Retail Industry Sales Compensation Designs and Use of Store Rankings

By Clinton Gott

Recently, we’ve observed retail organizations becoming more concerned about ensuring their sales incentives are rewarding appropriately and driving store-level results. Many organizations have also been wondering if and how store rankings should play a role.

Use of Store Grades/Rankings/Tiers

Most retail chains rank stores, often using A, B, C designations or tiers. Fewer though tie those rankings directly to incentives or at least to any significant degree. Usually such programs are designed to:

  • Create some level of contest-type energy – the classic use of leaderboards.
  • Support rewards and recognition programs – employees in top performing stores can receive some level of acknowledgement, whether just recognition or small non-cash rewards.
  • Identify which store practices to learn from and emulate (Tier A stores) and which ones may need more coaching and development support (Tier C stores).
  • Factor into merit determinations or other performance management evaluations, particularly at the store manager level.

The most common stack ranking metrics are of course tied to volume, which can have a bias toward larger market stores. Many actually prefer factoring in growth percentages or ideally performance against goal. This levels the playing field and gives all stores a chance to shine, not just finding success by being in a metro area or fortunate market.

In general and in most cases, if the grades are stack ranked, e.g., equal thirds A, B, and C, that approach can actually be seen in a very negative light. It’s a zero sum game. In good periods, objectively strong performing stores can be forced into a B or C grade if others happen to have performed even better. In general, forced ranking programs aren’t great in most settings, and if they tie back to compensation, they risk creating even more angst.

Retail Compensation Programs

First off, base pay whether expressed as salary for management or hourly pay for most employees is the most prominent pay component for sales organizations in just about all industries but particularly in lower paid ones like retail. That having been said, variable incentive programs can still have great significance in retail environments. In terms of plan designs:

  • The most common metrics are store revenue, sometimes margin, softer items like customer satisfaction (“fill out the survey on the web address found on your receipt”), and/or operational topics (safety, inventory management/turns/shrink, returns, etc.)
  • In terms of mechanics, the best way to pay is using goal-based plans, particularly when tied to primary volume metrics. All stores should receive goals and are calibrated against those expectations of performance. The results aren’t stack ranked but target incentives are paid out mathematically using an appropriate payout formula (using a minimum performance threshold where payouts start, 100% incentive at 100% goal, and then enticing acceleration for beating goal). This is a bread-and-butter sales compensation design, and it has strong applicability in retail.
  • In many cases, the variable incentive in retail is expressed as base plus bonus, e.g., $4,000 base with 25% bonus opportunity (so $1,000 bonus target) in a given month. The measures and mechanics then compute against that amount.

One interesting question to consider is who should be eligible for variable incentives. Clearly, store management and senior roles should be eligible for variable incentives. Again, typically that’s base plus bonus primarily tied to a volume metric and performance calibrated against goals. Other metrics or design elements can be included as well if such things are strategically relevant, but that’s not always necessary in the cash-based variable incentive program.

In terms of best practices, companies should try to extend some level of variable incentives as deep down into the retail store as is sensible. It helps to have the lower paid folks actually caring about how the store performs, even if the payouts (cash or non-cash) are relatively small. These are often team-based/total store metrics, and small rewards can really matter to someone at a lower income level. One area to consider is the gradually increasing minimum wage levels that lock in more pay in base but leave less opportunity for creative variable incentive programs. This is still a developing topic and can vary based on state-by-state minimum wage developments.

Also, some retail stores of course pay individual commissions, but usage varies and has mixed results. Few retail worlds truly have one-on-one sales rainmakers tied to individual customers. And without some connection to team results, customer service can really suffer. What happens when the dedicated salesperson isn’t working on the day a customer comes into buy? Most likely, that customer has a bad service experience, and it’s tougher than ever to recover in retail when the customer isn’t happy. In most store environments, offering rewards for how the total team and store performs is usually the right option when using variable incentives, while individual efforts can be performance managed or recognized in other ways.

Daily news stories consistently report on the challenges in today’s retail environment. A focus on high service and customer satisfaction levels can be a critical differentiator, and the right incentive plan designs will energize and reward the salespeople who make it happen.

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