Fueling the sales engine

Benchmarking Your Business Report - 2016 Benchmarking Your Business Report

How you structure pay, commission and incentives for sales staff depends on your goals and their values.

November 7, 2016

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After six years in business, managing sales solo was no longer possible for Casey Hurd, owner of Greenscapes Land Care in Still Pond, Maryland. The business employs 18 people today, half of whom are full time. Hurd would like to change the service mix from 80 to 50 percent residential, and grow the commercial maintenance division. “We have grown by 100 percent the past two years,” Hurd says, projecting 2016 revenues of about $900,000.

This year was the time to bring on a full-time salesperson – someone besides Hurd to keep filling the backlog. But how should this person get paid? That’s a question many landscape business owners consider whether they’re hiring their first sales associate or adding to a business development team.

There are three ways to pay a salesperson, says Jim Huston, president of J.R. Huston Consulting. One, you can introduce a solely commission-based model, paying out an average 8 percent of sales (based on industry benchmarks). “They get paid for whatever they sell,” Huston says.

Two, you can offer a mix of salary and commission. That 8 percent number translates to paying 4 percent of sales as salary and 4 percent as commission. So, for a salesperson who sells $1 million in work, that’s a $40,000 salary and $40,000 in commission. According to Lawn & Landscape research, the national average yearly salary for a salesperson is $45,000.

The difference is that guaranteed salary stream, which is attractive for recruiting and retaining sales personnel, Huston says. “Most people can’t live off of (commission only), especially if they’re just starting out,” he says.

Third, you can provide a salary for salespeople, then offer a year-end bonus based on performance. You set sales goals, and if those are met or exceeded, the employee is rewarded for his or her efforts. The benefit of this structure is promoting a “team player” attitude. The problem is, salespeople who only focus on commission might focus only on tasks related to driving their paychecks instead of what’s best for the company, such as servicing existing accounts, Huston says.

There’s no right or wrong way to compensate salespeople, as long as the pay – commission, salary or both – propels business development goals and aligns with your revenues and profit margin.

What’s the point?

Hurd weighed various compensation models for salespeople and chose to pay his new team member 3 percent of the gross profit for each job sold. “There is no room for error and he has to use our pricing,” Hurd says, adding that the salesperson does not have the liberty to discount services to seal a deal.

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Pricing is based on the company making 10 percent profit on jobs sold. Hurd’s salesperson will make a commission of 3 percent of that profit the first year of the maintenance contract only. (Maintenance contracts are generally three years.)

“He was very open to this plan because he has worked in the industry for a while and at previous jobs his salary was commission on net profit, not gross sales, so this gives him more opportunity,” Hurd says.

Hurd chose this compensation model based on what he thought the company could afford. “There are other accounts he is maintaining without a commission, and the commission is based on what I could spare on the profit margin,” he says.

Hurd’s salesperson is motivated by this commission model. And that’s the key, Huston points out. Sales incentives should inspire team members to drive company growth. The problem comes when an incentive or pay model propels personal growth without regard to the business’s overall health.

Huston has seen how commission can work against a company. At one landscaping firm, a top-performing salesperson focused on design/build work was making 8 percent commission on sales and selling $1.2 to $1.4 million per year.

The owner was paying her about $120,000 annually – but she wasn’t interested in any activity not directly tied to boosting her sales numbers.

“If the owner asked her to do something that did not specifically reflect on her commission, she didn’t want to do it,” Huston says. “She didn’t want to take this or that call. It was all about the commission.”

This owner switched gears after firing that salesperson and hiring another. He instead offered an $80,000 salary with a year-end bonus tied to performance. They set a sales goal of $1 million. “He wanted someone who would look out for the best interests of the company, and this arrangement worked out great,” Huston says.

“If the owner asked her to do something that did not specifically reflect on her commission, she didn’t want to do it.” Jim Huston, J.R. Huston Consulting

Huston compares this salary/bonus model to how Nordstrom handles sales and service. “They do not have commission salespeople on the floor because you get people who are only interested in doing what impacts their commission and they forget about what’s best for the company,” he says.

For any incentive, first ask: What is the point? Do you want to motivate an employee to produce more or reward a worker for their efforts?

Commission-based programs can push growth. For example, an irrigation service company noticed that a technician was only billing four or five hours per day. So, the owner told the technician he’d get paid $25/hour for billable hours and $12/hour for other time. His productivity doubled, and sales and profitability reflected that.

At Reef Tropical, President Claude Kershner IV says it’s important to have the compensation conversation with manager-level salespeople to understand what motivates them and what types of incentives will retain them since they are driving value to your business.

Reef Tropical’s sales manager makes a salary plus commission on total sales, along with a profit-sharing bonus. Two junior salespeople make an hourly rate plus commission based on their individual total sales. Providing commission on the total sales number is an incentive, Kershner says. “It’s much more attractive for the salesperson,” he says.

Ultimately, compensation is a matter of finding the right fit for the account managers/business development employees and the company.