Improve Your Business - Consider Commissions

I have written about the value of establishing a thorough and effective follow-up process in my previous articles.

A crucial part of driving the good sales habits we want to see in our salespeople is to reward them for performance, raising the thorny issue of commissions.

In the US, the bulk of income for a salesperson in the flooring industry is commission. In most cases, the salesperson will get a small weekly payment, considered a “draw”, against their monthly commissions. Whether we want to see this in Australia and New Zealand is debatable. Still, it’s academic because our salespeople would not accept having so much of their income at risk and in some cases, we would end up paying them below the minimum wage.

I have seen many flooring businesses attempt to implement a commission scheme. Invariably, they fail for two reasons: the amount of work that must be done to accurately calculate the commission and the contention it causes when salespeople believe it has been miscalculated.

Putting the problems aside, why would we want to implement a commission scheme for our salespeople?

The first reason is to give us a good reason to establish sales budgets. Given what we pay them, including benefits, how much should they sell to justify what we pay them? Not just gross sales, but what is the average GP% they should be achieving?

Now that we have established a sales budget, we can require them to use the sales processes and practices we have determined to best help them achieve our mutual goals.

Finally, we can determine what additional income they can earn by achieving and over-achieving their target.

Another benefit of budgets and commissions is they give us a reason to regularly meet with our salespeople to discuss their performance, how close they are to achieving their budget, how many opportunities they have that would get them across the line, and what help we can give them to convert opportunities into sales.

How we structure our commissions is up to each business owner, but my view is that we can be generous. If the salesperson achieves their budget, all the GP above budget are “found dollars” from our point of view, and we can share them in a way that is meaningful to our salesperson.

To ensure we don’t have salespeople cherry-picking opportunities to achieve budget, we might want to include a requirement that they achieve a minimum conversion rate, both by number of opportunities and by dollars quoted.

We want to remember that salespeople (bless them) might be inclined to manipulate their sales and conversion rates. They can do this in several ways, but all of them can be spotted if we know what to look for, and it will lead to a friendly discussion with the salesperson.

A question arises where we have salespeople earning commissions in good months but have frequent months where they don’t achieve budget. So long as I am satisfied that the salesperson isn’t gaming the system, I’m reluctant to claw back commissions from previous months. Instead, I would discuss with the salesperson the prospect of moving the commission from a monthly calculation to a longer term; say quarterly or even half-yearly. If they are not achieving budget frequently enough, there might be a case for performance management to help them get to where they need to be more regularly.

It costs us money to get potential clients into our showroom. We should monitor those opportunities like we would monitor our stock or our invoicing process. Setting budgets, monitoring performance, and rewarding achievement and over- achievement is an excellent platform for meaningful discussions with our salespeople.

As I said earlier, managing commissions is hard work and can lead to disputes. On the other hand, a business management system such as RFMS can calculate and pay commissions quickly and easily and provide salespeople with reporting they can’t dispute. We would be happy to arrange an online meeting if you would like to see what this looks like, amongst the other things that RFMS can manage for your flooring business.

Chris Ogden is a consultant and Managing Director of RFMS Australasia (RFMSanz.com), a supplier of IT solutions for the flooring industry. Chris has an extensive background in all aspects of the flooring industry, and he can be contacted at cogden@rfmsanz.com.