Employers across all industries are struggling to find, hire, and retain talented and skilled workers. And according to the cannabis business owners we work with, they are describing the same concerns with their workforce, particularly with retail dispensaries. In this article, we discuss how to increase profits by implementing a cannabis dispensary sales commission program.
Correlating job reports relate the onset of the pandemic causing the labor market to undergo a substantial shift. Although many of these changes were coming down the road, the pandemic only intensified them.
As a result, the job market is hot and competitive. More and more employers are offering increased starting pay, special perks, and other opportunities to stand out from the competition. However, many small businesses in the cannabis industry are still reporting job openings they cannot fill.
Changing Labor Market Effects on the Cannabis Retail Industry
Economists from the Real Economy Blog believe three main factors are leading the new job market. “The retirement of baby boomers, lingering challenges associated with the pandemic and a ‘you only live once’ philosophy among young workers are driving a structural shift in the labor market away from the conditions that had prevailed since the 1980s.” They even go on to describe this shift as “…the biggest change to the domestic economy since the automotive industry was forced to adapt to more dynamic foreign competition.”
The cannabis space sees the same challenges and trends in the changing labor market as in other industries, especially in retail.
As businesses reopen to full capacity and rebuild their workforce, they continue to struggle. Many shops can increase starting salaries, offer 401ks and stock options. In addition, we see a common trend where commissions are typically overlooked and could be the answer your dispensary has been searching for.
How can a Commission Structure help your Dispensary?
This article examines how developing a commission structure for your cannabis retail dispensary employees can increase retention and incentivize your workforce while improving your bottom line.
Since commissions are monetary payouts based on sales performance, your employees will feel empowered to control a portion of their paycheck, and dispensary owners will benefit from the increased sales revenue from their staff’s cross-selling efforts.
And your customers receive excellent service as your budtenders actively address their ENTIRE set of needs by asking questions and making recommendations.
5 Steps to Set up a Commission Structure For Your Cannabis Dispensary
1. Setting up a Sales Hurdle
- What is a sales hurdle? A sales hurdle is the minimum return rate a business needs to break even.
For a cannabis dispensary, a sales hurdle is the minimum sales number you want to attain before offering an incentive that makes financial sense for your operation. Operators use this figure to set goals for their employees.
Before the commission structure ‘ kicks in,’ staff should first reach their minimum sales goal. Because all employees receive a base salary and have a standard level of job performance expected, it is essential to set the goal and pay commission above and beyond this sales threshold and not on topline sales. Not only does this entice staff to work harder, but you can also create a competitive environment among your budtenders to drive more sales.
- How to set a sales hurdle in 3 easy steps
- Start with your annual financial planning and review your annual sales figures.
- Take your sales revenue and divide it by 12 to get your monthly sales.
- You get your DAILY sales threshold by taking your monthly sales and dividing it by the number of days in a month.
Ex. $1.8MM in annual sales divided by 12 = $150K (monthly sales)
$150K divided by 30 = $5,000 (daily sales threshold)
- Should the sales threshold be different for weekdays vs. weekends?
In short, yes. The answer is pretty standard across all retail industries as weekends (Friday-Sunday) are generally busier and, therefore, will produce more revenue.
For most dispensaries we see, the sales threshold should increase by 20-30% on weekends. Be sure to work with your bookkeeper or accountant to ensure your financials reflect the higher sales numbers from weekend shifts.
In this example, weekdays could be $4,500 and weekends are $5,800 per day.
2. Setting Commission Percentages
Although there are no specific rules you have to follow, we can provide some general trends to keep your dispensary competitive with the rest of the market.
We recommend managers and budtenders have a different structure since they each play a different role in generating revenue. (Note: This can vary depending on how job responsibilities are outlined in your establishment.)
- General structure ranges from 5-7% of sales that are OVER the hurdle.
- Typical sales structure ranges from 1-2% of sales that are OVER the hurdle.
By giving your employees more control over their earning potential, dispensaries can see higher retention rates.
Setting sales goals with an incentive program for your staff will drive sales. It will also help you measure the performance of your employees. To determine what works best for your shop, let’s take a look at an example of how one of our clients calculates his monthly commission payouts.
3. Calculating Monthly Commission Payouts
The example below shows one month of a sales and commission model for a client who has recently implemented an incentive program for their staff.
They have a 5% commission structure for their budtenders and a 1% for management. We break down each column in the following, describing the impact on the dispensary’s sales performance and the employees’ incentives.
- Column E – monthly sales target is $151,200.
- The average breakdown for weekdays and weekends in Column E is $4,500 and $5,800, respectively.
- Column D – ACTUAL daily sales were $204,000 at the end of the month.
- Daily totals are recorded each day after the close of business.
- Column F – the difference between the target and actual sales figures.
- Columns G & H – the calculated commissions (5% payout for budtenders and 1% for managers).
- Note: This is for the sales OVER the hurdle.
This basic example shows the effect incentivizing your staff can have on your sales and profits.
Are sales commissions deductible under IRC 280E?
Depending on how your employees’ time is allocated, a cannabis dispensary sales commission payouts may not be deductible under 280E. Portions of employees’ regular wages are often deductible; however, we recommend seeking the advice of a cannabis accountant to find out if you can deduct commissions as well. Eligibility should be reviewed on a case-by-case basis, depending on your business structure and business vertical.
1. How to Allocate Commission to Employees
- Pooled Commission Method
The simplest way to start calculating commissions on your own is to use the pooled commission method. With this method, commissions grow during the month and are distributed to employees based on the number of hours each employee worked relative to the total hours. For example, if an employee worked 5.3% of the total budtender hours, they would receive the same percentage of the payout pool.
- Performance Based Method with Tiered Options
Although this structure is more complex, it pays per person based on the specific receipt sale and requires automated processes to make it easily trackable. You can also set additional thresholds to pay out higher percentages to employees who are outperforming their peers. The results can be highly beneficial when conducting annual reviews, promoting, or training new employees.
For dispensaries just starting out with an incentive program, we recommend the pooled commission method. Because some shifts are less busy and produce fewer sales opportunities, but generally even out over the entire pay period. It can also help create a strong team dynamic versus an “individualized” mindset for your staff.
2. Distributing Commissions
Most dispensaries opt for bi-weekly or monthly incentive paychecks for employees who hit or surpassed their goals from the previous month. Some also create a second paycheck specifically for commissions.
Since physical checks create more work for the employee and operator, we recommend only issuing a physical check for the first three months and then moving to an ACH model.
We advise our clients not to distribute daily commissions as there is too much administrative work. In addition, the employee is more incentivized to wait for a higher amount. For example, instead of receiving an extra $8-$10/day, employees can receive an additional $200-$300 per month, which proves to be more enticing.
While cannabis operators are suffering alongside non-cannabis establishments, especially in the retail sector, the development of an incentive program has proven successful in generating more sales revenue and employee retention efforts.
For more information on a cannabis dispensary sales commission structure for your cannabis dispensary, reach out to our accounting experts at GreenGrowth. We are here to help your cannabis venture through any level of the accounting and tax filing process. We employ several financial programs that can assist the company with its fiscal responsibilities including, tax planning and compliance, outsourced CFO support, audit preparation, tax controversy support, and much more.
For recommendations and assistance with tax planning and accounting services, schedule a free consultation or contact us at 1-800-674-9050.