A Sales Compensation Plan that Supercharges Profits - Page 2 - Contractor Talk - Professional Construction and Remodeling Forum

john elliott · 02-24-2008, 10:47 AM

Quote:

Originally Posted by CBCron

John - please go back and read my replies carefully

I was composing my last post without know that you had just posted- however I think my reading was just fine.

I didn't claim that you had said tracking productivity was easy. What I did say was that comparing manufacturing industries with construction was BS of the first order. I guess I've just said it again!

John

CBCron · 02-24-2008, 11:45 AM

John,

Although almost all of my career has been spent in the construction industry, I have consulted with three or four manufacturing plants on productivity, total quality management, and self-directed work teams. From what I've seen, the two industries have a lot in common.

But, fair is fair. Can we agree to disagree on the manufacturers vs. contractors thing?

Now, what I meant by setting employees up as subcontractors was that they will not know how to incorporate, get insurance, etc. and someone will need to help them set things up legally. Including helping them find other contractors to work for.

I didn't mean to imply that a contractor could just suddenly call employees subcontractors, treat them as 1099s and get away with it. I apologize for not being clearer with my advice. I should know better.

Mike Finley · 02-24-2008, 11:56 AM

Quote:

Originally Posted by john elliott

There are yards of reasons why it is so difficult to create a sustainable incentive system in construction, especially residential construction. Every job is different. Even the distance to the portapotty is diffferent.

There is no problem with rewarding the producers of extra profit, the problem is how do you do that? How do you measure the profit of each and every small period of time which you need to do in order to closely connect, in the producers' minds, with the incentive scheme you are using?

Even if you achieve that, what happens when the job goes wrong, through no one's fault, and there is little or no profit. Does that mean everybody goes without their bonus, despite having worked extra hard?John

Yes, I'd like to see some answers or some info on this. Even though what we do is more systematic and more of the same thing all the time, each job is totally different. We don't price jobs based on time to complete, but on specific tasks broken down to individual items, square footages... etc... But once the job starts it's tough to know an exact time it will end or how many job hours there will be. We do have history in our accounting system to look back and could take average job hours vs gross billing to come up with some type of average labor rates.

Not really sure on any of this, any help would be great. Nothing I would like better than to have a really great system to reward workers for productivity in remodeling.

Pearce Services · 02-24-2008, 11:59 AM

Quote:

Originally Posted by Ed the Roofer

Why not consider working out a health insurance plan that can be provided for at various levels. .

I'm not sure how relevent this is now, based on the change in direction of the thread, however,

I looked into providing insurance to my guys, and thought, I would get a good plan for my family, (business pays the whole thing), and a fair plan for my guys, they pay half, and if they want the same plan as me, they just pay half of a larger nut.

I was told that the plan must be equally subsidized for each member of an organization regardless of their job title. I think this was bad info at the time, and am wondering if anyone else knows the real deal on this issue. Maybe this was a provider policy, but they spoke of it as a legal issue.

Mike Finley · 02-24-2008, 03:10 PM

It is my recollection that it has to be the same for everyone, however I wouldn't be surprised to learn there are exceptions in regard to who is classified as exempt and non-exempt employees (salaried and hourly) and if there was some classification by number of minimum employees and whether you were a sole proprietor or not.

I do recall my accountant saying something in regard to this, but don't recall all the details.

Vinny · 02-24-2008, 10:56 PM

Ron, I have compinsated my sales people in the way you have suggested and currently do a small salalry with a commisssion on the ticket.

The complaint from sales (when we did it the way you suggest) was as others have said, if the field screws up why should sales take it in the pants. Then what happens is the owner or general manager is always in a position to be scrutinized by sales for how fair thier being in thier read of the production and job cost info. "Was the short coming in sales or production?" If a sales person was responsible for prodution managment or job supervision I'd say its fair but what happens after they sold it and it got done isnt the sale persons problem usualy. Its thier job to get us in the door. That not to say we can accept a garbage sale but sales people will sell anything if they are allowed.

I went to a system where when sales sells a job, I or my field super review the job and if it meets our standard as a profitable job and we ( as field experts) accept it, the sales person recieves 1/2 of thier commission and when its done and paid for, they get the other half. Our review shakes out the over promised non sense or a low price. If we dont accept the contract the sales person can re sell it or walk away from the commission but I wont do the job if it was sold bad or it cant be done correctly.

I pay the salalry portion because we have dead seasons and they need to eat as well as the fact we have alot of repeat buisness from other contrctors and I dont think I should pay a commission on a sale that was an order take and not a real sale per say.

I like your approach but I guess I'm not sure how well it works in reality. But I am very sure there are probably as many ways to pay a sales peson as there are contarctors out there.

MEDIAINSTALLS · 02-25-2008, 04:31 PM

Quote:

Originally Posted by wackman

Ron,

I'm very interested to hear if you have a similar program for incentive based pay for employees in the field.

I find employees who are paid by the hour to naturally slow down unless I'm around and keeping the pace humming along. I'm looking to cultivate an atmosphere based on speed and efficiency ALONG with quality.

I don't want piece workers per se because quality usually goes out the window. Most programs I've heard involve to much work or are quite complicated.

In my situation I do the estimating and overall management, then I have a superintendent and a few carpenters.

Any ideas?

Thanks in advance,
Wack

Wackman

I use piecework in my business this keeps things easier for me especially when I can not be in 10 places at once. With the piece work i set up a tier pay schedule and report card style system. take his first 4 weeks on a piece rate then after the 4 weeks evaluate his performance and give him 3 tiers. say top tier is $100, mid level is $80, and bottom is $60. start them always in the mid level. then creat a rolling report card. on week 5 a new grade comes out for him and you average weeks 2-5 now and drop off week 1. he will be motivated to keep his quality of work going bc he will strive to be in that top tier. if you get someone that is on the bottom and doesn't move up after awhile hes your guy you want to replace. money motivates everyone especially if one is doing the same job and getting paid more bc his performance is better.

CBCron · 02-25-2008, 10:16 PM

Vinny,

The recommended system has been rolled out in several firms and works great, with an unbelievable impact on the bottom line, but it has to be customized for every company and managed skillfully. Just like with any compensation plan, managing it is half the battle.

Let’s review. The recommended approach is: if OPERATIONS comes up with the cost estimate, the sales commission should be based on PROJECTED gross profit. If the SALESMAN comes up with the cost estimate, the sales commission should be based on ACTUAL gross profit.

Here’s how each plays out.

If Operations controls the estimate, they should be held accountable for an inability to predict and manage job costs. That’s not sales fault. Sales' job in this case is to take the estimate they are given and maximize the price.

If Sales controls the estimate, and is paid on actual gross profit, they are highly motivated to coordinate well with operations. Sure, operations will occasionally mess up a job all by themselves but sales is far more likely to mess up a job with poor communication about the estimate and customer needs. As proven in several companies, sales becomes very skilled at helping operations when their commission is tied directly to it.

Naturally, all salesmen would prefer to have their commission based on the projected GP. They come up with every rationalization for that approach but the only legitimate one is when they don't generate the cost estimate.

Another point I may have not made clearly enough in the article is that commissions should not be paid out more frequently than quarterly. That way the good jobs and bad jobs have a chance to even out before the owner pays the commission. If the company has a dead season, like in paving, only about 75% of the commissions should be paid out until year end.

By the way, your job review process makes complete sense, especially if it is a large job. Letting a salesman establish the minimum price on a large job all by himself is a disaster waiting to happen.

You mentioned paying commission on top of salary. That creates several problems that this plan is designed to correct. Commission should not build on top of salary. Salary is a safety net. The salesman only starts receiving commission after their commissions exceed the paid salary.

The salary functions as a minimum guaranteed income that the salesman better be beating within 18 months. If not, either drop the salary or let go of the salesman.

Vinny, I know the approach works for paving companies because the first two companies I used it with were paving companies. Good luck with yours.

Cashattconst · 03-10-2008, 10:25 PM

I like how you explained. You have setup a very comprehensive way to pay each company is going to need to change and adjust as needed.
Thanks,
Ben

SethHoldren · 08-28-2008, 11:41 AM

In my experience, profit sharing plans leave employees doubting the company's integrity.

I've so often heard employees on profit sharing plans say stuff like, "Funny thing is, there's never any profit at the end of the year."

In my opinion, even if your books are top notch honest, the lack of trust makes these type of plans problematic.

Or, at least, they require immaculate integrity on the part of the owner and managers.

Remodel Bud · 09-14-2008, 07:10 AM

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silvertree · 09-14-2008, 07:35 AM

My first sales job I sold on par. That is, I got 10% of gross based on my companies pricing. I got 50% of anything above company pricing. This is illegal, but I didn't know it at the time. We sold siding, windows and roofing.
Later I got a percentage of the gross profit, which was not always good if production messed up. Then I got 8% of the gross sales, and sometimes up to 11 or 12% of gross sales for certain jobs.
I never got a salary, but I did get a draw based on commissions.
If I had to sell for someone else I would want a percentage of gross. I would expect to pay all my expenses like car, clothing ect. The company would cover office expenses and cell phone, or whatever we agree on.
I talked to one salesperson recently for a well known Minneapolis company and they told me they got a small weekly draw and 6% of gross.

Remodel Bud · 09-14-2008, 11:47 AM

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silvertree · 09-14-2008, 12:29 PM

Quote:

Originally Posted by Remodel Bud

Illegal. NO IT NOT. Hmmmmm national company, since 1953. A corporation with Aticles of Organization by excellent attorneys. Nothing illegal. I won't even entertain an arguement on this as it is laughable. It is a negotiated sale in the home. Negotiated.

I would expect any sales person to react the same in they want a nice comfotable draw. THe high acheivers want commission. I have had this discussion a thousand times. Our company isn't number one in Qualified Remodeler for nothing....thats for sure

The PAR system goes back to Tin man days. The movie Tin man addressed how they were stopped from selling with the old "Rep from Akron" spiel. Or the "Were looking to do a photo shoot" on the worst looking house on the block. Then you sell your siding at inflated prices. Base price, then PAR
Another example was Sears, they sold siding to you lets say at $500 a square, and then they "negotiated" a sale with me at $750 a square.
You must be old enough to remember Sears getting in trouble over that.
In Minnesota, I was explained that the PAR system is not legal, I can't sell Bob a window for $500 and sell Bill the same window for $700. Maybe your great lawyers found a way around this, and good for you, but PAR was a dirty word around here. But I'm not a lawyer or a consultant, so I'm sure this could all be explained with some legalese.
Actually, I don't even know what PAR stands for, but this being my first sales job, I just did what the sales manager told me to.

**Ed the Roofer** · 09-14-2008, 12:42 PM

Although the PDF link did not work, I was able to retrieve the Cached Version from www.saleseffectiveness.com

http://72.14.205.104/search?q=cache:...lnk&cd=3&gl=us

Ed

Remodel Bud · 09-14-2008, 12:50 PM

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silvertree · 09-14-2008, 01:32 PM

Let me back up a bit. PAR sales is done, and I have told salesman that there is more commission to sell above our usual or accepted sales price.
None the less, PAR as I understand is the usual price that a company can stay in business with. Obviously selling over that is very good for the company, and should be for the salesman also.
What happened was, and I know you know this is, a salesman would take advantage of a "Mooch" and sell at double or triple the usual price.
Now if this is good selling in anyones opinion so be it, but the system abuses older people and less sophisticated buyers. This is selling above PAR. This is what got Sears in trouble, and this is how the Tin man made his living. Back then we sold to a large Blue collar market. Now we sell to a different group of people. Tin man tactics don't work so well anymore. So in conclusion, PAR selling is not illegal, but selling the same job to another person for a lot more money is what got Sears in trouble and is what got the Tin man in trouble.
Nowadays screwing the customer is fair game, (just read your credit card or cell phone contract). So I imagine PAR selling is no longer a dirty word, probably even an ideal to shoot for. As for my experience, I started selling in 1978, I was one of a dozen salesman, all who were former Tin men. Not knowing any better, I took my instructions from these guys. It was just like the movie, and I was a naive kid. In retrospect, probably a great way to learn sales as it used to be. So Remodel Bud, good for you, your probably right. I'm not looking to prove you wrong, but I did sell PAR, but I never charged the slow people double. My boss ran a sleazy business, and he was a former Tin man who learned how to stay out of trouble by the time I was hired. But I wouldn't give out my company name to anyone I liked.

Remodel Bud · 09-14-2008, 02:22 PM

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silvertree · 09-14-2008, 03:11 PM

Well, at least you have a sense of humor.

orson · 09-14-2008, 03:55 PM

Quote:

Originally Posted by silvertree

Well, at least you have a sense of humor.

He probably sold it somewhere along the way.