Contractors, Are Your Sales Advisors on Commission?

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In follow-up questions from recent sales trainings, I’ve been asked, “Mike, how should I be paying my Comfort Advisors?”

The short answer: On commission. I’ll elaborate on that below.

Some contractors, especially newer “home performance” contractors, pay salary. Often the sales person prefers to work on salary. I’ve seen that the sales person who doesn’t sell much really prefers salary! Sometimes the owners seem nervous about commission. (“What if she sells $2M? I’d have to pay her $200,000!” Tip: If you’ve got a sales person selling more than $2M, smile as your write her large checks every month. She’s making a huge contribution to your business!)

Sometimes, I see a base salary, over quite a range from as low as $20,000/year to almost $80,000, plus a small commission.

In most of the successful contracting companies I’ve seen, the comfort Advisors are paid on commission. They want to be paid on commission. Like the example above, they want to ability to earn a lot to better provide for their families.

What does sales commission look like in the residential contracting ? Well, it varies depending on the particular trade. I’ll give an example for HVAC and Home Performance companies. (In solar companies, with the proportionally much higher equipment costs and project sizes, I see commission % about half of what I show below.)

Example of an HVAC or Home Performance Sales Advisor Compensation Plan

And a bit more explanation of the above…

  1. This commission is based on the selling price. The selling price should be consistent with the book pricing as determined by management, not something independently determined by the Advisor. Anything not in the price book needs to be approved by management prior to the sale. The salesperson’s job is to sell according to this book price (exception, see #3 below). It is management’s job to make sure the book price is right–and thus that the expected margins will be achieved.
  2. Generally, I believe it is the company’s responsibility to generate sales leads, although it fair to ask sales people–and everyone else in the company to help with that. I like setting an expectation on the order of one self-generated lead per week at the target for Advisors. Recognizing this saves the company marketing expense, it fair to spiff employees for this. (For employees outside sales, I like a slightly different formula, rewarding them initially for every appointment set–not just a name–and then a percentage commission on the sale. Say for example, $25 for each appointment set, whether it ultimately sells or not, and 1% commission when it sells.)
  3. Some company’s seem to give Advisors virtually unlimited discretion with pricing. I can’t see how that is practical and scalable in a way that ensures a company can be profitable. Some company’s don’t give an Advisor any discretion, and this sometimes frustrates a salesperson when they feel they lose a sale before the $9,400 was $200 too high for the customer. I like giving the Advisors the ability to discount, within set guidelines, if at their discretion that’s what is needed. However, if we don’t let them share in the pain of that discounting, we risk finding every single job gets discounted to the maximum level. Since we’ve set our pricing to achieve fair profits, we can’t allow the Advisor to simply give away all that profit potential. I would allow them to discount up to 10% off the book price (see #1), but with the understanding that the discount is shared equally between the Advisor and the company. Perhaps an example is in order. Let’s say a project prices out at $10,000. The Advisor feels she can sell the project by reducing the price to $9,400. Commission of the fairly priced job would be 8.5% of 10,000, or $850. Since the Advisor shares 50% of the $600 discount with the company, her commission is reduced by $300 is thus the net commission on the $9,600 discounted project is $850 – $300 = $550. The Advisor has real skin in the game. If that’s what is need to make the sale, she’ll do it. But she won’t do it willy-nilly, because she understands the impact the discount has.BTW, when an Advisor mis-prices something, you can apply this same methodology. If the Advisor had failed to include pricing for an additional duct run on a $10,000 project, to the tune of $600, the book price should have been $10,600. Her regular commission would have been 8.5% of $10,600 or $901. However, with the inadvertent discounting of $600, still within the 10% parameters, the commission would be $901 – $300 = $601. One expects a good Advisor won’t repeat that mistake too many times!
  4. The Advisor can increase her total compensation by taking advantage of the other spiff programs in the company from selling service agreements, to helping bring in great new employees.
  5. The tools the company will provide. (This could extend to things like uniforms, jackets, blower doors, infrared cameras, etc.)
  6. Your sales person is an employee–treat the to the same great benefits you offer the rest of the team. (You may in fact be required to in your state.)
  7. Most contracting companies that I’ve seen don’t give their fully commissioned sales force paid time off. You can really stand out here. Here I’ve given a fixed rate example, but I’ve also used a pro-rated portion of the previous years earnings. (I’ve heard others propose the trailing 6 months, for example.) I’ve gravitated toward the fixed dollar amount because it is easier to understand, explain, and plan for in a simple, precise way.
  8. I find a lot of HVAC companies understand the concept of the weekly draw, but many newer home performance companies don’t. Essentially this recognizes that from time to time, an Advisor will have a dry spell. But they still have mortgages to pay, food to eat, and other expenses. By allowing a draw against earned commission, the company essentially pays commission in advance on occasion. The Advisor knows what that minimum check they’ll receive each week looks like…provided they keep selling, and don’t fall too far behind. It’s important to set a limit on the expectation here of how much credit you’ll extend beyond what the Advisor has actually earned in commission.

Now, I’ve given examples of percentages and dollar levels here. But of course, you can modify them against your existing policies, compensation levels, and goals.

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About the Author:

Mike Rogers is the President of OmStout Consulting. A nationally recognized expert in residential energy-efficiency, he works with contractors and programs to scale sustainable market approaches to improving homes. More on Google+

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