Posts Tagged ‘Practical Sales Compensation’

Retail Industry Sales Compensation Designs and Use of Store Rankings

Tuesday, April 25th, 2017

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.

Practical Sales Compensation
– Getting Started (Part 1a)

Monday, February 14th, 2011

-By Per Torgersen

To see my preview to this blog series please visit:

So, now…

Getting Started:

The initial flurry of activity should be about building a foundation for a successful effort.  Some of the key elements to focus on include:

  • Securing Executive Sponsorship – Prior to kicking off a project, a high level executive (e.g., VP of Sales, Division/Business Unit President, etc.) should be identified as the primary sponsor for the initiative.  This individual needs to be at a high level within the company and is, ideally, respected and well-regarded as he/she will lend stature to the project, ensure access to and cooperation from the right players, as well as the necessary commitment to get the work completed.TIP – Once you identify the right individual, make sure you spell out the expectations around their role in driving success. Establish a regular schedule to provide them progress updates so they know what is going on, and reference them and include them in communications that go out to the Design Team and the broader organization.
  • Creating the “right” Design Team – There are a number of variables to consider  when selecting an effective Design Team. Decisions around how many and who to include could depend on the level of openness desired regarding the review and redesign of the incentive program.   In general, the Design Team should not be too large so as to make it unwieldy in terms of scheduling and full participation – less than ten is good, seven or less is even better.  Additionally, what I recommend is to include representatives from multiple functions that have a vested interest in the components of the program and its execution.  This typically includes Sales Leadership, Marketing, Sales Operations, HR, and IT (especially if there is a great deal of data accuracy or complexity involved). Additionally, representation from the sales force itself is important for ‘buy in’ – don’t forget you’re ultimately impacting their paychecks!  (I talk about this a bit more below.) Another area of decisions is around personalities.  If there are strong ones (and invariably there are in almost every design team!) whoever facilitates needs to make sure discussions are not dominated by one or two individuals. Otherwise, the end result can be that other team members feel excluded which can then come back and damage support for the final decisions during an eventual rollout of the plans. So, make sure you have a strong facilitator who can ensure an objective, fact-filled, and observation-driven process!
  • Inclusiveness – Although this issue was somewhat addressed in the Design Team topic above, let’s address the broader question of including sales people and others impacted monetarily by the incentive plan.  While it’s true that everybody cannot be on the Design Team, functions like sales, marketing, and sales operations should be tapped into for input, either through one-on-one interviews, focus groups, or surveys (online ones work great!).  Some organizations are uncomfortable with this as problems are raised about other areas like manufacturing quality and supply chain management, which impact a sales person’s ability to sell which, in turn, impacts their ability to surpass their objectives and obtain a high incentive payout.  Organizations often want to keep any and all activities associated with incentive plan design confidential.  My personal observations on this issue are that sales people invariably find out about anything going on concerning their incentive plans, and it can provide leadership with much more credibility in a roll-out situation, if they can highlight that they have been listening to the sales force and other functions, and incorporated commentary into the newly developed plans. This limits the bad ‘surprise’ element!

Next time, I’ll finish this section of “Getting Started” by discussing  Communication and Educating Team Members…

Practical Sales Compensation – An Upcoming Series of Three…Practical Posts

Thursday, February 3rd, 2011

-By Per Torgersen

Anyone who has been through a significant sales compensation design project can attest to how much effort it takes to do it well.  It’s not just about following leading practices in design, like having three performance measures or less, or making sure the sales role in question has some control over a particular measure.  There are so many other factors to consider and manage throughout the process, from selecting the right design team, to securing the necessary approvals. Perhaps the most critical part is effectively “selling” to the sales people you are trying to motivate.  In addition, you may need to navigate around distractions and issues that often come up along the way — big ones, like a re-structuring, or smaller ones like revised forecasts from finance or new product launch dates from marketing.  Maintaining awareness and staying focused is imperative to ensure everything stays on track.  Indeed, you can argue that the process never stops; even after new plans are in place there is a need to monitor how well they are working while also preparing for any changes to incorporate in the following year’s plans (hopefully, however, the level of activity is significantly less intense!).

A great amount has been written about the technical aspects of sales incentive compensation.  Although technical aspects of incentive design are absolutely important and must be heeded, this series is not about those specifics.

Instead, the spotlight will be on the process itself and some of the lesser known success factors – from how to get started, the “sausage making”, and finally wrapping it all up.  As noted in the title, the emphasis in this series will be on the practical activities that need to take place, how to avoid the many pitfalls along the way, and ensure a motivational, fair incentive program that limits leadership and sales force distractions from selling (which is, after all, the name of the game).

A quick preview on what’s to come:

1. Getting StartedSecuring Executive Sponsorship, Creating the Right Design Team, Inclusiveness, Communication, and Educating Team Members

2. The “Sausage Making”Establishing Core Decision Guidelines, Starting the “Selling” Process, Check Lists, and Design Team Socialization

3. Wrapping it All UpModeling, (Even More) Communication, Systems and Reports, Plan Launch, and more!

Stay tuned!