For the past nine years since 2011, we have been using occupancy cost to determine a store’s sales target. If a store achieves the sales target in a particular month, every team member of that store will receive a sales incentive that month in addition to his or her base salary and sales commission.
Occupancy cost refers to the ratio of sales to rent, usually expressed as a percentage:
Occupancy Cost = Gross Rent ÷ Gross Turnover
For example, if your rent is $7,000 and your sales is $30,000, your occupancy cost is about 23.3%.
For our business, we think that an occupancy cost of 13% and below is desirable. Here’s how you calculate the sales you need to generate to achieve an occupancy cost of 13%:
Sales Target = Gross Rent ÷ % Occupancy Cost
So with rent of $7,000, you will need to generate sales of about $53,846 ($7,000 ÷ 13%) to achieve an occupancy cost of 13%.
If your gross rent includes turnover rent, you will need to take that into consideration in your computation:
Sales Target = Gross Rent ÷ [% Occupancy Cost – % Variable Rent]
For example, if your gross rent is $7,000 + 1% of Gross Turnover, you will need to generate sales of about $58,333 [$7,000 ÷ (13% – 1%)] to achieve an occupancy cost of 13%.
In our case, our store manager gets 0.5% of the store sales and our store associate gets 1% of his or her individual sales as sales incentive if the store’s occupancy cost is below 13%. We have a tiered structure – 11% & below, our manager gets 0.75% and our associate gets 1.5%; 9% & below, our manager gets 1% and our associate gets 2%.
It’s important to highlight that base salary still makes up the bulk of our compensation and it is designed intentionally as such. There’s a lot of talk of pay-for-performance in retail – about how a significant portion of a retail staff’s salary should vary with performance. My own view is that pay-for-performance is perhaps relevant when a company is paying an executive a high base salary and is looking to incentivise her further if she meets certain targets. Take the case of an executive whose monthly base salary is $100,000, and let’s say she stands to receive another $50,000 as sales bonus if she meets certain revenue or profit goals. So two-thirds of her compensation is fixed and one-third is variable.
Retail, however, remains a low-wage sector. Imagine if a retail associate’s base salary is $1,000, and she will only receive another $500 as commission if she hits her sales target. I guess, in theory, this retail associate should be more motivated to achieve her sales target. She needs that $500! But in reality, she’s probably too stressed trying to make ends meet and I am more inclined to believe that the stress leads to poorer performance. And it’s not even about the performance. It’s simply not a conscionable thing to do.