Tips for Developing Effective Compensation Programs

Hiring and managing people well is a key to business success, and I maintain that people are your most important asset. They are more valuable than your inventory, showroom, displays, trucks and computers. And, there’s nothing more important – to the company and the employees – than a great compensation program.

In the kitchen and bath industry, there are almost as many different compensation plans as there are businesses. This is okay – as long as your plan works for you. Following is a brief look at the four most popular plans and their various pros and cons.

Regular Salary

The Regular Salary Plan pays the employee a set amount of salary (exempt employees) or hourly wages (non-exempt) on a regular (weekly, bi-weekly or monthly) basis.

For employees, the pros for this plan include security, a guaranteed same income each month, ease of budgeting and the assurance of making the same amount, regardless of productivity and performance. The cons include a lack of incentive and a lack of opportunity to grow compensation.

For management, the pros of this system include the ease of planning and budgeting, the ease of administering the program and the ability to have total control over how much is paid out. The cons include a lack of incentive, and the fact that the employee makes the same amount, even if productivity slips or productivity is weak.

Commission-Only

The Commission-Only Plan usually only applies to salespeople. It pays a certain percentage on monthly sales, gross margin dollars or a combination of both.

For employees, the pros to this type of plan include big incentives for selling more, increasing margins or both, as well as no limits on how much can be made. The cons include a potential wide variance in income and an inability to plan or budget as easily.

For management, the pros include only having to pay for productivity, and the ability to attract highly motivated and productive salespeople. Cons include the greater difficulty in administrating, planning and budgeting for such a plan, the potential loss of a “team player” attitude, the potential for employees to become too aggressive, the loss of control over the employee, and, if commission is on sales only, the loss of incentive to grow margins.

Salary + Commission

In the Salary + Commission Program, compensation is made up of a percentage of salary/hourly (guaranteed) and commission (driven by productivity of sales, gross margin dollars or both). Management sets both parts with a goal of offering both security and incentive. Continued on Page 25Continued from Page 22

Pros for employees include a partial salary guarantee (with more security than straight commission) and partial incentive (with more opportunity to grow compensation than straight salary). Cons are that the guaranteed portion may not provide enough security, while the incentive may not be big enough.

Pros for management include a partial incentive that forces employees to be productive, while cons include the difficulty in administering and budgeting this type of plan, and the fact that the incentive may not be big enough.

Guaranteed Draw

The Guaranteed Draw Against Commission Plan is similar to a straight commission program with the difference being that the employee gets a guaranteed amount in advance that is then subtracted from the actual amount of commissions when the results are in.

Pros for employees include not having to wait for commissions, big incentives and an ease in planning and budgeting. Cons include the potential to fall behind and owe the company money.

Pros for the company include ease of planning and budgeting, bigger incentives for employees, only having to pay for productivity and the potential to attract big sellers. Cons include difficulty in collecting if the employee falls behind, difficulty in administering, planning and budgeting, potential loss of control and risk of employees becoming too aggressive.

The Best Plan

Over the years I’ve experimented with all of the plans – both at my own business and with my consulting clients. From that, I’ve found the combination plan works best. Guarantee the employee “X” amount every month (somewhere in the 50-50 range) and then build a commission plan on sales and gross margin dollars for the balance. Figure 1 shows several examples of how each of the plans would work.

Let’s make the following assumption for each of the examples shown:

You decide how much you want to pay, what plan will best work for you, how much productivity (sales, GP% and GP$) you hope to achieve and then you plug in the numbers. In the examples here, my goal was to have the exact same monthly and yearly compensation for each plan. These are easy to build! If you have questions or would like help building a program, please contact me at darlingtonconsulting@gmail.com.

Examples #4 and #5 offer some guaranteed compensation ($2500 per month) and have built in an incentive that encourages more sales and gross profit margin. You can even “sweeten” that incentive to benefit both the company and the employee by building in a sliding scale commission based on the monthly gross profit margin, i.e. when the margin goes up (or down), so does the commission percentage.

Shown in Figure 2 is an example of a sliding scale commission. The great thing about this is that it includes an incentive to grow both sales and margin.

Remember this example is for a combination plan – where a given percent of the compensation is guaranteed and the balance is based on this formula.

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