Pros and cons of commission-based pay systems

Home Inside FCNews Pros and cons of commission-based pay systems

Jan 18/25; Volume 30/Number 15

By Reginald Tucker

From generous commissions, bonus cash awards, exotic trips or other prizes tied to performance and/or specific product promotions, there are numerous ways to incentivize floor covering retail sales associates. But there is some debate over the efficacy and sustainability of these programs, especially as it pertains to motivating store employees over the long term.

“We pay our salespeople on straight commission and have for 25 years,” said Darren Braunstein, executive vice president and COO of Worldwide Wholesale Floor Coverings, which operates three locations in Edison, Fairfield and Lawrenceville, N.J. “We believe there is no better incentive for retail sales associates than compensating them with commissions.”

The commission-based compensation system at Worldwide Wholesale—which is a member of the National Floorcovering Alliance—is especially useful when it comes to upselling the consumer. “We push [our salespeople] to trade up and sell better goods with various bonus programs that change from month to month,” Braunstein explained. “Their numbers are posted on screens in each store, where they constantly look to see their place, battling for the top positions.”

For other floor covering dealers, incentive-based programs help keep employees focused on the bottom line. “Our program is all commission and based on a percentage of profit,” said Paul Riemer, owner of Riemer Floors in Bloomfield Hills, Mich. The program, he noted, has been very effective in motivating salespeople. “It has worked well for us.”

But there are some business owners who don’t necessarily embrace this philosophy. Calgary, Alberta, Canada-based Fitz Flooring & Window Fashions, for example, takes a decidedly different approach.

“We never pay commissions,” said John Fitzsimmons, who founded the three-store chain nearly 25 years ago. “To maintain a team [mindset] we’ve always based what we pay our salespeople on the profitability of the store. But although we don’t pay commissions, we still track sales performance according to salesperson as well as the [four] different [locations], so we’re pretty good at knowing what’s going on and what’s not working.”

 

The psychology of selling

For many retail businesses—whether they sell laminate flooring, lamp shades or Lamborghinis—the decision to compensate salespeople on a commission basis is normally based on ownership preferences or prevailing wage/salary scales and business practices in a given market or region. But expert retail analysts and people who specialize in employee training point to commission-themed studies and case histories rooted in the science of psychology.

In a 2012 Harvard Business Review article (“Motivating Salespeople: What Really Works” by Thomas Steenburgh and Michael Ahearne), the authors noted that a few progressive companies have indeed been able to coax better performance from their teams, in essence by treating their sales forces like an “investment portfolio.” This approach requires that managers apply different levels and different kinds of attention to various categories of sales personnel.

“Some salespeople have greater ability and internal drive than others, and a growing body of research suggests that stars, laggards and core performers are motivated by different facets of compensation plans,” the article explained.

How does that work, exactly? According to the authors, the overachieving “star” performers usually meet or exceed sales targets, but those same salespeople might stop pushing hard if a ceiling is imposed. Meanwhile, “laggards need more guidance and prodding to make their numbers (carrots as well as sticks, in many cases).” Finally, the “core” performers group, which almost always represents the largest part of the sales force, tends to fall somewhere in the middle, as they usually garner the least attention. This despite the fact they’re the group most likely to move the needle—if they’re given the proper incentives, according to Steenburgh and Ahearne.

In the end, the authors argue, accounting for individual differences between classifications of salespeople raises the odds that a compensation plan will indeed stimulate the performance across all classes of RSAs.

 

Other motivating factors

As it turns out, commissions and other quota-based incentives are not the only means business owners and managers routinely utilize to encourage employees to sell more. Increasingly, owners are employing other, more “emotional” methods for inspiration.

“More than offering commissions, we try to establish a culture that this is a fun place to work,” Fitz Flooring’s Fitzsimmons noted. Morale-boosting techniques go a long way in his market, he said, given the challenging economic conditions in Calgary at present. “Many people feel fortunate that they just have a job. Our people realize that so they put in the effort and work hard.”

Fitzsimmons is not alone in his thinking. Aaron Skonnard, CEO of Pluralsight, an online provider of technical and creative training for professionals, has written extensively on the merits of commissioned salespeople. In an Inc. magazine article, “Why Sales Commissions Don’t Work (in the long run),” he rails against incentive-based sales programs as a morale builder.

For one, Skonnard believes sales-based incentives fail to motivate employees from within. Rather, it’s more important to focus on educating salespeople on the company’s overarching business goals, which allows everyone to move toward gaining a shared vision of where you’re trying to go as a company. This approach empowers autonomy and eliminates short-term thinking.

Skonnard believes commission-based systems are fundamentally flawed, in that (when they don’t work properly) they wrongly fault the people instead of a program that might not be working optimally. To support his view, he points to decades-old research conducted by management guru W. Edwards Deming, whose principles support the idea that it makes more sense to measure systems than people and thereby eliminate quotas.

But perhaps Skonnard’s strongest indictment of commission-based programs is his feeling that they are based on short-term performance and ultimately don’t serve the customer. “If you only care about next month’s numbers, then commission-based sales will temporarily do the trick,” he stated. “Rather than foster collaboration within the organization, commissions instead foster an unhealthy culture of competitiveness that ultimately is not in the company’s—or the customer’s—best long-term interests…. [I]f you’re not doing what’s in your customers’ best interests, your business will ultimately fail.”

At the end of the day, retail owners will embrace the philosophy they feel delivers the best results. What works for some might not be effective for others.

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