Photo: RetailWire [checkout associates]
Can retail pay be made more equitable?
By Knowledge@Wharton staff
Presented here for discussion is a synopsis of a current article published with permission from Knowledge@Wharton, the online research and business analysis journal of the Wharton School of the University of Pennsylvania.
Look across the ranks of almost any office, retail floor or faculty lounge and you’ll see many workers doing essentially the same job. Peek at their paystubs, though, and you’ll likely find disparity. Pay differences among workers can hinge on objective matters like experience. But salary disparity is often a function of more arbitrary factors, raising the question of why establishing compensation hasn’t evolved into a more fair, equitable and objective system. How do qualities as intangible and unpredictable as work ethic, creativity and esprit de corps get translated into compensation?
One of the big hurdles to a better model is the distorting effect that extremely high executive compensation has had on the entire compensation conversation.
But part of the reason firms haven’t been able to develop a better way of setting salary is that it’s really difficult, says Wharton management professor Adam Cobb. “You could make the case that this is the biggest HR challenge in most organizations: How do you pay people fairly, in a way that’s motivating and encouraging the right kinds of behaviors? Because it’s a moving target. We are human beings, and our perception of these things changes over time. What you think is fair and equitable might not be what I think is fair and equitable.”
Some companies are experimenting with more equitable solutions:
- Safelite Glass Corp, the large auto glass company, moved to a system of piece rate pay from hourly pay. More ambitious workers were found to have less incentive to differentiate themselves when hourly wages were paid than when piece-rate pay is used.
- Haier Electronics reorganized its workforce of 60,000 into about 2,000 small teams. The goal of the “microdivisionalization” was to create teams that would operate like business units, accountable for financial performance, with their continuation and compensation dependent on that performance.
- Buffer, a social media management tool firm, adopted what it calls an “open salaries” system, publishing all of its salaries, as well as the standardized formulas with which those salaries were calculated: Salary = job type x seniority x experience + location.
Discussion Questions
DISCUSSION QUESTIONS: What is unique about retail’s compensation challenges? Are you a fan of individual commission, team incentives or other programs designed to align compensation with effort and results?
Poll
BrainTrust
Robert DiPietro
SVP Energy Services and New Ventures, HomeServe
Frank Riso
Principal, Frank Riso Associates, LLC
Retail has many compensation challenges. For most retailers, the store associate pay is minimum wage and in most cases offers no commission. However, as times have changes living costs have increased. Today, salaries based on minimum wage makes it difficult to survive. I believe that in most retail organizations the executive compensation packages are too high, taking dollars away from investing in their stores. And at the bottom, the store associate salary is too low. I don’t think to increase the hourly pay is the solution and I am in favor of employment opportunities that focus on performance whether it be a commission or some other method. Incentives motivate employees and so does being rewarded for a job well done. Taking a few dollars away from the top and putting those dollars in at the store level would be a big win for all because investing in store employees, training and incentive programs will increase sales and customer satisfaction.
Aligning a pay-for-performance system with salary is a difficult position in regards to a direct relationship between effort and results. This will not change under any of our current programs, since experience is not a direct indicator of performance (in the short- or even the mid-term). This is a human factor, not a numeric one. Because I properly label and market a product according to FDA standards means that we avoid delays, future lawsuits and costs that could be in the millions of dollars over the next few years. Yet there is no numeric way to calculate this, nor one which directly relates my efforts, including time and experience, and the profitability of our company because of this. Any retailer has hundreds of these issues with customer service, logistics, marketing, etc., every day.
My pet peeve for retail pay is that the lowest paid position (typically the cashier) is the one that is guaranteed to talk to a customer every time they are performing a task but a stocker, etc. gets paid more and may not talk to a customer. If the difference in retail is the customer experience why is the person who talks to customers all day the lowest paid? I’m a fan of pay-for-performance whether it is customer satisfaction or piece per hour. Performance can be measured and good performance should be compensated.
What is unique about retail’s compensation is that it is one industry with so many different segments. It is also an industry made up of both part-time and full-time workers. You could never pay cashiers for the number of items they scan per hour nor a clerk for how many sweaters they refold. Full-time employees are paid more since we believe they do more and are more loyal to the company while part-timers either work for a year or two (if you’re lucky) and then move on. Commissions are the right compensation for salespeople in many apparel segments and need to continue to keep the salespersons from taking clients elsewhere.
The one area in which compensation competition could be effective would be in a total store sales contests among stores in the same district or company-wide, with the goal of increasing sales by a percentage of last year’s sales. The store doing the best would get compensation in the form of a bonus or increased discounts, etc. This would not be a regular thing but could be implemented often enough to keep employees interested in working harder.
It should be possible to capture metrics such as number of scans by a cashier or restock based on big data analysis and sensors such as RFID. In some cases computer vision can be used to detect sales floor interaction.
These are methods used in sports technology to measure players’ performance and track racing cars, and even social media strategy and salary contracts are tied to these metrics.
I’m a strong believer that future retail technology will begin to recognize “retail talent” similar to sports talent and we will see “contracts” on brick-and-mortar retail talent. The introduction of metrics and smart sensors will inevitably bring forth a reality in which differentiating retail talent is real.
Good workers are paid well. Period. If they are not, they find someplace who will pay them well. Retail workers are like baseball players. You have major leaguers who are paid well and you have minor leaguers who take what they can get. Retail is a rough game and often a cruel one. Most workers are disposable and replaceable. Those who are of value will be paid well.
Can retail pay be equitable with office jobs? In some cases, yes. In-store, on-floor staff typically are minimum wage, entry-level people. These are less-skilled folks who cannot and should not command a higher wage, such as those in an office setting that required training and more advanced skills. The argument can be made, however, that seasoned on-floor staff are indeed highly skilled in customer service and can “save the sale” better than entry-level people. I believe it is up to the employer to define those skills and identify those employees with those advanced service skills and compensate them accordingly.
No model is going to be perfect, since each one tends to emphasize one metric over another (experience vs “results”, etc.), and even systems using “objective” measures are necessarily subjective in choosing what to measure.
But the bigger issue of satisfaction with compensation in retail I think is pretty simple: it’s relatively low because most companies think that’s all they need to pay. And for every Costco out there that seems to argue otherwise, there are 8 or 10 CEOs responding to “activist investors” who agree.
In a previous company I worked for, the SVP of sales one year brought in an outside speaker he billed as the “million dollar salesperson” to speak to the sales team during their annual sales kickoff. He came in and told stories about how he sold to customers and built relationships with them to turn them into repeat customers.
The company sold managed network services and the sales team was used to multi-million dollar deals. The guest speaker was the top sales person at a local Neiman Marcus in the men’s dept. He had just closed out a year in which he sold over a million dollars of apparel.
His best story included one where he converted a sale of a single pair of $25 socks into a $10k purchase of men’s suits, ties, shirts, shoes, accessories, and of course socks. (The customer was a visiting diplomat from Europe who only came to the US once per year). By the end of his presentation it was clear how valuable an employee he was to that Neiman Marcus store. He had even been the subject of an article on selling in the Washington Post that year.
As you might expect, he was a well compensated store sales associate and the brand recognized his significant contribution!
Ever since then I’ve been waiting to see when the “year of the associate” will take place in retail where we see retailers finally invest in their store staff not just with training but with proper compensation and more innovative rewards (not just an “employee of the month” photo). When we have discussion such as this one I feel that I’m still waiting for that year to take place — maybe we’re now closer to where retailers will recognize that the people with the most customer face-time and interaction not only have the most impact on sales, but should also be compensated/rewarded accordingly vs the executives that may be making decisions that kill sales or hurt the brand instead.
Retail companies expect the frontline, client facing associates to provide a superior customer experience, while the current state compensation packages are far below the role expectations. The key differentiator of an in-store experience is the value added contribution of the sales associates, guides, etc, who are the true evangelists for the company, brand, and the products. The human touch and interactions are key components of a multi-sensory retail store experience.
With that said, aside from the fact that the store operations employee compensation packages are so low, in many situations, the financial and performance incentives are just not where they need to be.
Store associates compensation and bonus incentive models need to be aligned to fit the requirements of the digital first consumer, how happens to still enjoy the in store journey. There is a clear opportunity for retailers to base incentives not only on achieving key sales and inventory metrics, but also the intangibles and qualitative customer relationship components.
As retail increasingly moves online, many of the mundane jobs done in stores at the minimum wage level will be consolidated in centralized customer service and fulfillment teams. Many retailers will contract with 3rd party vendors for these services. This leaves retailers and brands with more to invest where they have a true differentiator against online retailers: in-person customer service.