During the past few years, more and more remodelers have been hiring salespeople and asking the same question: how should I pay them?
That’s a good question, to which there are probably as many answers as there are salespeople. A few companies pay 100% salary, others pay 100% commission. Most companies combine the two, paying a portion of the salesperson’s wages in salary and the balance in commission.
That approach might seem simple, but over the years I’ve seen many different ways to calculate commissions: zero commission on the first 28% of gross margin of contract and then 4% on margins from 28% to 30% , 6% on margins from 30.5% to 34%, ad infinitum, ad absurdum. Some of the compensation plans most admired by the owner of the company who developed it require an MBA in accounting and a full-time bookkeeper to monitor.
This kind of thinking drives me CRAZY. Why make things more difficult than they need to be?
Over 15 years, I’ve watched clients attempt to plan for and control the process of building a successful sales team and it has always has seemed significantly more difficult than any other component of building a successful remodeling company. There’s a better way; here it is.
Think Tank Discoveries
In 2005, during a Remodelers Advantage meeting, 12 successful owners and I spent all three days focused solely on developing best practices related to developing an effective sales team. Note that these finding are generalities and don’t pertain to all. But in my own experiences over the past dozen years, they’ve been corroborated again and again.
First, let’s talk about why you might want to hire a salesperson:
- Increase company volume
- Allow the owner to sell less
- Develop “depth in the backfield” for sales
- Begin the search for a competent sales person to whom you can sell the company
Second, let’s talk about reasonable expectations regarding hiring of salespeople:
- The first person you hire for sales–after doing ALL sales yourself–typically doesn’t work out because the systems have not been set up and tested on a real human being: this first hire is the guinea pig.
- It typically takes between nine months and a year to begin to hit 100% sales efficiency.
- The typical life span of 100% efficiency is between three and seven years.
- Even the best salesperson sells less than the owner for the first year or two UNLESS the owner cuts his/her sales time.
- The average salesperson can sell $1 million to $1.5 million annually.
- Most salespeople only handle sales, not design and not estimating.
At that meeting in 2005, we devised a simple graphic to illustrate how to think about developing a sales team:
A is the “intake phase:”
- Time: This can take anywhere from two weeks to two months
B is the “on-boarding phase:”
- Training /shadowing
- Testing and letting go
- Time: This can take anywhere from six months to a year
- Volume: Typically zero to 75% of annual goal at end of on-boarding
C is the “100% efficiency phase:”
- The system works, the sales person meets both sales volume goals and company margin goals
- Goals are met–all is good
- Time: this can last three to seven years depending on the person, the market, the company culture
- Volume: 100% of goal for 90% of the run; typically between $1 million and $1.5 million
D & E are the “out-take phases:”
When the sales goals begin be missed and additional training and reviews don’t impact the outcomes over a few months (depending on the average length of the sales cycle in your company = X) it’s time to make a decision: D is the “fast release” option: When sales fall to 75% of goal over X months, cut the cord. E is the “slow and painful” option: When sales fall to 75% of goal of X months, keep hoping for a change and watch morale detiorate
How This Applies: A Case Study:
To test these notions, let’s take a company with projected 2018 volume of $3.5 million. Currently, the owner sells between $2 million and $2.5 million. The owner has been the only salesperson since the company began. The average job size is $150,000 and the average sales cycle is four months.
- ·Question: When should the owner hire (not put the ad in) the first sales person? Answer: June of 2017 to on-board, test and train by New Year’s Day 2018 when you want 100% efficiency.
- Question: How much can the sales person be expected to sell during the on-boarding phase if he/she is functioning well? Answer: Between zero and $750,000.
- Question: What will the sales person be capable of selling in 2018 at 100%? Answer: Between $1 million and $1.5 million.
- Question: What will the 2018 company sales volume be under these conditions? Answers: IF the owner maintains his/her sales rate of $2 million to $2.5 million, sales volume can be between $3 million and $4 million. If the owner wants to drop back, then hire another sales person as soon as the first is at 100% efficiency
Note: This assumes EVERYTHING runs as predicted. Of course, how often does that happen in your company especially when testing a new system, employee or goal? The potential for downside risk is tremendous.
How High the Pay? How Deep the Structure?
Many people say a good salesperson should make as much as a good production manager. In lots of the country, a good production manager runs between $100,000 and $140,000. According to Indeed.com, a production manager makes $120,000 in San Francisco.
If the salesperson were paid entirely on commission, the rate would be nearly 10% (9.6%) on the mid-range of $1.25 million in volume. If the sales person were paid entirely on salary, the effective rate would be the same IF they sold $1.25 million.
If the salesperson were paid a combination of salary and commission, the structure could look something like this–assuming the same goal of $120,000 on $1.25 million:
- Annual salary of $60,000 or 50% of total
- Commission of $60,000 or 50% of total which represents 4.8% of $1.25 million.
Figuring the Hybrid Rate
Although I know a few of the best remodeling companies in the country that pay 100% salary and then monitor performance rigorously, the hybrid is most typical. The difficulty is in determining the parameters around the calculation:
- Salary: What dollar figure has a correlation with wages paid in your area for a lead carpenter? For example. In San Francisco, according to Indeed.com, a lead carpenter makes $30/hour or $60,000/year; they make the same in Baltimore. Take that amount and then add ...
- Commission: 4.8% of contracts signed. This extra amount would raise the sales person's total potential compensation to that of a production manager.
This to me is good because it is simple and straightforward: First, use wage scales equivalent to a production manager and a lead carpenter in your area. Second, anticipate between $1 million and $1.5 million as the 100% efficiency sales volume. And third, calculate a formula that works in your area. Perhaps you’d lower the salary equivalent and increase the commission or vice versa. Increase the percentage as minimum goals are met at the company’s desired gross profit margin.
The GOAL is to hire an efficient salesperson, capable of learning your well-crafted system and feeling secure and part of the team, thus the salary portion, but still motivated to sell–the commission part. It sounds so easy, but it is very difficult. May you succeed!