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Salary vs sales incentive plan?

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  • Salary vs sales incentive plan?

    The owner of the company i work for asked me to help come up with a plan to offer incentives for our GM who is also in charge of measuring and scheduling out Jobs.
    The industry is flooring.

    He makes 78k + $500 monthly (off the books) bonus. Has expensive full health coverage for himself and wife, plus gas card which is not really monitored.
    The dilemna is he repeatedly says he is too busy to measure or schedule things that we need done right away. If a customer wants something, they may not wait two weeks for us to free up time, so we lose business.

    The idea is if we adopt a % of gross sales, giving him a personal monetary incentive he will be more willing, possibly stay later or come earlier and that will make him more sales minded. As a retail outfit our # priority is generating sales. This guy is great in many ways, but does NOT have a sales mindset. However, he is money hungry. Right now, no matter if he measures or schedules the $$ is the same.
    My feeling is if we do a straight percentage of gross sales then he will find crafty ways to increase other expenses. There is not really enough profit, at least the past few years, to offer a % of that. Gross sales last year were about 1.8M but profit only 30k. Those #'s not exactly staightforward as owners have me pasy plenty of personal thru the company account...
    Any ideas or stories how you would work this. Finding someone different is not really what we want either, we just want him to not be so reluctant so re-arranging his compensation is the best way we think that can be accomplished.

    Appreaciate your thoughts/feedback.

  • #2
    First, it sounds like the company should really get its act together and start accounting properly. No "off book" bonuses, not passing personal expense through the business, etc. If they ever really hope to build value, they need to get that crap in order.

    Incentives or performance based compensation is very tricky.

    To be effective, the company needs to devise the overall "goal" for the company (normally that is net profit).
    Then you need to look at what is in the GM's control. The worst thing a company can do is create performance compensation based on a metric that is beyond the individual's ability to control (for example, if the company said, we will give you a bonus if floor traffic at the retail outlet is X number of people, but if the company provides no marketing budget or role for the GM to affect floor traffic, the incentive is pointless and demoralizing). Based on what is in the GM's control, what facet of that position would most contribute to the goal.

    I think your instincts are correct, gross sales doesn't sound like the right measurement, but without really getting into what your business does, what it sells, how it sells it, etc., it is really hard to give any sort of insight. It sounds like you need to provide an incentive on two ares, increasing sales and keeping costs in check. But it sounds like right now that the books really aren't in order to do that (e.g. net profit).
    Last edited by HHM; 02-06-2013, 04:50 PM.


    • #3
      Wow, HHM! thanks for answering. Great response, clearly you got alot out of the little i wrote. Very happy you agrred with my initial thoughts on the gross sales. My first response when tasked with this, i told her to lower his base to like 50k and pay for each measure on a sliding scale, like 75 if done in one day, 65 if two, etc.. but she wanted no part in that idea. So i turned to this forum as i know there are many wise ppl here. Heck, BK is smart choice for most.


      • #4
        If the Gross sales isnt the right approach, and the books are too fudged up to make it a percentage of profit, then what other options are there?
        The GM is the one who started this, keeps talking about his pay isnt enough to cover his bills (it is not our/her fault he lives above his means!) so he wanted Commissions on the sales he brings to the store.
        She feels if that takes place, then the sales staff that he supports will suffer as his focus will turn to taking care of his customers.

        We sell Carpeting, Rugs, Tile, wood etc. Mostly wall-to wall carpeting. Not much to drive customers other than REP and high end niche. We advertise appx 100k in magazines etc but thats' about it


        • #5
          So here are some basic rules of creating comp plans (I am in the sales compensation industry.... yes believe it or not there is a sales comp industry....). Some of this may be beyond the scope of what you are trying to do but just passing along some information because I can....

          1. When figuring out a compensation plan you should determine what you want the Total Target Compensation (TTC) (ie total pay including commission they receive) to be, based on "expected" average performance by that individual. They may make more than this, they may make less than this depending on their performance.

          2. Once you have your TTC you should determine your pay mix. The more influence the position has on the sale the higher the percentage of their compensation should be based on performance (ie some kind of commission). So as a generic example someone in sales support might have 95% of their target pay as salary and only 5% as commission/bonus. But a direct sales person might be closer to 60%/40%.

          3. As has been said, any commission/bonus structure should be based on something that that individual has some level of control over.

          4. Figure out what behaviors you want to drive and structure your measures to drive those behaviors

          So based on the information above here are some suggestions....
          It seems that the behavior that you are trying to change/drive is that measurements and scheduling are not being done in a reasonable amount of time. From what you have said so far my recommendation to drive this behavior would be to first establish what that is worth ( ie what is his TTC and pay mix going to be). Once you have that I would establish a measure based on average time to scheduled (assuming you could measure this, and ALL orders would need to be included in this measure). Then establish a reasonable goal (with room for excellence) for example say 2.5 business days is the goal (I would measure individual orders off of full days but you will get a decimal because you are averaging all of the orders). Then I would establish a payout table based on this. you can do the payout on a % scale or with $ amounts since it is only one individual... for example lets say we decided $1000 (just an example and the math is easy ;) ) is the target pay for for the month for this comp component....

          1.50 = 150% = $1500
          1.75 = 130% = $1300
          2.00 = 120% = $1200
          2.25 = 110% = $1100
          2.50 = 100% = $1000
          2.75 = 85% = $850
          3.00 = 70% = $700
          4.00 = 50% = $500
          5.00 = 0% = $0

          Now this was just an example, you would need to tailor that to what makes sense based on realistic averages for time to schedule stuff, as well as how much of his pay you want to be based on that. It sounds like (especially with this individual) that a % of sales or a % of margin is not going to drive the behavior of getting the scheduling done sooner.

          Based on his other roles as GM there may be other behaviors that you want to drive as well and some of those may make sense to pay based on % of sales or % of margin. But based on his role I would be more inclined to structure it as a goal based bonus as opposed to a flat commission. This is similar to what I outlined above but for example you set a goal for sales for each month, ( a good way to do this is something like sales from same month last year +x%). Then he gets paid a % of a bonus based on his achievement of the goal (achievement % = sales / goal) and then have a table similar to the one above, only instead of basing it off a number base it on % achievement of his goal ( because the goal could vary from month to month as I am guessing there is seasonality to the business).

          The good thing about the above is that the average allows for those cases where he has no control over it taking longer, and as it is based on a finite amount you can control the max possible payout.

          Another avenue with him might be to do what we call MBOs (Management based objectives) which is basically like a pass/fail bonus... so you could say in any month that your average time to scheduled is x you get an extra bonus of y. Or any time you schedule at least x number of jobs within y days then you get an extra bonus of z....

          I would ask some questions to try to give you a better answer....
          1. Is this the only individual that does measurements and scheduling?

          2. In a normal work week what % of his time would you expect to be spent doing measurements and scheduling (as opposed to other duties)?


          • #6
            Also is it possible to figure gross profit on a per sale basis ( sale - cost of goods sold) if so that might work into a measure as well.


            • #7
              Holy Smokes, Goon! Ton-o-info...thanks so much for taking the time!!

              Honestly, can't say i grasped all of it, but it's looks like good knowledge and im trying to apply some of it. Profits on Jobs would be the simplest and likely best approach. However, becuase there are many various costs, some unknown at the time and some after the fact, that we never do job costing. It's a primitive 'cash flow' type system.

              We have outsourced measures and had my own assistant (well the whole offices') measure, thing is the GM is a perfectionist and always says whenever someone else does it he soends just as much time correcting/figuring out what they were doing.
              I would guesstimate he spends 60% of his time measuring/scheduling/drawing up plans and seam cuts etc.

              @HHM - The business is slowly improving. an example being when i started the books were all done with a personal home based software (quicken). At least we now use Quickbooks. many many persoanl expenses and just odd things like allowing friends to swipe credit cards and then writing them checks etc...I'd give it maybe a D+ when i started and we might about a B- now. Bottom line is teh store has been operating nearly 20 years and has managed to stay afloat during a very rough past couple years (i kind of pride myself with that - but we did need numerous loans we're trying to pay off now).

              What i feel needs to happen at this point is probably offer a % of sales, then take a few expenses like installers and supplies and deduct that.

              All we really want is for this guy to realize that the most important thing is getting the NEXT job. Sure, having the one we are currently doing as perfect is up there. We can never again have a customer hear "we dont have time for that now"


              • #8
                If we were to just use a basic approach, which does anyone think is the better of these two:

                base pay + a % of gross sales minus a few expenses which he could have some control over - like supplies and/or installer bills. This % should be about what he is currently earning. We do not want to raise him unless there is more profit.


                A base pay + a % of the sales teams commissions. Roughly equivalent to what he is earning now. Again he is incentivized to get more work done/more sales. everybody wins.

                The owner shot down my 2nd idea but im not so sure it's bad.


                • #9
                  Hard to really say, honestly, it would be a recommendation in the dark. The main problem from a morale standpoint is if you are going to reduce the base, I don't care how favorable the plan my end up being, the employee ALWAYS feels like they are getting the shaft. The challenge, of course, is that if you don't reduce the base, any incentive plan you come up with (when you figure out the TTC) would probably not be worth the employees while if the company's goal is to try to keep him around what he is earning now. This person is earning $6500 per month now, so a limited plan that caps out, say at, $500 extra per month, isn't really worth any extra effort on the part of the employee.

                  Simplicity is important. The second option is probably the simplest. I would probably structure something around a $5000 per month base, with an average like goon suggests that realistically gets him to 6500, 9-10 months out of the year, but allow for a potential of up to $7,500 that is realistic (meaning, based on numbers the store has actually hit in the past. (e.g. find the best 3 performing months in the last 12, and figure a way to incentive that performance to get this person up to $7500 to $8,000).

                  I was at a firm that gave an "okay" base (slightly above market), but incentives didn't start until you reached $200K in gross sales per month. Come to find out, the firm had NEVER hit $200K in a month (ever), and based on the client flow I was seeing, even if I closed 100%, it wasn't possible to hit $200K. Client flow was largely out of my control, it was a function of marketing. Needless to say, myself and management didn't really see eye to eye.


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