BrainTrust Query: How to Create a Commission Structure for Better Retail Salespeople

Jul 26, 2010

Commentary by Bob Phibbs, The Retail Doctor

Through a special arrangement,
presented here for discussion is a summary of a current article from the Retail

I believe in commissioning sales. Whether that means employees
get an hourly rate and a percentage of sales, a bonus at the end of the month
or a chance to win a trip. Call it what you want but the best bosses share
the wealth, they don’t hoard it.

That said, paying a flat commission on everything
means it is a given — there are no goals to have to achieve so it can lead
to employees feeling they are “entitled” to
it rather than having to earn it.

Some stores only commission high-profit items
or various levels to minimize paying commissions on staples or low-margin,
high sale items.

As an alternative, I’m sharing what admittedly could
seem like a complicated commission structure but read all the way through:

  1. Make a schedule for the month. Enter each employee; each shift’s
    total hours to the best of your abilities.
  2. Total up each employee’s hours for the month.
  3. Add all employees total hours, then multiply the total hours by 15 percent.
    This is the maximum amount of hours you expect to use for the month.
  4. Divide your total store goal by that figure.
  5. Multiply your individual employees hours by that number to arrive at the
    amount of every employee’s monthly goal.
  6. Then, each day your employees work, make a goal sheet with each employee’s
    name and the amount they are expected to sell that day.
  7. At the end of the month, you use actual figures for total hours employees
    worked to arrive at correct dollars per hour they should have sold.
  8. If the store hit the store goal, you reward those who went over their goal
    by whatever you have promised, whether that is a percent of the increase
    or other bonus. If the store missed the goal, even if an individual employee
    “hit” their
    goal, no bonus. It’s great to have superstars but you need the crew to hit
    the goal in order to share in the increased business. Otherwise you just
    end up paying certain employees more because they clerk more or hog the floor
    from the others — neither of which builds sales.

 Here are two things that make this valuable:

  1. Nothing happens unless they hit the goal and;
  2. You only pay out based on actuals, but set the bar higher in case someone
    quits and you need to train someone new.

Finally, whatever you do to reward employees’ sales, pay it out as quickly
as possible to keep them motivated, preferably within a day or two of the end
of the month. Using this commission system isn’t the only way to produce
sales but paying commission based on sales goals clearly sets boundaries for
your crew to move the needle higher.

Discussion Questions: What is an ideal
payment structure for commission-based retail staffs? What do you see as the
common problems and benefits of commission-based pay structures?

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14 Comments on "BrainTrust Query: How to Create a Commission Structure for Better Retail Salespeople"

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Nikki Baird
Nikki Baird
11 years 9 months ago
I would distinguish between commission sales and bonuses. Commissions, to me, are indeed paying a percent to the employee based on what was sold. Commissions may work, but customers may not like commission sales–when you know the employee gets paid based on what they sell, every enthusiastic “Yeah, it looks great on you!” comes under suspicion. Bonuses are a different matter entirely. And I’m a recent convert to the importance of conversion rate. Setting a sales goal for a store employee is a helpful baseline, but it doesn’t give them the tools to actually achieve those goals. Focusing on conversion rate helps them understand one area that is critical to achieving a sales goal, and that is talking to and trying to help every customer who comes in your zone. Also, some days are better sales days than others–like weekends–so a straight average across the month isn’t fair to the stoic mid-week worker, the one who actually keeps the store clean and prepped for those heavy weekend sales days. So rather than commissions, and rather… Read more »
Roger Saunders
11 years 9 months ago
Commission sales, or store bonus programs are positive reinforcements for retail organizations. Keeping a couple of key elements in mind, generally deliver results that are needed: 1. Make the objectives/award consistent with company/store objectives–get the team on the same page. Keep in mind that finance, merchandising, operations, etc., should be able to see these awards as consistent with objectives they are focused upon, as well. 2. Develop a plan that gets associates interested and excited–they need to be champions of the plan. 3. Program should be easy to understand–people should be able to understand the award/reward program after one explanation. 4. Program should be easy to administer–finance/payroll has to help administer these plans. Don’t confuse their lives. 5. Make the Program TIMELY–be it a weekly, monthly, or quarterly effort, so you can keep the ‘hunger’/momentum moving forward. Whether the bonuses are large or small is NOT the key criteria. It is a part of overall compensation. If added sales drive incremental margin and added profitability, bonuses can be driven higher. Associates understand this. Keep it… Read more »
Kevin Sterneckert
11 years 9 months ago

We have seen a number of commissioned sales-driven retailers fall by the wayside. I’m not as convinced that commissioned sales lead to success in retail. Compare Best Buy to Circuit City as an example.

A significant flaw of any commissioned sales program is the emphasis placed on top-line sales dollars. Junior sales associates are looking for the highest ring, not the best function for the consumers’ needs.

There are many very successful companies that do not use a commissioned sales force. I agree that there should be incentives in place that allow the employee to benefit from the success of the store or the organization, but I am far less convinced that a commissioned sales force will lead to retailer success.

Max Goldberg
11 years 9 months ago

Commissions motivate employees to sell more products. The formula needs to be simple, so all employees can easily understand it, and it needs to benefit the retailer through higher sales. At the same time, retailers need to focus on customer service, as this not only builds short-term sales, but contributes to the long-term well being of the company. Perhaps a model that rewards individuals for selling and all employees for reaching customer satisfaction should be considered.

Doug Fleener
11 years 9 months ago
I’ve always used a group bonus for most specialty stores; although I might do both a group and individual incentive for certain types of retailers like jewelry stores, etc. I have a little bit of a different approach that gives the staff a percentage of the targeted bonus up to 100%. So as an example, if an employee’s target bonus was $100 and the store did 90% they were paid $90. After 100% of sales I like to add a multiplier so the staff is nicely rewarded for exceeding the expectations. They might get 1.25% or 1.5% for every percentage point over 100%. A staff that did 110% of goal would be paid at 115% or 125% of goal. Some retailers will cap the multiplier at a certain amount and then go back to the 1% over the caped amount. Regardless of how you do it, Bob’s on the money when he says share the wealth. I find employees who have some skin in the game are a lot more focused on achieving and exceeding… Read more »
Kevin Graff
11 years 9 months ago

As usual, Bob provides very sound advice. His approach is proven to be effective. We’ve always advocated that commission structures should be ‘non-inflationary’ on wage cost, meaning that bonuses/commissions should be paid out of the incremental sales above the basic sales goals. No salesperson should have a cap on earnings; the more they sell the more they make (and so does the retailer).

One other small piece of advice…basic commission structures become ‘boring’ after a period of time so always have additional contests, SPIFFS, and reward and recognition programs in place to keep driving performance.

David Biernbaum
11 years 9 months ago

Straight commission structures really do not attract better retail salespeople, in fact, quite to the contrary. The best approach for the retailer, the customer, and for the business, is to pay a salary structure with bonuses and incentives for sales, customer satisfaction, and departmental team accomplishments.

Ian Percy
11 years 9 months ago
As usual, an interesting proposition from Bob. I’ll resist my usual soapbox about how we really get higher performance from people and stick to this “pay” issue. My starting hypothesis is “You get what you reward.” So if you are rewarding only individual performance you can pretty well kiss any kind of synergistic experience goodbye. It used to be in the electronics stores you’d be attacked by hoards of sales people who smelled fresh meat the moment you walked in the door; like taking my dog to the dog park. You could actually feel the antagonism between the sales people as one would run off with the prey. If you want customers to have a wonderful ‘total’ experience, you need to reward the behaviors that produce that. I’d lean in the direction of letting the entire sales team solve this problem. Let them decide on the rewards (money or trip, etc.) within the parameters the store can afford. Let them manage the performance of each member and so on. When you net all ideas down… Read more »
Gene Hoffman
Gene Hoffman
11 years 9 months ago

Buyers want to perceive that a sales person is trustworthy and truthful. Thus trust should be the #1 objective to be achieved by any company in its pursuit of increased sales.

Commissions motivate already motivated employees. Without incentives, a sales person appears to be too casual, which doesn’t build trust. But commission-driven selling can raise doubts in buyers’ minds if sales people are gung-ho or if they are not totally honest.

So create a commission incentive pool based on increased sales. Divide the pool proportionately to the participants’ contributions but deduct one sale’s value for any buyer’s complaint after a sale and also for a returned sale.

Scott Knaul
Scott Knaul
11 years 9 months ago

I’ve seen commission structures work and fail, and to complicate the thought process, I’ve seen them succeed initially and then ultimately fail because new sales people can’t survive when the sharks are going after the prime sales periods.

Where I’ve seen it be successful over longer periods of time is when there is a combination of commissions and group bonuses based on a store’s performance. Depending on the type of retail organization that you operate, you can give more freedom to the “professional” sales people as they bring the money in based on their client list. If you pair this with a program or strategy of looking at when casual shoppers are in the store, you can pick up incremental sales and grow the business.

Alison Chaltas
Alison Chaltas
11 years 9 months ago

Variable sales incentives are an important motivator at retail. The challenge is to keep it simple, particularly when you are dealing with minimum wage outlets. We like programs that vary the sales goal with the month or season. Think like McDonald’s: “Would you like fries with that? How about a nice cold ice coffee? Would you like to try our new side salad?” Now translate that to mass retail incentives for programs that convert incremental profit: “We suggest you buy an extra ink cartridge with that printer so you never run out. We have a lovely new nail polish that matches that lip gloss you just selected. What kind of brushes would you like with that paint?”

Giving your sales people a focused,measurable clear goal with timely rewards, works.

Ed Rosenbaum
11 years 9 months ago

Unfortunately most sales people in a retail store environment are not trained to sell as much as they are trained to serve the customer. I do think there is a good avenue to bonus retail sales teams; but I am not in favor of setting it up as a commissioned structure.

The reason I am not for the commission structure goes back to the poor sales training given vs. the customer service training given. Equity has to be a consideration in staffing hours, days and how sales promotions are run in relation to the staffing. The model given in the article seems much too complicated. I believe that if you make something that complicated, people will begin to think–right or wrong–that you might be trying to pull something over on them. Why even make that a consideration in someone’s mind? Simply use the tried and true KISS method of communicating.

Marge Laney
11 years 9 months ago

Any step in the direction of rewarding front-line associate performance is a plus. So many times the WIFM (what’s in it for me) is about selling more to make plan to get the manager a bonus. Not a big motivator. Commission selling is not for everyone, but that’s where a good selection strategy comes into play. As Scott points out, however, the long term success of any pay structure depends on the ability to grow new talent as well as keeping the superstars happy and working for you.

Mark Price
Mark Price
11 years 9 months ago
I must beg to differ with the author of this piece. I believe that commissioned sales is one of the great detractors of real, sincere customer engagement. And the stronger you make your commission program, the greater will be the breakdown in customer relationships and the greater your competitive disadvantage. Recently, Daniel Pink, in his book “Driven” commented on how revenue improved for a sales-driven client of his by removing commissions. If the goal of a company is to create profitable, long-term relationships with customers, then the goal of every interaction is to support that customer coming back to that retailer and not thinking about any other alternatives. In order to achieve such a goal, sometimes the individual interaction may NOT be profitable (long-term thinking, anyone?) If the company shows that it will act in the long-term best interests of their customers, customers will reciprocate. If the company shows that they will push product to achieve a goal, then there is no way I can see that they can always operate in the best interests… Read more »

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