Whether your firm does handyman work or designs and builds extensive whole-house remodeling projects, one thing remains constant: Few business endeavors are as fraught with peril as tinkering with the way your sales team is paid. The delicate balance of salaries, commissions, bonuses, spiffs, prizes and trips in any arrangement is critical to not only the profitability of the company but also the productivity of the team.
As many remodelers can and do attest, any change in sales targets, any change in base salary (if salary is paid), and any change in commission percentage are all typically viewed with skepticism by the sales force.
The last time Tom Kelly of the venerable Neil Kelly Co. in Seattle changed his company’s sales compensation plan was in 1982, Kelly says. Their program has worked well since then so there has been no need to change the plan. But, he says, he has always been mindful of imbalances in sales compensation, particularly overcompensation.
In the overcompensation scenario, a remodeler will begin to notice a change in profitability — lower profitability — because prevailing prices typically can’t be adjusted. By the time the owner or manager recognizes the problem, in many cases the genie will already be out of the proverbial bottle. Efforts to reverse course and pay less typically result in misunderstanding. Valued members of the sales team make premature departures from the organization in a quest for greener pastures. Profitable remodeling organizations tend to find ways to keep their sales team together many years.
But there are larger challenges associated with paying your sales teams than simply keeping them in the organization. Many remodeling firms, over time, begin to see a split in their organizations. There is the sales team and everyone else. Perhaps your sales team won’t pitch in to help with other tasks — “Sorry, we need to be calling on customers.”
Many, many remodeling companies are home to cultures that focus so much on the sales team that the administrative and operations staff begin to view themselves as the red-headed stepchild of the business. A good sales manager, whether it is the company owner or an employee-manager, will find ways to motivate his or her team to appreciate the efforts of the operations staff so the entire company begins to work together productively.
As entrepreneurs, remodelers are constantly encouraged to drop their tool belts and begin to work “on” their businesses, not “in’’ them. What new remodelers typically discover as they begin to work on their businesses is a series of interconnected functions — sales, operations, finance, marketing, administration — that he or she must align toward business targets. It is at this point that he or she discovers the law of unintended consequences rears its head. If you change the way salespeople are paid, you will often see two unintended changes for each intended effect.
A textbook example is the sales manager who is charged by the company owner or president to fill a scheduling void for a window replacement crew. The sales manager then offers a higher commission on window jobs, and the entire sales team drops their normal (lower paying) activity on a quest for higher commissions. In the course of two days the window replacement crew becomes overbooked, and the roofing and siding guys are perilously close to running out of work. More importantly, the rise in commission directly lowers the company’s profit margin on the jobs sold. The effort to keep a window crew busy potentially creates lower profits associated to that crew for the month, quarter or year, and the problem then migrates to the roofing and siding crews. The sales manager is then on the hook to create incentives to keep them busy as well. Thus, sales compensation becomes a tool for targeting job size, type of client, level of profitability and overall organizational balance.
“In an entrepreneurial setting like remodeling or even in a larger corporation,” says Jason Kovac, a compensation analyst with the Scottsdale, Ariz.-based World at Work, “it is critical that sales compensation be aligned with the revenue, profitability and productivity goals of the organization.”
How some successful remodelers compensate their sales staffs
In speaking with remodelers around the country, there is a variety ways to compensate salespeople fairly and keep them aligned with the rest of the team. They generally fall into two camps: 1. a flat commission on all jobs sold, or 2. a combination of a draw plus an escalating commission schedule based on revenue and gross margin targets.
Virginia-based specialty contractor Creative Energy falls into the all-commission camp but also addresses the efforts of nonsales personnel in bringing in business.
“We do 10 percent commissions based on sales at par, more for sales above par and less for sales below par for salesmen,” says Andrew D. Mueller, marketing director for the firm. “Salesmen also have some incentive-based bonuses they hit monthly. Everyone else gets hourly plus 1 percent commissions on sales they help bring in. There are a few bonuses for the hourly wagers also. This business absolutely needs a system of commissions and incentives and hourly for nonsales staff.”
Davis Remodeling Contractors, a design/build firm based in Lakeland, Fla., falls into the second camp. The company pays salaries and commissions, but all are tied to a critically important company metric — cash flow.
“This year we started with a new program to motivate our salesman,” says company CEO and “coach,” Tim Davis, CGR, CAPs. “We use a salary with bonus system.
“I don’t know about other remodelors, but in our case we are a design/build company and our one salesman has many more responsibilities than just sales. So, to be fair to our salesman we compensate him with a modest salary and 2.5 percent of gross sales price bonus,” says Davis.
“However, he only gets the 2.5 percent bonus when the company receives either the down payment at contract closing or percentage-of-completion draws,” explains Davis. “This keeps him interested in the cash flow of the company and the progress of the project.”
At Brothers Home Improvement, with seven locations in California, Gene V. Cavana uses a small draw and straight commission to drive their 18-member in-home sales team for this large replacement contracting business. The draw is $300 to $400 per month with an average of 10 percent commission on all jobs sold. Similar to the system at Creative Energy, a par amount governs whether the commission is smaller or larger than the base commission of 10 percent. The company has also created a system to reward employees at its seven showroom locations for bringing in business, but this is at a lower rate than the dedicated in-home staff.
Linking sales to gross-profit targets
The system that has kept the sales team at the Neil Kelly Co. happy and productive for the last 23 years is linked with gross margin targets, says company CEO Tom Kelly. Under the system, jobs sold with the intended gross margin have a percentage set aside for commissions. Most of that commission amount goes to the salesperson, but the project manager also can earn a piece of commission by picking up draw checks, etc. Testament to the company’s sales compensation balance is the longevity of its large sales team. Among the 18 sales-designers in the company’s full-service remodeling division, the average tenure is a decade or longer. One individual, says Kelly, has been on the team for 32 years.
In the company’s home repair division, six sales staffers are also paid by adherence of the projects they sell to the gross margin targets. Also called “sales carpenters,” they have been on staff since the inception of the home repair division several years ago.
Cash flow figures in the mix as well, says Kelly, all salespeople get a 1 percent spiff when they bring in a 30 percent down payment with a signed contract. For a $100,000 job this amounts to an extra $300 upfront for the employee.
The company provides a safety net during the first six months of employment for a new salesperson. They get a salary that allows time for training and “puts the company in a better position to be able to say goodbye,” to sales staffers who don’t measure up during that initial period, says Kelly.
The beauty of the Neil Kelly company’s compensation plan is that adjustments are made via tweaks to the company’s targets for gross margin. Kelly says the company is currently evaluating its gross margin targets to make up for the higher cost of general liability and workers’ compensation insurance. Until now, Kelly says, the company had absorbed those costs, but business is strong enough that the resulting price change can be absorbed by the market, he says.
That said, “we never undertake compensation changes lightly,” says Kelly.