Darlington On Showrooms: The Basics Of A Good Compensation Program - Part 2
Let's continue with everyone's favorite subject: compensation. Last month we shared some facts, definitions, philosophies and strategies. This month we'll proceed along these same lines and conclude with some real life examples.
Compensation is a complex subject. There's always a delicate balance between what's right and fair for the employees and what's equally right and fair for the company. Any compensation program has to “feel good” to all parties.
ESTABLISHING A WELL-THOUGHT-OUT COMPENSATION PHILOSOPHYEvery company should formulate a well-thought-out, strategically driven set of criteria that becomes the basis for wage and salary decisions. If you are the owner or manager of the company, here are some questions you may want to ask yourself as you formulate this philosophy:
- Are you going to make your basic salaries simply competitive with the going rate for employees in your marketplace, or are you going to make them higher?
- Are you going to establish a structured pay scale for specific jobs in your business or are you going to set salaries on an individual basis based on the qualities and potential of the person filling the position?
- To what extent are the monetary rewards you offer your employees going to take the form of salary, commissions, performance bonuses or benefits?
- Are you going to base the salaries on how well the people perform or on other factors such as how long they stay with you or what credentials they bring to the job?
- Are you going to award bonuses on the basis of individual performance, tie bonuses to showroom results (the team) or use a combination thereof?
Please keep in mind that no specific answers are right or wrong for every situation. What's important is that your compensation philosophy takes into account your company's mission and strategic goals. Let's assume that your goal is to become the No. 1 showroom in your marketplace within the next three to five years. With this in mind you probably must offer an attractive wage and benefits package to attract and retain the people who can fuel your growth. And, you may need to pay these highly talented employees a little more than the market value today so that you can reap the benefit of their contributions three to five years from now. If your goal is to increase productivity (and most of you need to do this) you most likely will want to tie some portion of the compensation to productivity and performance. So, as you can see, you start with your strategic goals and work upwards.
SETTING PAY LEVELS FOR YOUR SHOWROOMOne of the fundamental tasks in any effort to create an equitable and effective wage and compensation system is to develop a consistent protocol for setting pay levels for each of the positions in the showroom. The more important a job is to the fundamental mission of the business, the higher the pay range should be.
The following procedure can help you determine some preliminary answers on how to approach this important part of establishing compensation levels:
- Make a list of the various jobs in the showroom from the most responsible to the least. It will most likely be a short list that includes the showroom manager, sales consultants, sales assistant, receptionist.
- Write detailed job descriptions for each position.
- Determine what each position is worth to the company.
- Determine what the competitive wages are for like positions in your marketplace.
- Determine what performance and productivity expectations will be for each position.
Let's work through an example for just one of these positions: sales consultant. Start by writing a detailed job description (this will have to be another article). Next, decide what this position is worth to the company. Break it out by productivity expectations.
If someone sells $30,000 per month at 28% gross profit margin the job may be worth $28,000-$32,000 per year. But if someone were to sell $60,000 per month at 36% gross profit margin this same position might be worth $45,000 to $50,000 per year. What's good for one is good for the other (employee and company).
Do some easy market research and determine what the competition pays their sales consultants. If you set your wage level just a little higher you should be able to attract and retain the best. When you pay more, you can and should expect more in terms of productivity and effort.
You should then do regular performance evaluations to coach and mentor the employee to the highest possible performance levels.
Obviously, there are other criteria that must be added to the formula. These things might include such things as experience, education, performance, seniority and potential. All of these are worth something - to the employee and the company.
If you've been reading my articles for any length of time you know how strongly I believe in well-written job descriptions. All employees deserve to know what's expected of them. Regularly scheduled (twice a year), professionally done job performance evaluations are a must. All employees deserve to know how they're doing. Set fair and achievable goals and incentives. All employees should know what their targets are - and should receive an “extra” for achieving them.
As stated in Part 1 of this article I believe wholesale showroom managers and sales consultants are paid on the low side. But, I also believe that their sales and margins are low. If - a BIG if - sales consultants are given all the tools (a nice showroom, good systems and procedures, training and coaching) their monthly sales should average $50,000+ and the gross profit margin should be 35%+. For numbers like these I believe a fair compensation should be in the $40,000 - $45,000 range. Yes, it will vary depending on geography, marketplace, demographics, competition, etc.
There are several compensation methods for salespeople: Straight salary, straight commission or a combination thereof. I personally like the combination of salary and commission - with the commission being driven by both sales and margin.
Following is an example of how you would develop a program that works for the company and the employee using a sliding scale commission program:
- Monthly Sales Goal: $50,000
Monthly Gross Profit % Goal 35%
Monthly Gross Profit $ Goal $17,500
Annual Compensation Goal $45,000
Monthly Compensation Goal $ 3,750
Using the combination salary/commission plan you might want these two pieces to be 50/50. Doing this the base salary would be $1,875 per month. You then build a sliding scale for commissions that will generate the other $1,875+/- based on the monthly sales and gross profit margin shown above.
- Monthly Gross Profit Average Monthly Commission X GP $
Less than 30%……………………...0%
Using the numbers shown above you would have:
- Monthly Base Pay……………………$1,875
11% Commission X $17,500 GP… $1,925
Total Monthly Compensation………$3,800
As sales and margins go up (or down), so does the commission portion. The more a sales consultant sells and the higher the margin, the more he or she makes. Likewise, the company makes more.
As part of this you should establish monthly sales and margin goals - and you should give each sales consultant a monthly report card on how he or she did.
For each month, keep track of each of the following:
- Sales goal
- Actual sales
- Gross profit percentage goal
- Actual gross profit percentage
Compensation may not be the most important reason people work for you, but it certainly is a very important part of the formula. (Other things might include job security, environment, etc.). As stated before, it's a very complex piece of the management puzzle.
Use some of the guidelines spelled out in these two articles to help you rethink and possibly improve your approach to this all important area.