How much should your people earn so you can attract top talent, reward them fairly for hard work, yet still maintain a nice profit? The compensation question isn’t so easy to answer, and many companies take a guess when assigning pay rates – and they err on the side of generosity.
Are annual raises a necessity – do they really motivate people to produce? Are your salespeople earning reasonable compensation and hitting benchmarks? What about incentives for all employees:
Maybe it’s time to evaluate your current compensation system to be sure you are hitting all of the critical pay rate benchmarks.
Making Hours Count. Employee retention is critical for running a successful operation, and compensation and incentives keep people productive. Just ask Mark Grunkemeyer, founder of Buckeye EcoCare, with two locations in Dayton, Ohio. To be sure his compensation and incentive systems are working, he offers every new employee a wager during the 90-day review.
“I say, ‘I will give you $1,000 if you leave the company today,’” Grunkeyemeyer says. “I offer the money to them right there. And so far, we have never had anyone accept a check.” That’s because they know by staying on board, they can earn an average $2,025 in bonus dollars per year for meeting individuals goals tied to sales, production efficiency and customer service.
All entry-level employees at Buckeye EcoCare are paid hourly. The company has three divisions: lawn care, tree/shrub care and landscape (seeding, sodding, aeration, lawn renovation). There are more than 10,000 customers on the rolls at Buckeye’s two locations. When employees are promoted to route manager, they are assigned a route of 500 to 700 customers. Then, their pay option changes. They can choose to go from straight hourly to guaranteed hourly. Straight hourly means employees get paid overtime for hours over 40 per week.
If they only work 20 to 30 hours because of weather, that’s all the time they are paid for. Guaranteed hourly employees get paid for 50 hours per week regardless of the time spent in the field. During a rainy week where they clock 25 hours, they still get paid for 50. If they work more hours one week to make up for rain days, their hourly pay does not reflect overtime.
“It’s a choice,” Grunkemeyer says of the pay system for route managers. Twice a year they are given an option to change their payroll category. The system isn’t perfect. And there’s a learning curve on both sides. (Payroll manages pay category changes; route managers learn through trial and error which pay system they prefer.) But it works at Buckeye EcoCare. “Based on the mission and vision of your company, try to create a compensation system that works for ownership,” he says.
The 4-10 Rule. A reasonable benchmark for overhead personnel, including the owner’s salary, is 12 percent of sales. But how much revenue must you bring in to justify your pay rates? Jim Huston, a green industry financial consultant and owner of J.R. Huston Consulting has a 4-10 rule for figuring out office salaries as they relate to overhead and revenues.
Here’s how it works: Multiply total overhead salaries by 10. That gives you a rough estimate of the revenues required for that salary base. Say you have $100,000 worth of overhead salaries. Multiply that by 10 equals $1 million. “That is where your revenue should be, or close to it,” Huston says.
Reverse this rule to find out the sales you need to justify those overhead dollars. Multiply your overhead by four. Say your overhead costs for the year are $200,000, quadrupled is $800,000 in sales you should generate to meet that 25 percent benchmark for overhead.
Now, covering the cost of your field personal requires a look at production. Commercial maintenance account managers should manage between $500,000 and $1 million of work per year, Huston says. “They are probably going to get paid about $40,000 per year, so if they are maintaining $1 million in business, that’s four percent of sales.”
Commission Question. Without sales, there is no business. Salespeople should be rewarded for bringing in more accounts, but benchmarks must be watched carefully to be sure that compensation doesn’t get inflated because of missed sales targets. In general, a salesperson earning commission only should be compensated for eight percent of what they sell. So a salesperson who wants to make $50,000 per year at that rate would need to sell $600,000 worth of work. “That’s a good starting point, and that is if they are just making a commission and are not doing design work or getting paid hourly,” Huston says.
But the big question is: How do you get that commission into the hands of a salesperson? There are three ways. First is strict commission that is paid out when the company gets paid. “Most people can’t work like that because there is ramp-up time,” Huston says.
Second is a base salary plus commission. For example, a salesperson is paid $2,000 base salary and all other compensation is made up by commission (adhering to that total eight percent benchmark). Third, a company can pay a salesperson a base salary and no commission. “Anyway you do it, the salesperson has to be paid about eight percent of what they sell,” Huston says.
So, if your salesperson gets an $80,000 salary and only sells $500,000, well you’ve paid them 16 percent of sales rather than eight. “Then there is no profit left for the company,” Huston points out. “You have to constantly monitor what salespeople are getting paid and what they are selling.”
Meanwhile, Grunkemeyer relates that his two dedicated sales managers are just the tip of the sales team at Buckeye EcoCare because every employee has an opportunity to sell and is incentivized to do so. Goals are set at the beginning of the year to increase route size (by 50 accounts, for example), or to maintain a certain customer retention rate (say two percent, which is virtually no turnover).
“People will sell if you give them some incentive,” Grunkemeyer says. “If you give them the tools to upsell customers additional services, they will take advantage of it, especially if you put a commission on it.”
As for sales managers at Buckeye, up to 20 percent of their total pay can be commissioned. So a sales manager making $50,000 can make $65,000 if he or she has a good sales year. “They all have the opportunity to sell themselves into more money,” Grunkemeyer says.