Developing a Commission System That Works

Many kitchen and bath firm owners want to “go to the next level” and hire an experienced sales designer. But their firms are rarely ready for this responsibility. One of the critical elements that’s often missing is a commission system that works.
Usually, the commission system the owner picks is chosen because it’s the easiest to administer, never mind that it rarely motivates high levels of sales or high margins of gross profit, or enhances the owner’s cash flow and net profit.

Let’s examine some commission systems and their characteristics:

  • 10% of the Selling Price. Salespeople paid this way have no regard for “hard costs” or achieving minimum gross margins. Owners are at risk of having mistakes in the field, unhappy customers and selling their way out of business.
  • Draw Against Commission. The commission is figured as a percentage of the gross profit. Because payment of the commission may be irregular, salespeople will often press for higher draws to meet family expenses. If a business slowdown occurs, owners may find their salespeople overdrawn and their cash flow hurting. Salary Plus Commission. This system gives comfort to a salesperson, especially if the salary covers household expenses. Most salespeople on this program will not exert themselves to achieve higher levels of performance.
  • Sliding Scale Commission. The commission is usually figured as a percentage of the sales price, except higher percentages are paid for higher percentages of gross profit achieved. In theory, this system has merit, but can prove troublesome. For example, a salesperson expects a 12% commission on a job certain to achieve a 40% gross profit. But due to unforeseen errors, the job earns only 38% and the salesperson is paid 11%. Owners may find themselves endlessly meeting with salespeople to review costs and negotiate a compromise.
  • Straight Commission as a % of the Gross Profit.
  • This system not only rewards the superstar for his/her sales prowess, but also enhances the owner’s cash flow. However, most salespeople looking for a job in this industry would reject such a program out of fear of not making enough money.

I have always been a believer in the straight commission methodology, in part because I wanted the very best salespeople to staff my showrooms in Connecticut. That said, I blended it with an optional draw against commission program for first-year salespeople. There was a limit to the amount that could be drawn in excess of commissions earned which was documented in our Sales Designer Agreement. This tactic enabled rookies in our organization to gain confidence in themselves – and our firm – though most converted voluntarily to the straight commission program after four to six months. At the end of one year, everyone had to be on straight commission.

Since I believe in a flexible sales approach, both minimum and suggested multipliers over contract cost were furnished in a bulletin each year. The established burden rate and multipliers were a direct byproduct of a budgeting process that assured the company of achieving its desired net profit. The sales designer could select the desired multiplier depending on the complexity of the job and the degree of client service required. Table 1 is an example of the Price Formula Chart that would be distributed by management annually.

Under this pricing methodology, a kitchen project with material (excluding appliances), use tax, labor and subcontract costs totaling $25,000 would bear a burden rate of 1.25 for an adjusted contract cost of $31,250. The $6,250 differential paid for the indirect costs of production on that job such as project manager’s salary, warehousing, trucking, etc. A 1.67 multiplier would deliver an estimated gross profit of $20,938 and a subtotal of $52,188. Then, a 1.02 multiplier was added – or $1,044 – for servicing the job through the life of the warranty to create a final selling price of $53,232.

For each project category, Minimum Gross Profit Standards were established 4-6% lower than what we wanted as a minimum gross profit percentage. If projects came in above the minimum standards, sales designers would earn their full percentage of the gross profit. In this way, hassles over commissions were kept to a minimum each year. Table 2 outlines what sales designers earned (except for appliances, which had a different commission schedule).

Straight commission salespeople earned 10% more than those on draw – an incentive for rookies to convert their compensation as soon as possible. So, in the earlier pricing example, the straight commission sales designer of the hypothetical $53,232 sale could expect to earn 33% of the $20,938 gross profit. The $6,909.54 in expected commission equals 13% of the sale price.

While this figure is higher than the industry norm of about 10%, our overall gross margins of 51.5% (when burden and service contingency are included) required better talent to make the sale. And better talent required higher pay rates.

Sales designers received 50% of their expected commission when the job was sold, the deposit check was received and cleared and the client file was complete for ordering by the office staff. Forty percent of the expected commission was paid when the job was invoiced and paid in full. The final 10% was paid when all invoices were received and the gross profit computed, approximately six weeks after final payment.

This may not be the simplest commission system to administer. But it can motivate salespeople, grow substantial revenue growth and maintain high margins of gross profit.

Project Category Burden Rate Suggested
Multiplier (GP%)
Minimum
Multiplier (GP%)
Service
Contingency
GP% Std.
Kitchen 1.25 1.72 (42%) 1.67 (40%) 1.02 36%
Bathroom 1.25 1.82 (45%) 1.75 (43%) 1.02 38%
Kitchen Partials 1.25 1.82 (45%) 1.75 (43%) 1.02 38%
Appliances - - - 1.34 (25%) 1.28 (22%) - - - 22%
Other Rooms1.251.72 (42%)1.67 (40%)1.0236%

PlanEqual or Greater Than
Minimum GP% Standard
25% to Min. GP%
Standard
15-25%
Less than GP%
Less than
15% GP
Straight Commission33%28%10%0
Draw Against Commission30%25%10%0

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