Can Commission Incentives Save J.C. Penney?

Along with its announcement that it's closing 33 of its underproducing stores and eliminating around 2,000 jobs, J.C. Penney (JCPN.Q) has also stated that it's bringing back a commission-based pay system to stimulate sales growth. Not every associate and department will be affected by this latest development, which could be good news for some and bad news for others who lack sales experience.

J.C. Penney's senior management team is confident that commission incentives will yield positive results in building the best, most dynamic sales team that will deliver top-of-the-line service to store customers along with establishing a long-standing customer rapport. While the move is a step in the right direction, is it being implemented too late to keep J.C. Penney from its demise?

Sell, sell, sell
Along with reinstating some of its old-time customer favorite and exclusive brands, and relaunching its coupon system, J.C Penney believes commission incentives will enhance customer service, and thus, drive sales. The fate of this experiment rests on the shoulders of more than 3,000 J.C. Penney employees who will be affected by the new pay structure.

Associates working in window coverings, fine jewelry, and the furniture department will be forced to step up their attitude, knowledge of store products, and overall customer service in order to boost their pay and ultimately maintain their status as a J.C. Penney employee.

Not only will these associates receive their standard salary but also a certain percentage of every sale they are able to produce at the register. For those associates who excel at delivering exceptional customer service, the move is likely to be a positive. In other words, associates will have to prove themselves as valuable to the company's overall future success or be placed on the chopping block.

Back to basics
For much of its history, J.C. Penney used commission incentives to pay its associates. Leading up to former CEO Ron Johnson's takeover, J.C. Penney associates working in fine jewelry, furniture, shoes, men's suits, window coverings, and the salon earned minimum wage in addition to a percentage of every sale they generated at the register.

Johnson saw this as an unnecessary company expense that should be eliminated. As a result, Johnson cut commission–based pay incentives throughout all departments. Ever since this change, sales at all J.C. Penney stores have been falling drastically, which has led to a slip in the gross margin and net loss.

For this reason, current CEO Myron Ullman has decided to bring back commission incentives to three of the six departments that once operated on commission. According to Ullman, associates in these departments will not necessarily earn less; instead: "[T]he new pay scale would be based on the prior year's pay averages." Ullman believes that by providing a competitive salary as well as the opportunity to earn extra cash through commission incentives, associates will be inclined to do their very best and therefore restore J.C. Penney's long-term success.

Back to industry standards
It should be noted that most of J.C. Penney's competitors engage in the use of commission-based incentives. For instance, Macy's (M -1.52%), Dillard's, Sears Holdings, and Nordstrom pay some of their associates commissions. Macy's, for example, offers commission incentives in varying degrees to all of its full-time associates. It all depends on the department, the products sold in that department, and the associate's time with the company.

In addition, Macy's full-time and part-time associates can earn Macy's bucks for every customer they get to open up a Macy's Rewards card. Despite the fact that Macy's, Dillard's, and Nordstrom all provide commission-based pay incentives to associates working in their respective shoe departments, J.C. Penney will not be offering commission incentives to its shoe-department associates even though it did for much of its history. While commission can often times change the sales environment, it has no effect if the retailer has little-to-no consumer traffic.

It's hard to sell when there's no customers
While commission-based pay incentives could help J.C. Penney get back on its feet by encouraging sales associates to work even harder, J.C. Penney is still lacking customers in its stores. The fact of the matter is that consumers now have a very different perspective of J.C. Penney's brand than before. It will take more than placing associates on commission for J.C. Penney to regain its strength and market position.

Without customers browsing and shopping throughout J.C. Penney, associates on commission will have little chance of serving customers to the best of their ability. As you can see in the chart below, J.C. Penney's sales per square foot have fallen considerably since 2011 while its competitors' sales per square foot have remained strong and steady. Generating sales requires customers being present, and without them no amount of commission incentive will make a difference.