Work Compensation Strategies and Examples

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I continue to be amazed that very few owners/managers seem to have a well-defined compensation strategy and philosophy. Most seem to operate under the “squeaky wheel” theory: Nothing happens until employees complain, at which point indiscriminate increases are handed out. Or, they let the competition dictate what compensation levels will be. This just isn’t the way compensation should be managed.

I’ve always said, if you want to be the very best, you must hire the best, train the best, communicate the best, motivate the best and compensate the best.

And, to do the latter, you need an effective compensation program that motivates employees.

Over the years, I have helped many kitchen and bath dealers develop compensation programs, each customized for the individual company. To ensure the right fit, a number of questions must be asked:

  • What are the compensation types and rates in your specific marketplace?
  • Do you determine the value of each position in the company and how much that position is worth?
  • What type of compensation program will appeal to your staff?
  • What job requirements does each position demand?
  • Will your program be individual or team driven – or both?
  • Will your total compensation program be in line with total company expenses and operating costs?
  • Will you be able to communicate your compensation strategy and philosophy to staff?
  • Will your pay scale for various positions reflect the relative importance of the job and the skills and experience required to perform the job?
  • Will your compensation program and policies keep up with the changing nature of the labor market – such as in recruiting and retaining the best employees?

COMPENSATION PLANS

In the kitchen and bath industry, there are almost as many compensation plans as there are businesses (see related story, Fair Wages). This is okay – as long as your plan works for you. Here is a look at four of the most popular plans and their pros and cons:

  1. Straight Salary Plan – This plan pays the employee a set salary (for exempt employees) or an hourly wage (for non-exempt employees) on a regular (weekly, bi-weekly or monthly) basis.

    Employee pros to this plan include security, a guarantee of the same amount of money each month, ease in budgeting and the fact that the employee makes the same amount regardless of productivity of performance. The con is that it provides no real incentive for the employee.

    For management, the advantages to this type of plan are that it’s easy to plan and budget, easy to administer and it offers total control over what is paid. The disadvantages for management include the lack of incentive and that the employee makes the same amount, regardless of productivity.
  2. Commission Only Plan – This may only apply to salespeople. It pays a certain percentage on monthly sales or gross margin – or a combination of both.

    The advantages for employees is the incentive to sell more or increase the margin – or both. There’s no limit to how much can be made. Disadvantages for employees is that there can be a variance in income, making it harder to plan and budget.

    For management, the pro is that they only have to pay for productivity. The cons for management is that, since this plan is hard to plan, budget and administer, it tends to discourage team players; it can cause employees to become too aggressive and it can lead to management losing control over employees. Additionally, if pay is set by sales only, then there is no incentive to achieve margins.
  3. Combination Salary and Commission Plan – The compensation is made up of a percentage of guaranteed salary and commission which is driven by productivity. Management sets both with a goal that the total will offer both security and incentive.

    Employee pros include some income guarantee and some incentive, which provides more security than a straight commission structure, while still offering employees the chance to have some control over pay. Cons include a salary that only accounts for part of the total compensation, and a limited incentive that may not be enough to give employees a feeling of control.

    For management, the pros to this arrangement are similar: There is some incentive, and the employee must be productive to earn at least part of that total compensation. The cons include the difficulties in administering such a plan, while the incentive may not be large enough to keep staff motivated. Plus, management can only budget a portion of the plan.
  4. Guaranteed Draw Against Commission – This is a straight commission plan (can be on sales, margin or both), but instead of waiting for sales/margin results, the employee gets a guaranteed amount in advance. This is then deducted from the commissions when the results are tabulated.

    Employee pros for this plan are that the employee doesn’t have to wait until the commission is figured to see some income, and there’s a big incentive to sell more, increase margins or both. Even better, there’s no limit on how much can be earned – but with the guaranteed draw, the employee can still plan and budget. Employee cons for this plan include that underachievers can fall behind and end up owing the company money.

    For management, the pros of this plan are that they can plan for paying the same amount every month, which makes it easy to budget. And this plan means they only pay for productivity.

Cons for management include difficulty in collecting if the employee falls behind, the challenges in administering such a plan, inability to accurately budget, the danger of employees becoming too aggressive and the loss of some control over employees. If the commission is only on sales or margins, this could cause the employee to lose incentive, as well.

To learn more about creating an effective compensation strategy from Hank Darlington, read Developing a Compensation Strategy. In addition, try reading Projecting Profits in a Softer Business Climate by Bettering Your Bottom Line columnist Ken Peterson, CKD.

Fair Wages? A new Kitchen & Bath Design News survey reveals that while compensation structure varies widely, designer/salespeople are consistently working long hours for less than stellar pay, with the salary gap between the sexes particularly evident. Click here for complete results of the survey, check out the 6/07 issue of KBDN, and see how it compares to KBDN’s compensation survey from several years ago.

More information on this subject can be found in Hank Darlington’s book, Kitchen and Bath Business Management, which can be purchased through NKBA.

Read past columns on Personnel and send us your comments by logging onto Kitchen & Bath Design News’ Website at www.kitchenbathdesign.com.

Be sure to participate in the next KitchenBathDesign.com Online Poll, which asks how kitchen and bath designers and salespeople are paid, online now.

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