Incentive Compensation Design in the Retail Sector
March 09, 2016
What does the Future for Incentive Compensation Design in Retail Hold?
Employee motivation is a critical factor in retail. And let’s face it: money talks, but monetary rewards need to be used and managed wisely in this ever-challenging sector.
Across the globe, retailers are encountering roadblocks: increased online competition, slim operating margins, pricing pressures, increasing living/minimum wages, as well as the need for omnichannel strategies, meaning a single customer view through which retailers are able to personalize the shopping experience.
Not to mention that in today’s digital age, consumers no longer require the help of retail associates, in a traditional sense. Thanks to technology, consumers now have everything they need to know about a product and/or service right in their hands—before they even enter a store. In a few swipes and couple of clicks, consumers are able to search, compare, and read reviews for whatever product they’re seeking, ultimately enabling them to become self-sufficient shoppers.
And retail employees are feeling the lack of love—it’s been reported that the average turnover for part-time sales associates has been as high as 66%. Those departures and required replacements aren’t cheap, either, as one CAP study found that to replace a $10/hour retail employee, the cost, on average, to search for, hire, and then train someone new is $3,328.
Putting Together a Retail Sales Incentive Program
So, then, how can retail managers continue to motivate their employees while facing these challenges head-on? To find success, we’ve found that retailers must:
- Transform their organizational culture
- Define incentive criteria by each specific role
- Tailor plans to the organization’s situation and circumstances
- Solidify the incentive calculation framework and process
- Promote incentives on an ongoing basis
Transform the organizational culture
In the face of customers shunning retail associates, retail managers must not simply stop worrying about training and development, and instead, should be driving even harder to the hoop. This means enabling their employees with the skills they need to complement and add value to the in-person experience. While they no longer need to be product information experts, per se, sales employees can still enhance the buyer journey during this critical last stop.
In fact, having to worry less about convincing a customer to buy (because the customer has already done the research and more or less has their mind made up), the sales associate can help a customer dive deeper into a product choice in order to get them the most value out of their purchase.
For example, a customer might know the general type of laptop they want, but do they fully understand all of the available product options? The employee can also assist in validating the customer’s decision, and can still actually sell, by pitching relevant upgrades and more. And how about the employee’s role as information gatherer? Nobody is in a better position to solicit customer complaints or kudos about a specific product or the brand itself.
With all of this, managers can reinvigorate staff, showing them they still have plenty to offer, and setting the table for an incentive scheme that speaks to each of these newly identified tasks and outcomes.
Define incentive criteria by role
It’s only at this point - having transformed the organizational culture - that you can start thinking about designing an incentive plan. But before jumping in, organizations must first define the criteria that relates to the area of responsibility for each role—or what we compensation experts call “line of sight”.
For example, it wouldn’t be prudent to tie a salesperson’s incentive compensation to gross margin since salespeople do not determine markups or discounts. Likewise, in a centrally controlled, multi-store environment a store rep or associate should not have their incentive based on net profit because they cannot control many of the elements that determine that number, such as costs and overhead for the store.
What does make sense, though is aligning retail employee behavior with the customer perspective. Specifically, customer experience is broken down into three categories: effectiveness, ease, and emotion, where sales associates must be able to make a personal connection with the customer in order to be successful. As Terry Lundgren, former CEO of Macy’s, said during a roundtable discussion, the top sales reps are successful because they become friends with clients.
Thus, it goes beyond just selling and meeting quotas; it is building a trusting relationship, which in turn increases the chance of repeat purchases. This is the area where retail employees should be positively reinforceed through proper incentivization.
Tailor schemes to the organization’s situation and circumstances
Next, programs should be tailored to each organization’s situation. For example, some retailers pay their selling staff an hourly rate plus commission. Others pay just an hourly rate. With the increasing minimum wages in the US and increasing living wages in the UK and Europe, we may see a shift to lower commission rates or elimination of commission programs altogether.
On the other hand, with the increasing popularity of BOPIS, or “buy online pickup in store,” (50% of consumers expect to buy online and be able to pick up their goods in the store), retailers may decide to maintain their commission plans.
One thing is clear: flexibility is critical in designing incentive compensation programs.
Solidify the incentive calculation framework and process
And speaking of flexibility to rapidly react and adapt, retailers should consider how they calculate their incentives.
Are the plans administered in Excel or do you have an Incentive Compensation platform to calculate and report payments, and automate sales compensation management? With increasing challenges in the sector, including demand volatility, labor management, and hiring demands, more and more retailers are investing in Incentive Compensation Management (ICM) or Sales Performance Management (SPM) platforms to provide rigorous planning to meet ever changing business needs—effectively enabling them to track store and employee performance across the organization, as well as calculate and administer incentive compensation payments.
Did you need to adjust your plans due to Snowmageddon 2016? No problem. Having a flexible ICM platform enables retailers to effectively manage their plans throughout the year with minimal disruption by providing robust plan modeling capabilities to quickly assess different scenarios prior to finalizing for deployment to employees.
Promote incentives on an ongoing basis
And last, to be effective, employee incentives should be promoted on an ongoing basis, particularly in retail, and must adapt to the new profile of your sales people and your buyer, in particular, millennials.
The entire sales force is shifting and millennials is not just a fad. The way this new talent learns, engages, and executes their jobs, aspirations, and goals is completely opposite from prior generations and sales leaders must take notice and accept these changes.
As it relates to the retail industry, most employees are paid an hourly wage vs. a salary, so frequency is important. Retailers may want to plan specific SPIFs (Special Performance Incentive Funds) throughout the year to generate excitement and “sweeten the pot,” in addition to their standard incentives. They can be designed for individual winners, team against team, store against store(s), or managers versus managers.
Challenges against quotas for individuals, departments or total store can be just as productive and exciting, and can be adjusted on the fly, in real-time, with the right solution—not something you can typically do with multiple spreadsheets. Contests can run for a length of time, whether it is based on seasonality or customer trends, and variety is important. And don’t forget variety when considering the type of award. Gift cards and time off can be as motivating as cash.
Retail Incentive Compensation Plan Design Examples
Now, where do you go from here?
The following are some high-level incentive compensation plan designs for different roles within the retail sector:
Salesperson: Compensation for retail salespeople vary from straight salary to straight commission, with many variations in between. The most commonly used scenarios are draw against commission and base rate plus commission. (Note: US employers should be aware of the overtime exemption provided in the Fair Labor Standards Act if their salespeople work overtime hours.)
Store Managers: In a centrally controlled environment, store managers typically have effective line of sight in three areas: volume, selling costs and shrink.
Buyers: Buyers usually have responsibility for margin, turn rate and volume, so their incentive plan should be based on these criteria.
Top-Level Executives: Incentive plans for top executives should include a net profit measure, such as EBITA or EBITDA.
The decision of whether or not to utilize incentive compensation is one that each retailer must make depending on the organization’s circumstances.
Once the decision is made to utilize incentive compensation plans, they must be adapted to the organization’s unique situation and designed to result in increased sales and profits.
My mantra as a compensation professional is “keep it simple.” If you ask an employee how they’re compensated and they cannot explain it to you, you may want to consider taking a look at your incentive plan design.
OpenSymmetry’s Strategy Team can assess and help design motivating incentive compensation plans and provide implementation services around the implementation and ongoing support of your enterprise ICM/SPM platform.
Download: Planning for Retail Success 2016
Download: Incentive Compensation in Retail - 5 Bottom Line Benefets