A good sales compensation plan enables a company to hire good salespeople and motivate them to allocate their time and effort to maximize company profits. It should be tailored to encourage the performance of duties with the best return and discourage unproductive or unnecessary activities. An effective compensation plan should also be linked to the overall business goals of the owner.
You should be cautious when you are affecting either the amount or way people are being paid. It is an emotional issue-and could venture into the world of employment law. However, we also feel it is better to present employees with a compensation system that enables the retailer and employee to prosper rather than foster an environment where no one wins. Customers, employers, or employees do not win when the level of performance does not produce a sufficient level of sales and profit. It is therefore our objective to produce and present compensation options that produce a high level of profitable business.
The objective of this document is to recommend simple and practical compensation systems that help you produce a high performance environment where customers can accomplish their goals, employees can meet their needs, and owners can build a profitable business.
There are typically three (3) basic types of plans:
Type A: Salary per hour, or per year.
Type B: Salary plus some form of variable compensation.
Type C: Salary plus mostly commission.
When structured properly, compensation plans should have the ability to focus the sales staff into specific areas of importance the owner or manager wants to emphasize. Compensation plans can substantially improve the results of your sales staff and therefore will improve the results of your store. This is accomplished by motivating talented people to provide customers with higher levels of attention and service. It is our feeling this higher level of service will lead to higher close rates, higher tickets and more referral business. We believe this can be accomplished in a high performance environment where above average and top performers make more money, but the store’s percentage of dollars allotted to compensation is actually less. The following materials will help you to decide which plan will best focus your staff, and also give you some important topics to consider in structuring a plan for your store.
Store Manager Compensation: Manager compensation plans can help maximize untapped resources that will help improve overall business results. Too many owners have structured their current store manager pay plans with the emphasis on salary, not results. Consider whether your compensation plan should be based on a single focus (for example, a percentage of total store sales volume) or whether you want to implement a more comprehensive plan that measures and rewards such things as:
- An increase in sales volume from that of the prior year.
- Reaching or exceeding budgeted sales.
- Obtaining a predetermined Gross Margin Percentage for the store.
- Bottom line profits of the store.
Ask yourself the following questions relative to their current compensation system:
Does it ...
1. Attract talented people to your store when recruiting?
In a shrinking labor pool, how you compensate Sales Professionals has a significant impact on the quality of the people you successfully recruit. It has to provide certain guarantees, with the potential to earn much more. Top performers want an opportunity to make more money if their performance warrants it. Research indicates top performers are frustrated by compensation systems that do not differentiate between top performers and poor performers when it comes to compensation. It is therefore in your best interest to offer a compensation system that inspires top performers to accomplish more. You will find it easier to recruit those people who have the greatest talent and desire to help you improve your results.
2. Encourage the sales staff to make customer service their number one priority?
Organizations exist to fill the needs of customers. This should be the priority of each member of the store team. It is critical that each member of the store team be committed to the level of service desired by the customer. The level of service in the average retail store in the United States is very poor. Sales people in many stores seem to be interested in everything but selling merchandise to customers. This leads to many different categories of poor service and they include:
-Customers who walk into the store and wander around without getting any assistance at all.
-Customers who get frustrated by apathetic sales people who do not seem to care about what they
need or want.
-Customers who encounter the sales person who does not have sufficient product knowledge to
help them make a good buying decision.
-Customers who work with a sales person who has a great deal of knowledge, but does not turn
features into benefits.
-Customers who get unlucky enough to get a sales person who sells down below the actual needs
of the customers.
-Customers who unfortunately are linked with a sales person who does not suggest add-ons to
make the main item purchased more functional.
Most customers enter a local bike store because they want a better experience than one provided by a mass merchant. Research indicates they are willing to pay more. It is important the sales person demonstrate a higher level of confidence in their products and services. Each segment of your selling proposition must work together in a system to ensure your customers get the best possible experience.
Compensation is an integral part of a performance-driven system that rewards sales professionals for helping customers make a good buying decision. In order for compensation to drive sales it must be combined with:
-Effective selling strategies
-Strong Service Culture in the Store
-The right Leader/Manager
Compensation is earned when sales professionals provide each customer with the specified level of service.
3. Compensate the sales force fairly in exchange for results?
Whenever talent and motivation can impact output and quality of service, it seems compelling to pay more to those employees who perform at a higher level. Therefore, while you should pay market average for jobs, there should always be a variation in pay for each individual on each job based on how well the job is performed. It is therefore very important that each member of your staff has a defined job responsibility and each person has their performance measured against stated standards and parameters. The measurements most prevalent in big-ticket sales are conversion rate, average ticket, and gross margin. We recommend that you consider average ticket and gross margin as the place to begin.
It is both fair to employees and good business for the retailer to have a pay variance that matches the performance variation. Think of it this way; when you hand over a paycheck to each Sales Associate, do you feel good about it? Are you satisfied that you got sufficient productivity in relationship to the pay? If you do not, then your current Compensation Plan may be paying poor or average performers too much and top performers too little.
The distribution has to be fair. Of course, what the store perceives as fair may not be the same as what less than ideal performers perceive as fair, but these are not the employees you are trying to please. It is worth noting that most Sales Associates will agree with any plan that gives them fair opportunity to match or beat their previous salary.
4. Provide a certain level of income regularity to the sales force?
No industry suffers from seasonality as much as the Bicycle Industry does. This makes it difficult for your employees to meet their financial responsibilities if the Compensation Plan cannot guarantee a minimum amount on each paycheck. Although it is not the responsibility of the store to manage each employee’s finances, it is extremely important to them to have some level of regularity--a minimum amount they can count on.
5. Help retain top producers?
Your top producers are your most valuable assets. Does your Compensation Plan reward them sufficiently to encourage them to remain in your employment? Does a Sales Associate who sells twice as much as another make only a little more or a lot more? Pay for performance creates a preferred employer position in the marketplace for talented and motivated employees. It also provides a better opportunity to keep your top performers. Your investment in their training, education, and improvement provides you a higher degree of sales and profits. Their reward is more income through their actions. It is truly a win-win formula for building and retaining a team of high performers who turn shoppers into buyers and ensure each customer leaves your store fully prepared to have the best possible biking experience. They have the right bike and accessories needed to enjoy biking to its fullest. This high performance environment is not typical in retail today. This has left talented and motivated people without a place to go. Unfortunately many of them have left the biking business altogether, thus creating a void in the industry for top performers.
6. Help minimize turnover and promote longevity?
Multiply the number of Sales Professionals who left your organization in the last 12 months by $10,000. This is a reasonable estimate of your lost profit when you consider:
-Lost sales opportunities while you are short-staffed.
-Lost sales and time spent during new employee education and training.
Moreover, there are other costs and pains to bringing new employees on-board. It is difficult to find staff with excellent sales skills and appropriate bike knowledge. So it is in your best interests to design a Compensation Plan that encourages longevity. However, it should also be noted that extremely low turnover is not good either. A lack of turnover usually indicates you are retaining some sales staff that should be replaced based on their performance.
7. Encourage attainment of individual goals and objectives?
The objective of compensation systems should be to motivate and sustain higher levels of performance. Employees have their own reasons for working in your store. Their reasons may vary from enjoying the bike industry to simply wanting to do something they feel is compatible with their skills and interest level. Your store provides them an opportunity to accomplish their personal goals. It is in your best interest as owner or manager to determine why they are working in your store. This is especially important as it relates to compensation. How important is compensation to them? What are their financial needs? If you want a high performance environment fueled by sales associates who can help customers make good buying decisions you must link compensation to the performance you need. The process starts with determining the specific income goals desired from your sales staff. We believe this process--called collaborative goal setting--is essential to getting your sales staff to buy into the process needed to accomplish the results needed sustain the results you need. Every Sales Associate should have specific sales targets, and your store should have a system in place that monitors progress towards those targets. The competitive spirit inherent in most people helps motivate them to reach their targets. After some time, most people also want to know “What’s in it for me?” The Compensation Plan must clearly reward individuals for reaching their individual sales targets.
8. Systematically reward the sales staff for selling higher margin products in your store?
Profit is the engine that drives long-term growth in your business. In fact, your business cannot be sustained without profit. Generating profit dollars must be an integral part of your overall performance and compensation plan. This means that your sales professionals must be focused on selling those items in your store that generate the most profit.
You need sales, but you also need profitable sales. At the end of the year, it does not really matter how many units are sold. The bottom line is profit, and your Compensation Plan should include provisions for an increase or decline in profit. Average selling price, average margin, and add-on sales, are all areas of measurement that tell you how you are doing to that end.
9. Encourage attainment of the store’s sales targets?
It is critical for you to have a budgeted sales target for each week, month and year. The compensation system should be aligned to ensure the store meets it specific sales goals and targets. Compensation like all other expenses in the store comes from customers purchasing products and services from the store. Pay for performance provides the financial motivation for sales professionals to strive for the level of excellence necessary for the store to achieve its goals. This approach tends to foster an environment of individual performance. If you feel this method produces an unhealthy level of competition, you may want to adopt pay for performance that rewards group performance. This method rewards the store team by paying a bonus when the store meets its goal.
10. Encourage healthy competition amongst the sales force, without sacrificing teamwork?
Many people feel this is a difficult objective to achieve. On one hand, you want your sales force to work together, but on the other hand, you do not want to inhibit Sales Associates from wanting to be the best. Experience tells us that teamwork, a high level of customer service and individual performance can co-exist, but it requires principle-based leadership with a clear set of values. Individual competition will always exist in any business environment. In fact, that can be a good thing. The way to assure a strong team is simple (at least it sounds simple!):
-Strong Leadership with a clear vision
-Hiring Quality Team members that are bought into that vision.
11. Produce a higher degree of job security by establishing a high performance environment.
There are very few people in the world that want or choose to work in jobs that do not provide some security. It is understandable. Your sales staff has food bills, tuition, rent, car payments and other financial responsibilities. The fear of not earning enough money to meet those responsibilities will force some staff to leave your store. Other potential employees will not even consider working in your store if your Compensation Plan does not provide some sense of financial security. This means that compensation for all of your employees must be part of an overall performance system. Since customers pay the bills your store must produce a consistent level of revenue needed to pay your staff on a consistent basis. This means your store must be a high performance environment. It is simply not an option. Compensation is only one means of producing the results you desire. It must be combined with proper merchandising, sales management and customer service, etc. to produce the level of profit needed to compensate your staff adequately.
12. Allow you to add to the sales force without affecting selling cost percentage?
If your selling cost percentage automatically goes up (excluding the cost of the training period) by adding to your sales force, then your Compensation Plan is flawed. Although you do not want to have so many Sales Associates that none of them have a fair chance at earning a decent living, you do want to have as many as possible to make sure all customers are served and served well. Your Compensation Plan should allow you to add to the sales force without affecting your selling cost percentage. This is a measure of PRODUCTIVE PAYROLL. In other words, the staff who receives your payroll dollars generate the revenue necessary to maintain a profitable business.
Compensation Plans Compared:
Team Bonuses to Prevent the “Us” Versus “Them” Attitude
Although we have mentioned many times that management of the sales force has more of an effect on how well the sales force works together than the Compensation Plan, we strongly encourage the use of a monthly, quarterly, or yearly bonus. This bonus should be divided among the Sales Professionals to emphasize their dependence on one another. If this is done, the bonus can be divided based on hours or total sales of each Sales Associate.
Regardless of whether you have a Team Bonus for Sales Associates or not, there should always be a Team Bonus for the support staff based on the store’s achievement of certain targets. You might pay 1⁄2% of sales if the store exceeds last year’s sales and 1% of sales for exceeding this year’s goal. The Bonus should then be divided based on their individual income. For example, if one employee made $20,000, which was 30% of the total Support Staff payroll, he or she would receive 30% of the bonus.
Split Commissions Foster Teamwork
It is understood that sales will sometimes be made through the efforts of one or more Sales Associates. These sales should be split evenly regardless of either Sales Professional’s perception of how much either contributed because there is no way to quantify how much effort each expended and what impact it had on making the sale.
To avoid any arguments, do not consider any arguments brought to you. Stick to the rule no matter what the circumstances and assure your sales team that they will win some and lose some, but it is the only way to be fair.
Spiffs on Specific Products
No Compensation Plan would be complete without the addition of occasional contests and spiffs. These short-term incentives provide fun, the chance for extra income or prizes, and/or skill building. Spiffs or contests on selected products are a wonderful way to move products you’d like to part with for any reason and reward Sales Professionals for doing it. Remember though, that spiffs or awards are most effective when they are occasional and on different products. In addition, every store should have an award for Sales Professional of the year or month or any other varieties of benchmarks you believe are worthy of recognition
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