Paying Sales Pros (Part 3 of 3)

The seasoned veteran sales professional is a person who has been selling residential and light commercial HVAC systems for several years. He or she has a good grasp of sales skills as evidenced by a closing rate of 65% or higher.  (Some I know hit 90%, and not on price!)

They are masters of the subtle question and know how to elicit strong emotional drivers from their clients and harness their solution to those drivers so sales are (to a casual observer) very easy. (But they fully understand how complex and difficult selling at such a high level is!)

Such professionals often have the ability to compose a job completely from scratch and do not have to rely on a retail price book prepared by the company’s management, but as a good team player, will use such a book when it is available. They know how to mark up a job for the correct margins and complexity factors and are good at assembling all the components of a superior system and understand their crews well enough to peg the labor required to within minutes of the actual time the job will take.  They are good at load calculations and equally at ease with duct design and piping problems. They understand controls like the backs of their hands and know how to use retail financing programs with grace and finesse.

Such people easily sell $1 million and more a year in residential and light commercial jobs. Some score as high as $3 million a year. And they are all driven to succeed, and wear the badges of their success— the cars they drive, the clothes they wear, the jewelry they use, even their club memberships— with pride.

So how do you pay such beasts?

Recognize that they want pay that says to the world, “I am in the best of the best club! I know how to do it better than the rest!” They want big paychecks, and they usually despise draws or base salaries. To them, pure commissions are the best way to fly.

So consider giving a veteran little (or no) base or draw, and basing their compensation entirely on commissions.

How you structure the commission plan will depend on how they sell for you.  If they sell off a company-supplied retail price book, you can make their commission a percentage of the sales contract they write.  A veteran of such volume should easily earn 8% to 10% (sometimes even more) of their gross sales. [Note: to be sure the company nets the net profit it needs after the commissions have been paid, please see my article on pricing for job commissions by clicking here.]

Thus, if Susan sells $1,500,000 a year off a retail price book and she gets 9% of the sales, she will knock down $135,000 a year, in line with the top producers in most markets according to the web site salary.com.

But what if the sales veteran has complete control of the job pricing and does not use a retail price book?  Then they should be paid a percentage of the gross margin dollars they write up on contract.

Here, it gets a bit stickier, but can still be done with relative ease and good results. I suggest that companies that use such a system base the gross margin payout on a gross margin that nets the company its target gross margin after paying the commissions. (See the article I referenced three paragraphs above.)

I also suggest you stipulate a floor below which commissions are paid at a reduced rate.  For instance, if you determine that your company needs 36% gross margin to be successful, and that to fund the commission the sales veteran must sell jobs at 44% gross margin to fund his commission, you could say that any job that sells below 44% gross margin has reduced commission.  (In this example there is an 8% cushion for a job at 44% and less than 8% for jobs from 43.9% down to 36%.) For instance, the veteran earns half the normal commission rate for sales below 44%, or a sliding scale, such as 7/8 of the commission at 43%, 6/8 (or ¾) at 42%, 5/8 at 41% and so on down to 1/8 at 37%, with no commissions at or below 36%.

But if the veteran brings in a job at 55% gross margin he should get his commission rate on that sale, and it will be a doozy of a commission check! But then, it was a heck of a sale!

The commission check should be based on a percentage of the gross margin dollars. Since the gross margin dollars will be smaller than the gross sales dollars, the commission rate obviously needs to be higher than a commission rate based on sales dollars. For instance, if a sales person normally earns 8% of the sales dollars on a retail price book method, a veteran paid on gross margin would need a rate that yields the same commission dollars as the retail price book price using the gross margin dollars.  For instance, if the retail price book gave a price of $8,000 for a job and it had 44% gross margin in the job, the job would generate $3,520 in gross margin. A commission of 8% of the sale is $640. So a veteran on gross margin commissions would need a rate of 640/3520 or 18% to make the same income.

Two fallback ideas need to be considered. One is the issue of expenses. For high output veterans, many contractors use a generous commission rate and pay no expenses. For instance, a veteran might have a commission rate of 20% or more of gross margin dollars. In return for the chance to earn well into the six figures (say, $2,000,000 volume at 50% gross margin times 20% = $200,000!!!), the veteran pays for his own car and gas, cell phone, sales tools, fax machine at home, and so on. (The company, of course, would still provide normal payroll benefits.)

The second issue is whether or not to pay the veteran his commission on the job after the job is finished and costed out.  I am in favor of this, but some folks wince at the thought. Here, the sales person turns in a job and figures it will take 4 man-days. The job is installed and then costed out.  During cost-out, it is found that the job took 4.5 man-days, and that the sales person overlooked some material that the job needed, so material costs were higher than estimated as well.  The sales person had figured the job at $4,000 gross margin at bid time, but the job actually only generated $3,720 gross margin.  The commission would then be paid on the $3,720 that actually was generated, not the $4,000 that was estimated.

Such a plan keeps the sales person realistic with his labor estimates.

Such a plan can also be combined with a high-throughput incentive program for installers and the sales person can be given a portion of the company’s cut of the savings on a job. For details on how this would work, use the “Contact Us” link at the top of the page, or “Leave a Comment” and ask for the article and I will email it to you as an attachment to my reply.

One final thought— if you have a well-structured commission program (one that brings more money to the company than it costs you to pay out), don’t worry if you have a sales veteran who makes as much (or more than) you do. Think of how much wealth he or she is bringing you in the process! Oh, that you would have a DOZEN such producers selling for you!