Tip # 1 - Use Compensation Systems that Encourage Performance
In our consulting practice we have learned that employee productivity is critical to the performance of a small business. In fact, when wages, as a percentage of sales, are above where they should be, it is a primary reason for business failure. In a small business, each worker needs to be productive and needs to justify, through their performance, his/her income. A company’s compensation systems should encourage employee performance.
During our consulting process, we look at the wages of each employee and salesperson. Our rule of thumb is that when wages and total compensation are above 22% of sales or when total compensation is more than 50% of expenses, a business may have too many employees or may be paying them too much. We take a hard look at their compensation systems. We also recommend that a salesperson should bring in roughly 4 to 5 times his/her compensation in gross profit to the company.
We find when people are compensated for results, rather than just for showing up or putting in time, performance increases. Whether you pay hourly or by salary, part of your employees’ compensation needs to be tied to their or your team’s productivity. Your compensation systems need to be well thought out and performance enhancing.
“One store changed their commission system from a percentage of sales to a percentage of profit. Within two months, margins went from 34% to 43%.”
If you have a need, email us and we will send you our report on creating a performance enhancing compensation system for your salespeople.
Thanks for reading.