Pros and Cons of Different Compensation Plans

Joe Milevsky JRM Sales and Management

Every retail operation is unique. There is no one-size-fits-all model for sales compensation. This session will cover::

The different ways of compensating The pros and cons of each system How to determine if your method is effective How to determine the amount a salesperson should earn Stress-free ways to change the way you compensate

2017 HPBExpo Education

Sponsored by:

1

Pros & Cons of Different Sales CompensationsSales Compensations

Presented by Joe Milevsky

Founder/CEO

AGENDA

Introduce myself and JRM Sales and Management, Inc.

Seminar: Pros and Cons of Different Sales Compensations

Questions and Answers

Drawing – fill out the registration card

See us on the trade show floor or call me personally to discuss your issues and concerns

EVERY COMPANY HAS COMMISSION EMPLOYEES

We call them owners

All too often all of the stress of performance is on the shoulders of the fewshoulders of the few

This decision is best made objectively and not driven by salespeople’s fear or the fear of developing a “predator-like” environment.

2

THE PROS & CONS OF DIFFERENT SALES COMPENSATIONS

Over the years as a business analyst and consultant I have seen every imaginable form of compensation for salespeople. Each client situation is unique and there is no “one size fits all”.

iff f i Different ways of compensating. The pros and cons of each system. How do you determine if it is effective? How to determine how much should a salesperson

earn? How to facilitate a change in the way you

compensate with minimal stress.

WHY HAVE AN INCENTIVE SYSTEM?

To illicit specific behavioral responses leading to improved performance.

If those responses are not clearly defined then conflict will likely arise. y

Those responses revolve around developing a company selling system and holding salespeople accountable for all aspects of it.

The incentive program should be designed to encourage salespeople to utilize the company selling system and to directly associate that behavior with positive compensation.

HOURLY OR STRAIGHT SALARY:

The advantages are: The simplicity to administer;

Th “ d t ” i i th ht t b li i t d The “predator” image is thought to be eliminated; Provides a more secure and predictable income for

salespeople; Generally it is easier to recruit

someone on salary versus commission.

3

HOURLY OR STRAIGHT SALARY:

The disadvantages: No matter how well salespeople sell there is no direct benefit. The people that are attracted to this type of environment may be the wrong type of people; Making a decision to hire additional salespeople must be viewed as a large additional expense and not truly based on what is best for your customers.When on salary, very often the better performers are not rewarded. Poorer performers are rewarded out of proportion to their actual sales contribution.

SALARY PLUS SMALL COMMISSION OR BONUS

Often in smaller operations salespeople have additional duties and are unable to exclusively focus on sales.

This is not an ideal situation but in reality it extensively exists.

In situations like this some sort of salary may be required to address non-sales responsibilities.

SALARY PLUS SMALL COMMISSION OR BONUS

The advantage is that there is at least some incentive for individual performance The main disadvantage is that the incentive is not great.

Example: Salesperson A has an hourly salary of $12/hour and is paid 2% on everything that they sell. The $12/hour is roughly $25,000/year. If they sell $400,000 during the course of a year, that is only an additional $8,000 per year. $100 in commission for a $5,000 sale may not get them excited.

4

GROUP COMMISSIONS OR BONUSES

The main Advantage is that they encourage teamwork.

The Disadvantages include the feeling that no matter how well I do as an individual, my team members performance may negate my efforts.

DISGUISED COMMISSION PROGRAMS

Such as the constant adjusting of salaries in reaction to previous monthly or quarterly sales performance. The advantages:The advantages:

It is ultimately incentive based; Salespeople tend not to get as upset about a lost sale since the

bigger picture is what will happen over the month or quarter; it may be easier to recruit with such a system over straight

commission.

The disadvantage is that it ultimately is a disguised commission and may lead to some issues of trust in ownership, etc.

STRAIGHT COMMISSION

(OFTEN SOFTENED BY THE USE OF A DRAW AGAINST EXPECTED COMMISSIONS)

The advantages include:

Direct correlation with individual effort and reward

Adding additional salespeople to achieve the optimum number of salespeople on staff is viewed as doing what is best for the customer and not an added expense

If I pay salary then the percentage goes up if sales do not proportionately increase as I add additional salespeople

5

HOW COMMISSION IMPACTS YOUR BOTTOM LINE VERSUS STRAIGHT SALARY

Profit expressed as a percentage is:

Sales – Revenue - 100%COG = 55%COG 55%Gross margin - 45%Operating expenses (includes sales payroll) 40%Profit = 5%

If I pay 6% of sales it will stay 6% of operating expenses regardless of volume

STRAIGHT COMMISSION

The disadvantages are:As consultants we encourage our clients to hire the best people they can find to fill their sales positions.

Do not rely on experience alone.y p

Therefore we often must look outside of the industry to find great people.

It makes it more difficult to recruit people from other industries that have become comfortable with a set income.

Throw in evenings, weekends, long hours on their feet, cancellations and the like and the difficulty to recruit strong people from other industries geometrically increases.

HELP WANTED AD

Be willing to work 40 to 50 plus hours a week.

Stand on your feet most of the time

Deal with other salespeople that might be jealous of your success

Successfully complete a sale only to have the sale turned down by credit, delivery and installation shows up late or otherwise makes mistakes, etc. causing the sale to be lost.

Work holidays, week ends, nights and go nuts during our busy season

And oh by the way we pay commission

6

SEASONALITY & LEGAL ISSUES

How can a salesperson maintain an acceptable income during our slow season when on commission?

How do owners maintain acceptable income during the slow season?

How do I keep them employed?How do I keep them employed?

Wage and hour issues and the ever‐changing laws – be in communication with your attorney when adjusting compensation plans and when you learn about law changes.

Salespeople must work the phones, follow up on earlier proposals, find out about service needs, etc.  

Seek to even out your year as best as possible with new introductions or added service venues

MULTI‐LEVEL COMMISSIONS

Different rates of commissions paid for different levels of performance (typically volume or gross margin)

The advantage is that this type of incentive seemsThe advantage is that this type of incentive seems geared at specific corporate goals. The disadvantages include the fact that most

salespeople cannot seem to focus on these types of goals and there appears to be little evidence of their effectiveness.

KISS principle may be best

TO COMMISSION - OR NOT TO COMMISSION; THAT IS THE QUESTION

Commissions may be thought of as the lazy person’s sales management system.

If you could have the best possible sales management system in place and were willing and able to hold salespeople accountable for your selling system processes, then in theory you would not need a commission system.

Our general experience is that our clients that utilize incentive programs that constitute a majority of their sales compensation, are considerably more successful than those that do not.

7

DETERMINING PAY SCALESDetermining the appropriate percentage of

commission to pay depends on many individual company aspects. The following examples explain this concept:

Company A is in downtown moderate-sized city USA. Its volume is two million dollars per year and the average

salesperson sells about $300 000 per yearsalesperson sells about $300,000 per year. Minimal income required to keep salespeople is $35,000 to

$40,000 per year. Incentives may have to be in the 12% area to maintain a

staff.

In order to be profitable the company must maintain high enough margins to offset higher salesperson compensation percentages.

DETERMINING PAY SCALES

Company B is in big city USA.

The company relies on low margins and aggressively promotes.

Its volume is $100,000,000 per year and the average salesperson sells $1,500,000 per year.

Minimal income required to keep salespeople is $50,000 to $60,000 per year. Incentives must be in 4% area to maintain a staff.

The lower incentive percentage is needed to achieve profit goals with lower company margins.

CONVERTING TO COMMISSION

JRM Sales & Management’s clients are very diverse.

Although we encourage incentive programs, in most situations, there are times that we do not.

Your decision should be objectively made primarily based on what is best for your customers.

That in turn will be what is best for your company and ultimately what is best for your salespeople.

8

CONVERTING

Converting to an incentive program can be very difficult if it is not done properly. Weigh the pros and cons, seek outside feedback where appropriate and make pp pthe best decision possible for your business.

Guarantee their income will not go down as long as performance is at least as good.

Give your people the tools they need to succeed.

IMPLEMENT EFFECTIVE SALES MANAGEMENT PROCESSES

Your own selling system

Setting & achieving different kinds of sales goals

Measuring the right things

Staffing your floor based on customer needs

Training new hires & developmental training Training new-hires & developmental training

On-floor observation and feedback

Private coaching sessions

Follow-through coaching

Compensation system that is best for you

Do not let any customer interaction fail!

FLOOR RULES & CLEARLY STATED COMPANY VALUES

Along with a selling system that is built around how you want your customers treated there should also be the development of the rules of engagement.

Fl l t b l l d fi d th t d l ith Floor rules must be clearly defined that deal with situations such as what to do when a customer requests a salesperson that is unavailable.

Developing any rules without the willingness and ability to hold people accountable for those rules is worse than having no rules at all.

9

IMPLEMENT VALUES, MISSION, FLOOR RULES AND ACCOUNTABILITIES

Our mission is that we are client centric

First in takes the first customer

No carding No carding

Salesperson cannot own customer  

Customer can own salesperson

If a customer asks for a salesperson (no interrogating customers) who is not available – the sale is made –the sale is split

Handling of incoming phone calls

MEASURE AS A TOOL TO HELP YOU COACH IMPROVED PERFORMANCE

Ellen  ‐ $745,089    ‐ $463/Customer   

Rick    ‐ $527,108     ‐ $185/Customer

Roger ‐ $963,330    ‐ $343/Customer

Sally    ‐ $760,265     ‐ $269/Customer

Joan   ‐ $445,023     ‐ $194/Customer

OPPORTUNITY

Ellen achieved $463/Customer

Roger achieved $343/Customer

If Rick, Sally & Joan could be helped to climb to just $300/Customer.

They would do an additional combined $658,604

That Would Be An 19% Increase!

10

SUMMARY

Base your decision on what is best for your customer not on fear of creating a predator like environment

Be transparent ensuring commission reports are timely and accurate

Rejoice when salespeople earn big commissions

Give salespeople the tools they need to help their customers and maximize their earning potential

We are offering to HPBA membersa free 30 to 60 minute consultation

Email joe@jrmsales mgmt comEmail joe@jrmsales‐mgmt.com

If we are unable to meet with you this week then

I will personally contact you 

DRAWING

Complete the registration card for a 

FREE BUSINESS ANALYSIS

$3,000* Value

Drawing to be held at the conclusion of HPBA’s convention this week

*Travel related expenses are extra.  Additional fees may apply to businesses outside of the US & 

Canada, or organizations requiring additional preparation and on‐site days. 

(*must be taken by May 31, 2017)

11

EXCLUSIVELY WORK WITH INDEPENDENT RETAILERSJRM’S CLIENTS ARE EXTREMELY DIVERSE

From under 1 million to over 100 million

Major cities/small town America and internationally

In every imaginable situation; but 3 basic categories:

Some 60% are not in serious trouble but they feel stuck; the  Some 60% are not in serious trouble but they feel stuck; the business runs them; they want help to get to the next level;

Some 20% are extremely successful; they seek outside objective help to ensure they stay that way;

Some 20% are in serious trouble and require immediate turn-around.

WE BRING UNPARALLELED VALUE TO OUR CLIENTS

We have a 16‐year proven track record with hundreds of clients.Whether you are developing your exit strategy or just starting up, we are the champion of the independent retailer.

Creating unique selling systems for each client

Implementing people management processes and procedures

Increasing operating efficiencies

Developing merchandise strategies

Developing financial processes to ensure your goals are realized and your 

company is safe

We give you access to a broad array of intellectual properties and  unparalleled 

industry specialists.   

THREE POSSIBLE OUTCOMES

If you don’t believe that the visit is worthwhile –You Pay Nothing!!

You tell us it was worthwhile – you pay our fee plus travel‐related expenses – and that is all we do for now.

You ask us for a proposal on how we can help you implement our recommended changes.

We have very limited dates available for the rest of the year. 

Make the decision today 

to plan for the future of your business.

12

SPECIAL OFFER

Schedule a Business Performance Analysis before the end of the our convention, and complete it by May 31, 2017.  

Simply check the box on the card 

indicating that you want to schedule it.  

We will give you $1,000 OFF our normal fee of $3,000*. 

*Travel related expenses are extra. Additional fees may apply to businesses outside of the US & Canada, or organizations requiring

additional preparation and on-site days.

JRM Sales & Management

1690 Stone Village Lane, Suite 1021

K GA 30152

Visit us at our HPBExpo Booth

Kennesaw, GA 30152

678-574-0937

www.jrmsales-mgmt.com

joe@jrmsales-mgmt.comJoe MilevskyCEO/Founder