Managing in the Pay for Performance Environment

Pay for performance management

At DMSRetail, the retail success company, we operate within the philosophy of the 6 pillars of retail; one of those pillars being people.

The effectiveness of that particular pillar is optimized through the implementation and maintenance of strong, performance oriented compensation plans.

Even without knowing much about performance management or compensation plans, a quick look at the compensation practices of big ticket retailers and others who sell to consumers, such as furniture and large appliance stores, new car dealerships, real estate agencies and home recreational equipment suppliers, would reveal that a solid Pay for Performance Program is in place.

The reason: big money is at stake. A simple hourly wage, salary or team bonus arrangement just won’t cut it when the goal is to get top performance from top performers in big ticket sales.

When you consider the above, why would any retailer settle for a compensation plan that is not designed to maximize the effectiveness of people; inspiring top performers to drive the profitability of the business?

The benefits of a Pay for Performance Program outweigh the myriad concerns often associated with that program, as expressed by some management individuals and, indeed, by some sales associates although for different reasons, by a significant margin.

Implementing a properly constructed, well communicated and well managed Pay for Performance Program is critically important to the success of the retailer so, the prudent course of action is to address concerns and present evidence to those who have doubt that, by adhering to a set of principles and behaviors, and with all other things being equal, success with a Pay for Performance Program is sure to follow.

It must be noted that the majority of retailers who have not had success with a Pay for Performance Program, have failed to

a) construct a solid plan

b) clearly communicate the plan, goals and objectives during roll-out and continually thereafter and, most alarmingly,

c) ensure that their management were capable and empowered to manage within the Pay for Performance Program environment.

Any, or all, of the above three important points of failure are enough to thwart any chance of success with a Pay for Performance Program.

Do not question the wisdom of implementing a Pay for Performance Program but, rather, question the organization’s ability to construct, communicate and manage a Pay for Performance Program.

The retailer who accepts that Pay for Performance is the best and most profitable way to run the business will set about ensuring the organization can handle it and will make the changes required to do so.

The Most Important Benefits of a Pay for Performance Program in the Retail Organization:

Maximum Customer Loyalty – Superior service to, and treatment of, the employee serving the customer, including the compensation plan, leads to superior service to the Customer, resulting in increased Customer Loyalty; loyal customers being, overall, the most profitable customers for the organization as found and documented in the published Service-Profit Chain by Harvard.

The expected and desired outcome of maximizing customer loyalty:

Increased revenues and profits for Stakeholders

Let’s take a closer look at how this single, most important benefit is realized through:

Extraordinary Employee Engagement strongly in support of the on-going efforts to strengthen the loyal customer base

Optimum Retention Rate of Top Performers

Significant improvement in all Key Performance Indicators; very notably Wage Cost

Extraordinary Employee Engagement through Alignment with Company Objectives:

A Pay for Performance Program provides the mechanism to link, or align, company objectives with specific targets set for individual employees.

To enjoy extraordinary employee engagement, it is imperative that the company cascade and communicate clear business objectives throughout the organization.

This becomes the framework in which to set targets and goals for the individual employee; clearly pointing out the individual contribution expected and required.

Provided the initial roll out with detailed and extensive communication designed to invite all employees to embrace objectives, combined with on-going dialogue backing up those company objectives, is clear and concise, employees will necessarily find that they are aligned with the objectives.

Through various means, the most important being honest, open and on-going face to face communication between superiors and subordinates, regarding financial and general profitability objectives, the alignment will take place naturally and will be reinforced structurally to allow other company goals and objectives to be layered on as required.

Employees who share in company goals and objectives, by having ownership of their piece of it as it has been clearly communicated and assigned specifically to them – a piece that is uniquely their own to be measured against and held accountable for – will, quite naturally, be more engaged.

Optimum Talent Retention:

Super Performers expect to be rewarded accordingly. In any environment, if a Super Performer is treated the same as a non-performer, there would be no incentive for that Super Performer to:

a) Continue to perform at a higher level and

b) Remain in that environment when there are so many other opportunities available

The result, for the company, would be undesirable in either case. If the Super Performer drops to the level of the non- performer, the company loses. If the Super Performer leaves for the competition, the company loses.

With a Pay for Performance Program in place, the Super Performer will be taken care of naturally.

S/he will take responsibility for his/her targets and be accountable for personal results compared against those targets.

S/he wins both monetarily and non-monetarily, with prestige, recognition, team acceptance and camaraderie being the most important of the non-monetary rewards.

It is the responsibility of management personnel to ensure that the true Super Performer (who is naturally so inclined anyway) behaves according to the company standards, at minimum, and preferably better.

Performance Management:

A Pay for Performance Program allows management to pull all working parts together to develop an unbiased, totally objective, employee evaluation Program to be used frequently, if not necessarily always officially, at various times throughout the fiscal period.

It is well known, among retail executive and retail consultants, that the primary reason for push back against, and general apprehension about, any sort of individual Pay for Performance Program is erroneous predicted outcomes that may, in fact, have been evident during prior experiences with such programs.

One of those most dreaded and most often commented on such outcomes being unusually aggressive employee behavior, on the sales floor, leading to customer dissatisfaction and an erosion of the team concept.

This, however, is a misconception and will not come to fruition when the Program is properly managed by competent, well informed management personnel who fully understand the Program and who, when witnessing negative behavior of any description, are both empowered and capable of taking appropriate action to manage it within the framework of the Performance Culture established.

To be sure, poor behavior is not the result of a Pay for Performance Program. Rather, it is the result of management actions, or lack thereof, when faced with an inappropriate hire, possibly one with a poor attitude, without respect for the customer, company or fellow employees; even an associate who is pessimistic or possibly lacking the required level of intelligence to handle the job.

The list of possible deficiencies is endless but none of them can be left ‘untreated’ by management. Deficiencies causing behavioral issues must be addressed swiftly and in an unambiguous manner.

Done properly, within the framework, the expectation of unusually aggressive or otherwise poor behavior can be completely eliminated.

It is, however, important to understand that an appropriate level of aggressiveness is normal and, indeed desirable within the established Performance Culture.

Without a doubt, a Pay for Performance Program which is properly constructed, rolled out and managed, will enhance the Customer experience in store and will have the added benefit of creating a rock solid team environment; one in which any results or performance oriented individual will thrive.

Reduced Wage Cost:

As one of the highest in store controllable expenses, Wage Cost, or Payroll deserves and receives a lot of attention throughout the retail organization.

Without reducing the size of the workforce and without reducing the number of employees available, at any given time, to respond to the customers in store, retail organizations must, nevertheless, keep very tight control of this high expense category.

This is one of the very best, but often misunderstood, reasons for the implementation of a Pay for Performance Program because it provides insurance against non-performing employees and their burden on payroll. See the example of a simple Pay for Performance Program below.

With a properly constructed, properly managed Pay for Performance Program Wage Cost will be optimized. The benefits accrue from two sides:

1) Revenues will go up and those employees responsible for the increases will receive appropriate rewards for their performance. As the Pay for Performance Program has been constructed with various performance levels in mind, the amount paid out will be in line with the wage cost budget that was determined at the outset.

2) For those employees who are not performing at the desired or targeted levels, the money they would receive beyond their normal hourly rate or salary which, in a properly constructed Pay for Performance Program would be at minimum levels leaving the opportunity open for them to create more income for themselves, through their own abilities and level of performance would be minimal.

Keep in mind, the employees, in the underperforming category, would be managed very closely to ensure they quickly move into the higher performing category to enable a comparative reduction in their personal wage cost.

But, in the meantime, they are not a burden on the extra payroll dollars designated for high performance rewards.

Significant improvement of other Key Performance Indicators:

The Super Performer who is competent, properly trained and well managed will produce personal results that meet and, in all likelihood, exceed standards set by the company.

This will be clearly seen in all Key Performance Indicators having a direct relationship to the sales process. For example, Average Sale, Average Units Per Transaction, Conversion, Sales Per Hour, Sales to Target, Sales to Last Year.

The Super Performer will positively impact all other Key Performance Indicators as well, being part of a group of individuals working toward the same goals and surely delivering their part of the overall company goals, to the extent that they are in a position to have that impact.

An Example of a simple Pay for Performance Plan:

Step 1: Start with a reasonable and attractive income target for your average performer. We define an average performer as one who delivers 100% of their sales target.
Reasonable and attractive income target should be slightly above what your target competitors provide to their average salespeople.

For our example here, we’re going to assume that number is $2,500/month.

Step 2: Based on your target wage cost, determine the expected level of sales. Our example target wage cost is 10%. Therefore we expect our average salesperson to deliver sales of $25,000/month.

Step 3: Determine what percentage of total income is to be generated through variable component. This step is critical in defining the soul of your compensation plan and usually comes from the nature of the retail vertical you are operating in.

For the purposes of this example, to stay in the middle of the spectrum we decided on a variable component of 50% of income.

Step 4: Calculate the %commission: If our salesperson is to get half of their income from salary and the other half from commissions, then,

Salary: $1,250/month

Commission: $1,250/month which means:

(1,250/25,000) x 100 = 5% commission on sales.

Let’s look at a couple of examples.

Scenario A: Let’s say you have 2 high performers (monthly sales of $40,000 each) and 2 low performers (monthly sales of $10,000 each)

Your payroll will look like this:

High performer income: $1,250 salary + $2,000 Commission (5% of $40,000) = $3,250 each

Low performer income: $1,250 salary + $500 commission (5% of $10,000) = $1,750 each.

Your Wage Cost becomes:

2x$3,250+2x$1,750 = $10,000 (Total Payroll)

Divided by,

Total sales of $100,000

= 10%

As you see, even with 2 low performers, the system protected the wage cost.

Scenario B: Now imagine if everyone in that store were high performers:

Then the new Wage Cost would be:

4x$3,250 = $13,000 (Total Payroll)

Divided by,

Total sales of $160,000

= 8.125%

As we mentioned earlier, even in a 50% hybrid Pay for Performance implementation, this compensation system acts as insurance for the wage cost. This is just one of the benefits, among several, of Pay for Performance compensation systems.

As you will, no doubt, have deduced from the above examples, if all or even the majority of your associates, are low performers and consistently fail to produce the desired or targeted sales levels then, of course, your wage cost will be high. That is a mathematical certainty.

A Pay for Performance Program will not create miracles.

If the above is true in your organization, you have bigger problems and you must look very closely at every area of your operation, as there are some very serious underlying issues preventing proper performance at store level and any hope of running a profitable retail business is lost in any case.

What To Do Next:

DMSRetail has developed a “30 Minute Retail Management Tune-Up” which we conduct over the telephone with you and your top staff members. Here is what we accomplish together in this fast-paced, zero nonsense session:

• Ideas on how to implement pay for performance in your company

• Support for the new hires

• Addressing the non-selling staff incentives

The 30 Minute Retail Management Tune-Up is conducted by the principal of our company, Matt Parmaks M.Sc., who worked with more than 100 corporations including Sony, Bell and Praxium Group.

Please be assured that this consultation will not be a thinly disguised sales presentation; it will consist of the best intelligence Mr. Parmaks can supply in a thirty minute time span.

There is no charge for this call, but please be advised that the call must be strictly limited to 30 minutes.

This consult will typically take place within 1-2 weeks of your call. To secure a time for this consultation, please call Josephine Hill at +1 (312) 239-0919 or email and she will advise you regarding available time slots.

She will also provide you with a pre-consultation questionnaire that will prepare both you and us to get maximum value in the shortest amount of time.

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