a program, including the fact that the employees’ free stock created a concrete impetus for peak performance. Under an ESOP, company victories directly affect everyone’s financial gain. “One thing I knew I didn’t want to have was ... multi-tier management trying to tell people what to do,” explained Zavadil. “I wanted to [work with] ... successful people, or entrepreneurs, [who] wanted to create their own business[es] and do things. I wanted to be their partner and tag along.”
Zavadil’s not the only one singing the praises of ESOPs. The ESOP Association reported a dramatic leap in the number of companies utilizing the plan between 1974, when 200 existed, and 2005, when the total number of ESOPs had expanded to 11,000. Interestingly, manufacturing accounts for 25 percent of all ESOPs, and distributing (along with construction) is the program’s next largest sector. In 2004, the ESOP Association estimated $600 billion invested in the nation’s ESOPs.
“Cash-based incentives bring short-term pleasure,” said Rose Shorma, vice president of marketing at ASB. “Investing in one’s future makes good sense. We receive regular feedback from our sales associates on how exciting it is for them to receive their annual ESOP report[s] showing the increase in their shares and the dollar value [of their stocks].” As Shorma pointed out, no salesperson will witness a 700 percent value increase on incentive prizes.
ASB’s commission structure, which has held firm at an average of 70 percent since the company’s inception, further incentivizes its staff. “We were the first ones to pay 75 percent commission on our gross profit on an order back in the ’80s,” contended Zavadil. “Nobody did that. They all said we were going to go out of business [and that] we were crazy, but we found a way to [pay for it], because our goal was to give the lion’s share to the person in the field so that there was incentive to do more—not to give them trinkets ... to try to trick them into doing more.” In the early ’80s, he said, the highest average split for distributors was 50 percent.
Not only does ASB pay handsomely on its commissions, the organization’s goal-setting techniques allow salespeople to adjust sales goals based on their own performance expectations. As Zavadil explained, ASB’s quotas work backwards from a salesperson’s stated goal. “A salesperson will say, ‘I want to make $100,000,’” he said. “Well, we work the math backwards and say, ‘If you want to make $100,000, then you [have] to sell this amount of product at a 30 percent gross profit under our splits, and you’ll make $100,000. ... Everybody has their own drive and desires and that’s really our environment. Everybody kind of sets their own deal[s] and we support them.”
Similarly, Proforma’s entire business structure reflects a participatory philosophy. Inspired by a prospective employee who started his own business after an interview with Proforma, the five-year-old company embraced a franchise business model. This allows business owners to enjoy the benefits of Proforma’s marketing support, supplier network and office support while enabling the organization’s members to focus on selling. Proforma’s members split their profits with Proforma—and the split favors the business owners.
“Proforma members’ average gross profit is 40 percent and they pay only seven percent of [the total amount billed] to Proforma. That means our members net 82 percent of their gross profit,” explained Muzzillo. “Combine that with the purchasing clout of a preferred supplier network that allows our members to buy five to 10 percent better than any competitor in the industry, and our members are netting the highest percent of gross margin in the industry.”
Proforma additionally offers a high-stakes incentive program aptly named the Million Dollar Club, which awards travel to owners raking in at least $1 million annually. The program’s total membership is currently inching toward 100. “The Million Dollar Club is an incentive in more ways than one,” stated Muzzillo. “It also affords our members the opportunity to network with a large group of individuals [who] are top performers and with our top supplier group. This kind of opportunity ... provides motivation for our members to work hard and become members of the Million Dollar Club.”
Zavadil also mentioned the value of networking as a sales incentive. ASB conducts two national sales meetings a year to build team camaraderie and provide networking opportunities for the ASB sales force. “Hopefully, the [salesperson who] isn’t [making money] may just sit down and have a beer with somebody who is getting it, and some of it will rub off,” Zavadil claimed. “Because when you see people’s names and dollar amounts, that doesn’t mean as much as if you see the body ... on paper, this guy looks like a superstar, but then you see him in real life and he’s just Joe Average guy [who’s] figured it out and is working hard.”
As for how well incentive programs work for manufacturing and distributing specifically, Shorma contended that merchandise-driven incentives have their own set of benefits, including decreases in turnover, product quality and workplace injuries, while increasing morale, attendance and accuracy. If an organization doesn’t have the luxury of restructuring, it can at least opt to offer the most fruitful program it can afford.
“Cash may seem to have a high[ly] perceived value,” said Muzzillo, “but generally ... instead of using [cash incentives] for any kind of enjoyment, the recipient often uses them to pay bills or to pay for expenses. The perceived value of a vacation or an electronic gadget that [salespeople] wouldn’t purchase for themselves is often higher than a cash incentive and more cost-effective for the company.” To find out more about incentive programs, he suggested the Selective Gift Institute, a vendor of Proforma’s, and ASI, the Advertising Specialty Institute.
While we all enjoy gifts, the vitality of both companies indicates that Zavadil and Muzzillo are onto something. The real rewards, it seems, can be reaped in by allowing employees—or in Proforma’s case, its owners—to be in control of their own success. Sometimes, even for salespeople, the best motivator comes without a hefty price tag.
As Muzzillo stated, “Recognition has proven to be a particularly excellent motivator among our members, and is the most cost-effective form of incentives that can be utilized.” Whether a company tempts its sales staff with explicitly cash-driven incentives, travel or networking opportunities, Proforma and ASB show the best incentive investments follow the old rule of thumb when it comes to gift giving: it’s the thought that counts.
- Companies:
- American Solutions for Business
- Proforma