Real Issues. Real Answers: Sales quotas and commissions

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With the wild swings in the market over the past 15 months or so, many companies have gone from serious sales declines last spring to very strong sales since last fall. These peaks and valleys can play havoc with sales quotas and commissions for our sales pros. This month’s question, from a dealer in Ohio, explores the idea of adjusting expected sales quotas, and possibly even commission tiers and percentages, in order to keep our top performers from jumping ship.

HOW WOULD YOU RESPOND TO THIS DEALER’S QUESTION?

“We are debating if we should (or should have previously) adjusted expected sales quotas of our salespeople, and possibly even their commission tiers and percentages. With the wild swings in the market over the past year or so—first with the slowdown from COVID-19, then the explosion in sales that kicked in about six months later—we want to be sure we’re compensating our people fairly. And we definitely don’t want to lose the good ones because our pay structure isn’t competitive. Would appreciate hearing from other companies with suggestions or advice.”

 

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Responses from lumberyards, building material dealers, and specialty dealers.

“It is a good idea to re-evaluate sales quotas, but you have to be careful when messing with commission changes. I have heard salespeople complain about compensation changes over the years. What is the cost of the change in productivity and dollars?”

“I think salespeople are motivated by commissions and as sales increase, they should be paid their normal commission rate which today makes for high compensation.”

“Our program is a base salary plus car allowance and phone allowance. We pay our folks 13.5% commission. To receive commission—we take the total 13.5% commission amount and subtract the base plus allowances. We pay their insurance, vacations and holidays. We do not have sales quotas or commission tiers. We have expectations in sales and expect our folks to make a certain salary. We do not have any limitations on their income. Their salary goals will set the sales goals.”

“The market has made us evaluate our sales process externally and internally. With clients we do all we can to educate them on waiting periods. We allow our sales team to pursue opportunities outside the norm. We also have added materials that we had not previously sold in order to maintain cash flow. We are currently paying our sales team salaries with bonuses with little-to-no commission. We had to have transparent conversations with the team and come up with numbers that make sense for them. They are in love with the vision and opportunity, so they are willing to stay on board.”

“With an increase in sales and profits this past year, we doubled all employee bonuses. This includes taking all 12 full-time employee bonuses from $1K-2K up to $2K-4K.”

“Leave it the way it is. You’ve got to take the downs with the ups. It all works out in the end.”

“Cap at a flat rate of gross margin = 5%.”

“It’s a good time to be an outside salesman. If I’m making $$$, then so should they. Good luck to them and their higher pay. They earn it and in this environment it won’t last forever. Let’s all make some good memories.”

“We adjusted our pay structure after the explosion in sales because our lead times extended. Sales team used to get paid on shipments and we adjusted to pay them half commission when booked and then balance once shipped, instead of 100% commission once shipped.”

“We have not adjusted our process and/ or payment on commission. We are 100% commission based, but feel the market will run the other direction as some point. We have communicated to our sales staff to save for the future.”

“No changes, let them reap the rewards also.”

“Setting sales quotas for our salespeople would be a very difficult mountain to climb for our company, so we have chosen not to even try. The economic cycles along with the volatility of wood prices would lead to having to change the quotas way too frequently and as a result we would always be behind the curve. Instead, we pay all our salespeople a percentage of the monthly gross profit of their business. This leads to a fairly high cyclical curve in their pay. Right now they have big smiles, but the 2009 to 2012 period was difficult for them and the company. But the good side of our system is that the salespeople and the shareholders all have skin in the same game. And we definitely don’t want to lose the good ones. Throughout the many cycles of the past we’ve never had to worry about this issue because the good ones always figure out to do most of the right things during the down cycle to keep their household budget balanced.”

“Don’t do tiers. They are complicated and confusing and result in game playing by the sales team. They focus more on manipulating sales/shipments/invoices for their personal gain instead of selling or being a good co-worker. Also, I would make sure you are compensating on true profit, not gross profit. This ensures that any discount/rebate is discounted from commission, as this is money the company never sees. Quotas are a joke too. Do you ever fire a salesperson if they don’t hit it? If you don’t, then don’t bother with all of the time/stress/ effort of quotas. Pointless work if the accountability is not enforced on the back end. Whatever structure you have, if they are generating more profit dollars for the company, they should be making more. It would be a lot easier and less stress if sales folk were just salaried and held accountable like rest of the employees.”

“Always pay workers what they are worth. The volatile market conditions have wreaked havoc on ‘normal’ and if you have been able to keep or grow customers, the value of your sales team should be apparent. If you don’t have some type of variable structure in place, the competition will notice.”

“Consumers today are in a mindset I have never seen. Spending is completely out of control in a very healthy way. Customer would walk in a year ago and ask how much for a sheet of OSB and we would say ‘$14’ and they would walk out without the product saying they would think about it. Today they ask and we say ‘$60’ they look at you with a short pause and then say ‘give me three sheets.’ Makes no sense. A year ago, for example, a yard’s inventory could have been $1 million and today it is $4 million. What happens to the small yard throughout the U.S. if the market price drops fast? We need to get a message out to all to make sure to increase your inventory and to keep inventory at a minimum. We need the Fed to slowly raise the interest rate and remember what the government was formed to do.”

“Our tiered commission structure is based on gross profit dollars attributable to each sales person. We trust that the potential to earn more compensation because of higher sales will keep us competitive in our marketplace.”

“We are leaving it be, they will share the good with the bad. That’s fair, we think.”

“What we have seen is that the variability between salespeople has gotten larger. Those with a few strong builders as customers are selling above last year’s numbers, and those with a number of smaller builders are often below forecast. Our commission is based on gross margin, not total sales. That seems to keep things balanced regardless of what the market does.”

“We are a strict salary-only company, and then we give bonuses for a job well done.”

“Building material prices are up significantly, but availability of many products are down in some cases. Do you pay commissions based on a percentage of sales, percentage of margin, a sliding scale, or other method? If you need to make changes to your commission structure, first ask yourself, does that reward the right behavior? If so, you should move forward with a structure that benefits the sales rep and the company.”

“Late is better than never, but you’ve already put yourself in a bad spot. You should count your stars that they haven’t already left. An ‘A player’ is good enough and smart enough to chase the almighty dollar. With that said, perks and support is an easier discussion starter and may ease the discussion.”

“You should—and need to—increase compensation to salespeople.”

“We have five outside salespeople, and we pay 2% commission on gross sales. I determine pricing on all jobs and there is a minimum they can make.”

“Adjust sales quotas, yes. Commission tiers, however, are a little more difficult. Ours is based on several factors including total sales. With inflation dollars they are killing it. Hopefully they are banking some for when it turns the other way. If they are willing to ride the roller coaster then I would leave it the same. This is definitely a discussion that needs to happen.”

“Offer them a short-term or one-time bonus to help compensate for the wild swings if you are able. Be an open book as well and communicate with your people and let them know where the business is.”

Responses from wholesale distributors, manufacturers, and service providers

“Any adjustments to compensation should have been made 1/1/21. Doing it now will not be taken well by your sales staff, as it will be seen as a reaction to the current state of our industry. If the compensation plan worked during the past, it should work now. Remember, when this market tanks it’s going to peel off at least as fast and hard as it did on the way up. Are you prepared to lower your general managers and sales staff expectations when that happens? As a rule of thumb, I would advise against making compensation adjustments in reaction to any highs or lows in our business. If your salespeople are capturing a windfall in gross profit right now, let them have it and enjoy it, because they will be working twice as hard when prices fall and will likely get much less for their efforts.”

“Sales quotas and commissions are strategically set in order to drive sales in the direction needed to grow the business to leadership’s expectations. External factors may make the results less than, or greater than, those expectations. Like anything else in this world, it is never a sure thing. Great leadership and their teams are satisfied that all are always performing their best and doing all they can to take best advantage of the current environment regardless of quotas or commissions.”

“Quantity of product sold is the fairest way for company and employee.”

“We will have no change to commission structures, though we provided income support through the deepest part of the downturn.”

“You need to pay attention to your marketplace. Keeping an ear to the ground to find out what your competitors are doing is essential intelligence to use to guide your decision making. Also, given that the price spike is probably transitory and will likely subside as the supply side gets on track as the economy opens up, be careful that any changes you make are able to be stopped and don’t have to be reversed. An example would be time delimited bonus programs which are tailored to the current situation which are designed to end (but which can be extended).”

“We have not adjusted, but are trying to come up with something to do for our essential workers who haven’t missed a beat during this last 15 months.”

“You must have been competitive before the pandemic, so why worry? It sounds like you are questioning yourself, asking, ‘am I paying them too much?’ Well, 2008 taught us to get our commission structure and salaries in order to hold on to good people when everyone else was failing, independent lumberyards were failing, as well as distributors. Still, we were able to retain the same sales force as then with no threat of anyone leaving. The struggle is finding truck drivers and warehouse help. Competing with our own government is making it hard. Stimulus, unemployment compensation, COVID-19 can’t win!”

“If your pay structure isn’t competitive, you should either make it competitive, or over-compensate performance in your sales crew with lucrative commission percentages, to keep that salesforce hungry and performing! When the wholesale lumber business conducted sales surveys years ago, the average compensation percentage was 35% of profits (which may be split up in big wholesale offices by 20% buy-end versus 15% commission on the sell end). But, many wholesalers increase that general 35% up to 50% if the salesperson produces some set amount of gross margin over a quarter/year, etc., that gross margin to get 50% commission was around $220,000/annually probably 20-25 years ago, a number more easily reached today with record, run-away pricing. And that 50% was awarded on every dollar after the $220k threshold was met. Of course, any uncollected funds were deducted from the salesperson’s total for the time period in question. And, some wholesalers added perks to maintain solid performers: health, 401(k) matches, dental/vision/hearing, vacations, life-insurance, and discretionary bonuses to differentiate their company from its competitors. So, there’s more than one way to skin a cat.”

“I support and have implemented both ‘capped’ and ‘uncapped’ commission structures. For more experienced, or later-in-career sales reps, I strongly suggest uncapped commissions. These experienced reps have seen and understand swings in the marketplace, and understand that there will be good years and bad years. For younger reps, who are trying to build their savings and establish consistency in their financial lives, capped commissions might be a better route… they sacrifice potential big earnings years with a more balanced pay structure. These programs also are dependent on your sales structure, and whether you want to retain the bulk of your sales team (due to the complexity of the product or service), or if you are okay with 8%, 10%, or even 12% turnover every year.”

“We have a tiered commission system based off the gross profit margin. The higher the total margin for the month, the higher percentage you get of profit. For example: 24.99% and less = 4% of gross profit; 25.00% to 32.49% = 6% of gross profit; 32.50% and higher = 8% of gross profit. Growth targets are based on an average of the past three years. This helps to balance out spikes within the assigned territory. No system is perfect, and different industries work differently. You may need to adjust the percentage tiers to fit your product offering.”

“Maintaining commission levels with the sales force lets them know they are a valuable asset, and we honor our commitment to pay them in a way they agreed upon at the time of hire. If they are not making ‘mustard’ then they need to be released, which was also as agreed upon at time of hire.”

“Pay a higher base rate on a tiered commission. Security is the biggest issue with employees…they need to feel some sort of protection.”

“This is when the value of a strong base pay with bonuses paid on volume is best, instead of the feast and famine of commission sales. You want to keep good people, then pay them well and they will pay back with sales growth.”

“It is always good to tweak the commission programs to protect the salespeople from unforeseen dips if base salaries are not high. Anytime commissions account for over 20% of a salesperson’s typical income, you should try to protect them on the downside. To protect the company from windfalls, we often set caps, but those caps are so generous that our salespeople have not viewed them as limiting. We cannot afford to lose our best salespeople to the competition.”

“With employment opportunities opening all around the country, you are right to be concerned about losing your better employees. These days, many people look more to their complete ‘package’ as opposed to just the pay. Jump on Indeed.com and look to see what your competitors and similar companies have to offer. Compare your PTO/vacation policy, and benefits package. If you don’t offer health insurance, your employees may need more than just a paycheck to justify staying with you. Compensating your employees ‘fairly’ doesn’t mean paying them what you feel is fair between you and him or her. Rather, ‘fairly’ may mean a compensation package that more closely compares to what he or she could get if they shopped around for another job. Do your homework. Look around. You might be paying considerably less than others in your industry/market. Remember, an employee who truly feels appreciated and necessary will likely stay where they are. Check your relationship with your crew. Having said all that, ‘sold dollar amount’ quotas will not give a great idea of performance. Today, a salesperson can sell half as much as in normal times to meet a quota. Targets based on profit margins may be a better way to create a compensation package. Step up for your best and most loyal people. If you don’t, someone else will.”

“Stay the course and keep doing what has worked in the past. Sales have always gone in cycles that come and go. Don’t start a compensation program that you would need to change again later.”

“We have maintained our commission structure throughout the pandemic. Last spring, yes commissions were lower, but business was slow, and no one jumped ship. Basically, there was nowhere to jump to. I told some employees that basically during this time you are working for benefits and we as a company just need to maintain. Some employees were making less than they would on unemployment benefits. This year we are having record sales and commissions are more than making up for the decline last year. So many companies were reducing their work force, but we’re lucky to maintain ours.”

“With the current market and increases in overall product cost and availability, any quota adjustment would be nearly impossible. Not being sure of the way you pay your sales staff and assuming that it is based upon gross profit and percentage, they would be getting raises by default.”

“Considering how important effective salespeople are to our business, our approach is to monitor the market to see what others are paying, and to have open communication with our reps. The last thing I want is to be blindsided by a top rep leaving for more money from a competitor. I feel like if I have to make a counteroffer to try to keep someone on our team, they’re already gone. The secret is to pay them competitively and treat them so well that they’ll never want to leave.”

Hundreds of readers share their insights for this every-issue feature. Have a Real Issue? Contact Rick@LBMJournal.com.

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