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.

Look at Pricing

The start of the year is a great time to look at pricing. Usually, you have an idea of how your company fared the year prior, and you want to ensure you will continue to grow in the months to come. Many of us make New Year’s resolutions with respect to spending or saving in our personal lives, and it’s no different for business owners. Making sure your pricing is in line with where it should be is one of the strongest ways to start the year the right way.

Part of looking at your price book is finding where the issues are, and that can take time. An HVAC company in January is going to be very busy, so it’s a difficult time for a close look. However, a plumbing company might not be as busy. Whenever you tackle this job, your best bet is to look at what your labor rates are. Start there, and let it trickle down across the board. Ask yourself, “Are my labor rates helping my business stay profitable?”

Remember, there are many different services out there and many different groups or communities that you can engage. Never hesitate to say, “Hey, I’m a business owner in Florida. What should my labor rates be?” You can build your price from there. There are also some great billable hour calculators available.

Set Goals

There is no better time of year for looking inward than January. Set your personal goals and company goals for the following 12 months. If you can break those down into departmental goals, even better! Perhaps that means a CSR booking closing rates a little better, or a truck doing 250,000 a year rather than 200,000.

Many companies have found that using an Objectives and Key Results (OKRs) goal-setting system pays off. Looking for a guidebook when it comes to OKRs? Check out Measure What Matters: How Google, Bono, and the Gates Foundation Rock the World with OKRs by John Doerr. 

One key question is the best way to handle setting goals: Is it smarter for business owners to handle this solo, together with staff, or to delegate completely? 

The best approach is to set goals at the department level. As an owner, you need to take the time to understand what the goals are in each department, and make sure they are in line with your goals for the company. No one likes to set unattainable goals for themselves, so make sure you push your departments to set goals that are lofty, rather than simple ones to feel good about hitting. Entrust your staff to aim higher, and watch how they respond.

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