DarlingtonOnShowrooms: People - Your Most Important Asset; Part 5 - Compensating The Best!
When I teach my "Managing for Profits Seminar" there is always a lot of interest in how much to pay your showroom salespeople. The compensation package should be developed so that you can attract and retain the best people for each position. If you compensate the best, you should expect the best productivity and loyalty in return.
First decide what each position is worth. For example, I'd be happy to pay a showroom sales consultant $75,000 per year if he or she produced $1,000,000 a year in sales at 40% gross profit. But, I'd only be willing to pay $45,000 a year for $500,000 in sales at 36% gross profit.
Good help is hard to find, and in today's economy it is even harder to keep. If you're going to make the investment in recruiting, training and employment taxes, then you have to protect your investment.
According to Supply House Times' 2000 Showroom Survey, the average compensation for a showroom manager was $30,000 to $35,000 and the average for showroom salespeople was $25,000 to $30,000. Some 45% paid various spiffs; 38% paid on a commission basis; 30% did discretionary bonuses and 31% paid no incentives. These numbers are too low! Like most things in life, you get what you pay for.
As a broad statement, I think showroom managers should be paid $50,000+ and the salespeople $40,000+. The local market and productivity numbers help dictate what the compensation will be, but it has to tie in with productivity. Minimum sales per salesperson have to be $40,000 per month at a minimum of 33% gross profit. Compensation grows as productivity grows.
Some wholesaler showrooms sell only to the plumbing trades. It's tough for them to achieve margins of 30% or more. Wholesalers are volume driven - showrooms are not.
A wholesaler salesperson selling $100,000 per month @ 20% will earn $20,000 in gross profit dollars. A showroom salesperson only has to sell $57,150 @ 35% to earn the same gross profit dollars. Should the showroom salesperson be compensated less? I think not.
There are other issues also. The showroom salesperson spends all the time and energy specifying a project but because a plumber is buying it, the outside wholesaler salesperson gets credit for the sale. Is this fair? I don't think so. Whoever does the work on the sale should get credit for it. In addition, how can you track total showroom sales and profits if someone else gets credit for the work?
Every employee needs money to pay the bills and afford the other necessities of life. However, after your employees have enough money to pay for these basic needs, additional money becomes less motivating and other incentives - surprisingly, non-cash incentives - become more important.
Most employees consider the money that they receive on the job to be a fair exchange for their labor. Compensation is viewed as a "right." Recognition, on the other hand, is a "gift," and using it helps you as a manager get the best effort from each employee.
Fringe benefits are all the "extras" that companies add to the basic compensation. All of the extras add about 33% to the cost of the package. Be sure your employees know what these extras are and how much they cost.
There are several types of compensation.
1. Straight Salary/Hourly. This is paying the same amount every week, every other week or every month.
2. Straight Commission. This is totally driven by productivity either in sales, gross profit or a combination of both.
3. Combination of Salary/Commission.
I like the last one best. Make the base pay about 40% of the total you want to pay. This amount is guaranteed. The balance is driven by sales and profit margin. To add incentive to achieve the highest margins possible, build in a sliding scale for the margin.
Monthly Gross Monthly
Profit Average Commission Rate
42 - 43.99% 13% of GP $
40 - 41.99% 12% of GP $
38 - 39.99% 11% of GP $
36 - 37.99% 10% of GP $
34 - 35.99% 9% of GP $
32 - 33.99% 8% of GP $
30 - 31.99% 7% of GP $
Less than 30% 0
(No Base Pay)
Profit Average Rate Commission
42 - 44% 22%
40 - 42% 21%
38 - 40% 20%
36 - 38% 19%
34 - 36% 18%
For the sliding scale compensation, you make the numbers what you want them to be. This means that half of the compensation is guaranteed and half is driven by sales and gross profits.
When you do goals and incentives, they have to be fair and achievable.
If you pay on a straight commission basis, you set the percentages based on how much you want to pay for sales and gross profit dollars being produced.
For example: You want to pay a showroom salesperson $4,000 per month for producing $60,000 per month in sales at 38% gross profit margin. The compensation would be:
38% GP x $60,000 Sales = $22,200
11% Commission x $22,200 GP$ = 2,442
Monthly Base Pay 1,600
Total Compensation $4,042
As sales and gross profit margins go up and down, so does the compensation.
To help develop a team effort at our business, we had a monthly incentive "pot" that all salespeople and support people shared in equally at each branch showroom. If the branch showroom sales were $500,000 and the gross profit margin was 38%, the gross profit dollars would be $190,000. We put 1% of gross profit dollars in the "pot." If we had five salespeople and four support people, we divided $1,900 by nine, and each person received $211.11. Everyone worked together to make sales, margin, and most importantly, happy customers.
I'm a proponent of paying showroom staff attractive, competitive compensation. I also believe the company should enjoy higher than average productivity.
To be the best, hire, train, communicate, motivate and compensate the best.