If you think the housing market is chaotic and disorganized, examine how building material dealers pay their sales reps. It makes the homebuilding industry look positively regimental.
Surveys and recent interviews suggest LBM operations today are more inconsistent–and inconstant–than ever when writing pay plans for their inside and outside sales staffs. You can find variations based on job title, branch location, seniority, and the market's level of competition. And there are all sorts of opinions over just how much to protect sales reps as the housing recession goes on.
"The devil is in the details with these plans," says Ross Ridout, a vice president and general counsel for Ridout Lumber, the 13-branch chain based in Searcy, Ark.
The crosscurrents appear to be the product of three separate and contradictory desires: 1) Keep valued sales representatives solvent despite their lack of commissionable sales; 2) Fend off rival dealers trying to poach reps; and 3) Find ways, in spite of the unpredictable economy, to motivate a class of workers that respond to both carrots and sticks.
This year's ProSales 100 survey reflects what has happened as a result. When asked to identify a payment system that they used for salespeople, every one of the eight choices listed was employed by at least 10% of the respondents. And because they could pick more than one payment system, enough chose multiple methods to average out to 1.66 plans per dealer. A percentage commission based on gross margin led the way with 46% of the respondents saying they used that approach, but straight salary came second at 22%.
To Each His Own
Depending on the staffer, Ridout Lumber pays straight salaries, commissions based on percentage of gross profit, goal-based bonuses, and commissions based on team performance.
In contrast, B&B Lumber, a two-location dealer based in Wichita, Kan., decided in 2008 to start tallying its pay numbers by simultaneously using two systems–straight salary and a commission based on percentage of gross margin–and then handing out paychecks based on whichever number is higher that month. Thomas Baalmann Jr., a sales rep at B&B, says the company did that to help its sales reps "feel secure" about their income regardless of business conditions in the community. Housing starts in the Wichita market have plunged more than 75% from their level five years ago.
"They can't control the market if there's nothing out there to sell," he says.
But B&B's desire to help reps feel secure stems from more than just strong paternal feelings. Baalmann notes there are three Lowe's, two Home Depots, two Menards locations, and several pro dealers in the Wichita metro area. Seeing sales reps–and their contacts–lured to big boxes or hungry pro dealers was a definite possibility.
"We did not want to lose any talent to the new arrivals," says Baalmann. By offering a more consistent wage, the two-track compensation system has tamped down any sales rep's desire to jump fences.
Many other dealers pay a combination of base salary and commission, but purposely keep the guaranteed pay so low a rep couldn't survive on it alone. That's the way Carl Liliequist, CEO of Hawaii's Honsador Lumber, does things at his 14-location company.
"For a really effective salesman, the base might only be one-third of his compensation," Liliequist says. "Maybe a new salesman, it might be half, so it mitigates the fluctuations that someone might have in a commission program."