Commission Plans: The Good, The Bad and the Ugly

by

Greg Dooley
VP of Customer Success
November 12, 2019
/
5
minutes to read

Commission pay often gets a bad rap. Perhaps it comes from the old (and not always fair) TV trope of glad-handing used car salesmen in plaid sport jackets, trying to sell you more car than you need, but consumers of just about any product or service typically equate commission pay with sleazy salesmanship.

It’s unfortunate, because that stigma stems from the worst extremes. I sometimes see residential plumbing, HVAC or electrical businesses use their websites or marketing messages to rail against competitors for paying their employees high commissions, or for the simple fact that they pay commission at all — playing on the assumption that homeowners see commission pay as inherently dishonest. 

Okay, commission can incentivize upselling — but it doesn’t have to. When we coach business owners and GMs about pricing their work, we always advise working toward a pay system that accomplishes all these things:

  1. Compensates employees appropriately for their performance
  2. Contributes to company profitability 
  3. Leaves homeowners feeling like they were treated fairly and respectfully

The importance of that last point cannot be ignored. Yes, we’re all in business to make money, but you’ll lose business if homeowners feel like they’re in an adversarial relationship with your company. As some of my Pointman colleagues put it (highlighted by Contractor magazine) during a workshop at this year’s PHCC Connect: “It should never be the customer vs. the contractor; it should be the customer and the contractor together vs. the problem.”

Designing a Commission Plan

How do you pick the compensation system that works for your people, your bottom line and your customers? 

It’s not easy. We understand that most home services companies are small enough that they simply can’t have separate salespeople on their teams. It’s just a fact of life: Techs will have to do some selling, and it’s not always comfortable for them. So you have to instill your vision and values within them, to make sure everyone is selling your services from the same ethical baseline. (Here are a few tips from Service Excellence that may be helpful.)

The truth is, there are ways to design a commission-based pay structure — also called “performance pay” — that can achieve a harmonious balance of the three components noted above. 

Here are four types of performance pay plans, each listed with their pros and cons to help you compare them and find the right fit for your business. 

Oh, and the plaid sport jackets? Definitely not advisable.

1. Percentage of Sale

This arrangement is perhaps the simplest option. The tech receives a percentage — typically a small one, like 3% — of the value of everything they sell. This can be split with other techs when they complete the work.

PROS: It’s easy to calculate, and also straightforward — your techs know exactly what to expect.

CONS: This plan is the type most likely to encourage upselling over efficiency or good work. Ethics training and values reinforcement are critical.

2. Piece Rate

Here, techs receive a flat fee for selling a task — typically 6% if they’re also paid hourly, and 17% if they’re not. This is built into the back end of the pricebook, so it calculates on reports.

PROS: Piece rate is easy to calculate, and it encourages efficiency.

CONS: This typically works only for service work where companies use the pricebook tasks in their field management software appropriately. If you use custom tasks or jobs, it will not work properly.

3. Billable Hour

You commission your techs on the number of billable hours they sell. This is usually done on a sliding scale, starting with a small percentage for 20 hours sold, and then it ramps up incrementally. For example:

  • 20 hours: $100
  • 25 hours: $200
  • 30 hours: $300
  • 35 hours: $400
  • 40 hours: $500

PROS: It’s easy to calculate, it encourages efficiency, and it’s easy to split among those who did the work.

CONS: As with piece rate plans, it is imperative for the price book to be set up appropriately and used as directed. Billable hour commission is hard to calculate for custom jobs.

4. Percentage of Profit

Here, you commission your techs off of a percentage of the gross profit on the job — which means parts and labor costs come out before calculation. Contractors who use this approach typically set the commission at about 10% of gross profit. 

PROS: It encourages efficiency, it’s easy to split, and you only pay commission out of money actually made on the project.

CONS: It can be difficult to calculate, and techs may disapprove because they can only control labor costs, not parts costs.  


Once you’ve settled on the right commission plan for your techs, it might benefit your team (and your bottom line in the long run) to speak with a sales trainer about proper selling techniques.


4. Add-On or Upsell Count and Amount

Here, we’re looking at repairs sold beyond the original reason for the call. Every time you enter a customer’s home your techs have the chance to sell value added work, beyond the repair itself. If you’re training your techs to sell add-on products, don’t you want to know who's doing it well, and who may need a training refresher?

5. Agreement Opportunities/Sales

Maintenance agreements are the key to a consistent client base and essential for keeping your team busy during the shoulder seasons. Every time your technician is in the home of a non-member there is an opportunity to sell. Are they delivering? You need to know.

6. Future Opportunities

Are your technicians talking to customers with forced air heat about the improved comfort that comes with a humidifier? How about the benefits of water softeners or whole-house surge protection? If the customer is interested, but not now, you need to be able to follow up on those opportunities.

How much money do you think gets left on the table just by failing to make a follow-up call to reintroduce an offered product or service? Tracking these opportunities can be the secret to putting more of that money in your pocket. These opportunities are the gold dust that’s hiding in your business. With a little work, there’s a lot of money just waiting to be panned for and earned.

7. Replacement Opportunities/Sales

Repairing a capacitor on a 17-year-old condenser, or the pilot on a 12-year old hot water tank? These are opportunities for replacement, and your techs should be offering that as an option along with the repair itself. You can determine what you consider a replacement opportunity in your business. But regardless of the conditions you establish, you want to know which of your techs is making the most of them. 

And if they didn’t sell? See the previous item. You should be setting this as an opportunity for a follow up.


Have any recommendations for additional information you’ve found to be essential? How do you make sure your team shares these details after each visit? We’d love to know — drop us a line here.

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