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January 1, 2008

EARNING POTENTIAL

Using MSCI's compensation survey as a jumping-off point, Forward's panel of experts explores sales force salary issues in the metals industry.

A sales force at the top of its game is the backbone of a successful metals company. And a well-compensated sales force understandably is more motivated to play harder and win.

Just where does the metals industry stand in the sales team salary lineup? Which line of business offers better compensation than others? Which regions pay the most? The 2007 MSCI Sales & Management Compensation Survey, which contains data for 65 jobs from 94 service centers in close to 375 North American locations, examined those questions and more.

For example, outside sales representatives in stainless steel fare best, with a median total salary of $87,500. Inside sales reps in aluminum, with a median total salary of $36,600, take home the least. Both outside and inside sales reps earn the most in the Mountain States region, no matter the product. For inside sales managers, the higher the company’s revenues, the higher the median total income. Outside sales managers come out further ahead with service centers whose annual sales range from $50 million to $99 million. For both managers, earning power rises on the West Coast.

To interpret what the data means and look further into sales force matters that concern the metals industry, Forward convened a panel of compensation experts. Participants consisted of Michael Anderson, director of compensation, benefits and payroll for Ryerson Inc. in Chicago; Shawn Smith, vice president of human resources for O’Neal Steel Inc. in Birmingham, Alabama; Jackson Nickerson, associate professor of organization and strategy at Washington University’s Olin School of Business in St. Louis; and Christine Midwood, director of survey services for Salary.com in Waltham, Massachusetts.

Forward: How does sales force salary in the metals industry stack up against other businesses in general and other distribution businesses specifically?

Midwood: I was able to compare the MSCI job survey against similar jobs in our database of 3,500 jobs to provide a reference. It’s been mentioned that MSCI and the metals industry isn’t comparable to other types of manufacturing because of the differences in business cycles. But when I did those comparisons against similar sales positions, there were only two jobs in the metals industry that stuck out as being significantly different from the national market in manufacturing, and the data was compelling. In the metals industry, the inside sales rep is paid about 40% higher than all national data for other manufacturing companies, and the vice president for sales is compensated 40% less than manufacturing as an industry.

Anderson: For distribution businesses like ours that are cyclical and selling commodities, it’s very hard to compare with other types of sales forces. You have to first ask the questions: Are they selling a commodity? Are they selling a unique specialized product? Is relationship selling important, or is technical expertise more critical? All of these factors impact compensation level, as does the type of person you want selling your product.

Smith: Certainly, to understand why the higher pay for inside sales, it would be helpful for all to understand how the nature of our business has changed over the last 20 years from being primarily a seller of commodities, where we did very little value-added services relative to the level of our business today, at least in O’Neal’s case, where 60% or more of our business is tied to some form of manufacturing, that is, changing the size or shape of the metal before it’s shipped to the customer. That requires a higher level of expertise from our inside sales people. We do a lot of work with manufacturers who want to assemble, but don’t want to do the front-end dirty work. As a result, we produce parts, kit them and ship those kits to our customers for assembly.

So, when you talk about manufacturing, we look at our business in two ways: Half of that is what we call traditional center with a limited amount of job-shop activity, and the other half is heavily focused on manufacturing. But the degree of technical difficulty associated with the manufacturing we do is far below that of what would be considered in a pure manufacturing environment.

Midwood: To your point, Shawn, as the nature of what you’re selling becomes more complicated, compensation changes, too.

Smith: Well, it certainly does for our inside sales people, but we stratify our inside sales people into two groups: inside sales reps and processing specialists, who are solely focused on the sale of value-added services. There is definitely a different level of compensation for those two positions.

Nickerson: It’s really not fair to make comparisons across industries. Not only is there cyclicality or lack of to account for, but people have different career paths, and that does factor into compensation and why a particular person might choose to work for a firm. The idea that one person is paid 40% more and another person 40% less—it really depends on what the task is, how it’s defined.

If you have an environment like that of the metals industry, where inside and outside people are seeing each other, talking to each other, comparing themselves to one another, then there’s going to be significantly more compression between the high and low take-home pay levels than in industries where those people are not interacting. My general understanding of MSCI members is that there’s a lot of collaboration and, as a result, there’s much more wage compression.

Anderson: The other thing you’ll find, too, is that there’s tremendous variability in company size in our industry. Perhaps Salary.com controlled for this when it was looking at comparative compensation for vice president of sales, but you could have a midsized company in our own industry where someone might be a vice president and a somewhat larger company in our industry where a person with similar responsibilities might be the sales manager. You have to be careful comparing titles.

Midwood: I think it’s really important when you’re comparing any job in a survey that you don’t compare titles, that you compare the roles and responsibilities of the jobs as included in the job descriptions. When I did this comparison for MSCI, I matched job descriptions, not titles. A company also should always look at what similar companies in terms of size, location and, of course, line of business are paying. Compensation varies by size of organization. As an organization gets larger, that role—the vice president role, for example—becomes much broader, and compensation goes up accordingly.

Forward: Is sales force compensation keeping up with profits?

Smith: Most of our at-risk plans are 100% based on profitability of the company, so there’s a direct relationship between corporate profits and what our sales people earn. For some of our outside sales people, we may have the at-risk based on two components, split 50/50, one being gross margin, while the other would be a financial component tied to the profitability of that particular location. So, as corporate profits or location profits go up, the sales people definitely benefit.

Anderson: I would agree with that. Since targets are generally set based on business plans, as the business succeeds, the sales people succeed, as well.

Forward: Do you see any variation in the non-at-risk component of jobs that have an at-risk component? If a member of the sales force, for example, is more profitable over time, does the company ratchet up base salary?

Anderson: We look at the total compensation target. As long as we’re keeping pace and keeping our eye on being competitive in terms of total compensation, we’ll move in tandem with the industry. Certainly, any individual’s compensation—base and incentive—will be largely dictated by individual performance.

Forward: MSCI’s data reports the average salary increase year-to-year over the last five years has been 3.5% to 4.2%. Those are not significant hikes. Given those numbers, how do you attract and/or retain good talent?

Anderson: There’s a complicated answer to that question. Certainly, everybody doesn’t get an average salary increase. You get more or you get less, based on individual performance. But when you’re trying to attract somebody to work for the company, I don’t think that person is looking at your salary increase budget. They’re thinking more about how well personal goals can be matched at your company, so they would be looking at your business strategy, the strength of the company, your reputation in the marketplace for pricing, quality and product availability.

Our industry is small. People know each other. They know the reputation of management. Yes, employees are looking for competitive pay packages, but they’re also looking to see how are they going to succeed in the organization. ‘Are there promotional opportunities? What kind of organization is behind me when I’m doing my job?’ Good sales people aren’t thinking whether or not they are going to get an average pay increase. They’re asking whether they can do better here.

Smith: It’s my experience that employees look at the whole company picture when they come to work for you—reputation, environment, types of people, integrity of management, strength of a company. But in this day and age, you have to offer a competitive compensation package just to be in play. If you fall short of that, you’re not going to attract the kind of people you want.

 Nickerson: I did a study on workers in a garment company where they historically used to earn by individual piece rate. At some point, the company implemented teams, and the workers had a choice—go into teams or work by piece rate. We found the workers were willing to take up to a 50% pay cut—and these weren’t wealthy workers, by any means—to work in teams, because they found it was much more fun. They were willing to give up that much in pay to enjoy going to work each day.

Forward: How do you structure incentives for your sales force?

Anderson: Our outside sales force incentive opportunity—if they hit their target—is 25% of their base salary midpoint. For inside sales, it’s 15%. I think that’s exactly the number in the MSCI survey. We’re directly at the medians.

Smith: We have designed an at-risk component for every sales position. Each of these jobs has some portion of their total compensation target at-risk, ranging from a low of 10% to a high of 30%. The total compensation target is essentially the employee’s base pay and the at-risk component added together. Most of our incentives are paid quarterly and employees are paid a percentage of their at-risk pay based on some combination of territory sales and financial performance.

Our company uses Economic Value Added [EVA] as our financial performance benchmark. Our goal is to achieve an EVA of 100%, which essentially means we have achieved 100% of our profitability goal for that period. Employees with at-risk pay based on EVA results are paid the same percent of their at-risk pay as the company or operating unit achieves in its EVA percent. So an employee working in a location which achieves a 105% EVA would receive 105% of their EVA-based at-risk pay for that quarter.

Forward: What are the trends in sales compensation for the metals industry?

Smith: We’re taking a step back and asking ourselves, ‘Do we have our plan structured correctly so that it best benefits the company? Are we in tune with what the rest of the industry is doing?’ What we’re finding is that we’re probably off base a little in the way we’ve structured our target setting. Right now, I’m just speaking about outside sales employees. We have a total compensation target that is comprised of base pay and an incentive target. Those two together equate to roughly the market value for that particular job. We have a fairly high at-risk component, so for individuals to earn market value for their positions, they really have to maximize the at-risk incentive portion, that is, at least earn their targeted amount in order to earn the market value compensation for that position. If the plan is structured in such a way that earning market value is likely to happen, it’s not a problem. But if the company isn’t careful, it runs the risk of underpaying its employees relative to the at-risk portion. That puts it in a position of underpaying relative to the market.

Anderson: A significant factor that impacts sales compensation target setting in our industry is the cyclical nature of the business. For any industry, of course, target setting is critical, but when you have a cyclical business, it becomes a challenge. You have to be able to anticipate where the market is going, which is not always a scientific enterprise. That also impacts how much leverage you want in your compensation plan, how much confidence you have in your target setting.

The starting point for target setting should be, what is the business plan for the corporation for the coming year? If you tie targets for sales incentive to business planning, you have the best chance to have fair targets because you’re factoring in all those things you know about the market. Obviously, there are lots of factors involved in business planning for an upcoming year, but I’m sure all the sales plans in our industry are driven basically by some measure of volume or profitability that’s related to volume.

Smith: There’s probably one area where [O’Neal] has been somewhat remiss, and that is to make certain the targets that we define for our employees are realistic relative to the point we are within the business cycle. If you’re not careful, as that cycle goes down, and you haven’t adjusted your targets in a reasonable fashion, you definitely will underpay your employees.

Forward: Looking into the next five years, do you anticipate sales force compensation in the metals industry will keep pace with where it’s been the past few years?

Smith: As a company and an industry, we have to be careful that we don’t allow our employees to suffer unreasonably during the down cycles. When times are good, employees, of course, truly benefit. We certainly saw that in ’04, ’05 and ’06. But ’07 was more of a challenge. Our business softened quite a bit during the year, and, as a result, incomes had to be adjusted accordingly. Part of our job is to make sure our employees understand that’s the nature of this business. The compensation in particular for sales employees is not going to be something that will necessarily level after a certain number of years. It’s going to fluctuate.

Nickerson: What a company looks at when setting salary goals for its sales forces is actually fairly complicated. It requires a lot of judgment and experience. It’s exactly right that you want to start with a sales plan. But often those plans are based on annual projections, so if there are changes during the year that are unanticipated or if that plan is based on one set of numbers rather than a range, a company has to be prepared to make adjustments.

Strategy also comes into play. If you want your sales people to be working closely with your operations folks, you have to know that they’re going to compare take-home pay, so you have to factor that into your compensation structure. If yours is a company that keeps its sales people separate from operations and the rest of the facility, then stronger incentives can be used for the sales force. As long as they’re not engaged in those social comparisons.

Forward: How much does the benefits package play into the ability to attract or recruit employees?

Smith: Certainly, you’ve got to be competitive if you want to lure individuals who have not necessarily worked in our industry, but also to attract talent within the industry—people who are working for other service centers.

I’ve looked at the numbers, and most benefit packages are fairly comparable. Looking at MSCI’s salary survey, it seems that levels of pay are also very close.

Anderson: People are more keenly aware of benefits issues than they were in years past, certainly in so far as defined benefit plans are disappearing and defined contribution plans have risen. People are more informed and more likely to ask questions. They know they’re going to be more personally accountable than their parents were for their retirement income, healthcare and so on.

Nickerson: One of the marvels of the market is that anything that’s observable, competitors will adopt quickly. In terms of benefits packages and wages for a particular class of job, there isn’t that much variability; companies are largely offering similar packages. Benefits are not going to be differentiators. What differentiates companies are the intangibles—learning, career path, opportunities to improve themselves, the extent to which the job is interesting. Those may have more to do with which company someone chooses than what are the salary, at-risk wage and benefits.

Smith: We tend to find out very quickly if we’re off base in terms of what we’re offering a potential candidate for employment. If they’ve had other interviews, they’re going to let us know fairly quickly if we’re not in the right ballpark. And we have to get there fairly quickly if we want to compete.

Forward: Are there sales compensation programs the metals industry hasn’t adopted that you feel it would do well to adopt?

Anderson: Not that I’m aware of. There is certainly some variability in our industry about how people are compensated, which is driven by a set of factors that any company applies when it’s trying to think about how to compensate people: ‘How do we go to market? What are we selling?’ The basic factors and tools in incentive compensation are very similar.

There aren’t any magic bullets or exciting new concepts in compensation, although companies may have different philosophies about compensation, depending on their business strategy.

Nickerson: I do a fair amount of executive education with MSCI participating companies, and I’ve been impressed with their progressiveness and willingness to see what’s out there and to give it a try. There are many old-line industries that aren’t as progressive, so I suspect this industry has tried lots of variations, even though you may not see any large innovations.

Anderson: You rightfully can say this is an old-line industry, but it’s also an industry that has gone through a tremendous amount of change, particularly in the last 20 years. There’s been a lot of consolidation. There’s been a lot of competitive pressure that’s driven margins significantly lower than they were 20 or 30 years ago. Companies have become tremendously more efficient than they were in years past. Those who didn’t change are no longer with us.