The idea to offer our members a compensation class came to fruition in early 2022 at our company's signature event, Acceleration Days Workshop™. During the event, we opened the floor up for questions, and one of them was regarding compensation. What followed was a lengthy group discussion that made us realize that if we reviewed the compensation structure of ten different members, we'd find ten different methodologies on how they pay. The worst part – none of them would be cost-effective.
The Creation of The Compensation Equation™ Formula
We ran the Compensation Equation as a two-part class held for our Blue Collar Success Group members. Part one was virtual and covered what we'll be going over in this series. Part two consisted of an in-person workshop that helped attending members customize their own company's plan. The formula and materials we use are based on methodologies that Kenny Chapman, Founder of The Blue Collar Success Group, and I used to create The Blue Collar $100M Playbook™. When putting the Playbook together, we sat down and asked, "how do we get our members to a hundred million?" We quickly realized that compensation was a big part of that equation.
In this, the first of a three-part series, you will see how we created The Compensation Equation™ and the subsequent formula and Playbook. And we will explain how you can do the same. In subsequent installments of this article, we will not only dive into the specifics of restructuring compensation plans, but we will also cover compensation's impact on profits and company culture. First, however, let's examine why most compensation plans don't work.
The Birth of The Compensation Equation™
The more we dug in, the more we discovered that most businesses have either inherited or duplicated a comp plan from someone else in the industry. Even where it seemed to be working, closer examination proved it to be much less advantageous than a custom plan. Case in point – one of our clients had a challenge with their overhead and their direct labor based on their current compensation structure, which was borrowed from a friend in the industry. I asked them to show me the input sheet, and within less than an hour, I saved him a hundred thousand dollars on his compensation plan. He told me that he had no idea how broken his system was. There was a need to dive deeper into this topic, and that's how The Compensation Equation™ workshop was born.
The Complexity of Compensation
We live in a world where people often expect before they deliver, and how we compensate people often affects the results that we get from them. Performance, morale, and retention are a big part of the compensation complexity.
For example, you may be paying people based on seniority, which is how the trades have historically operated. The challenge this presents is that it can create complacency and a sense of entitlement. There are other ways to incentivize longevity and inspire renewed motivation in the process. One way to achieve this is through incentive packages that go beyond the paycheck. For instance, after three years of service with your company, a team member qualifies for more time off and is awarded a gift card to a store or restaurant they frequent. Then after five years, you may decide to pay for a short vacation for that team member and their significant other, along with the paid time off.
In another scenario, you may find that someone who has not been with your company as long as their co-worker may be higher skilled. When this occurs, we point out that there are several ways you can pay based on performance without creating animosity. Sales Program Incentive Funds (Spiffs) and bonuses for achieving certain measurable goals, receiving positive online reviews, etc., put the ball in every team member's court.
If you are not able to create incentives for every position, try creating incentive base pay. Start with what are the most important items a team member can do to contribute to the company's goals and compensate for incentivizing that behavior. For example, your apprentices' main objective is attendance and punctuality. For this, you may choose to pay them a monthly bonus based on these requirements. Remember, all incentives must be completely "objective-driven" so that anyone in that position has the same opportunity.
When comparing team members in separate roles, it’s also important to understand what value they bring to the table.
Here is an example: A technician may generate $400,000 a year in repair work while earning between $80K and $100K a year. A properly trained CSR, however, may only get paid $35,000 despite booking well over $1,000,000 a year via phone work. Do you see the inequity there? The way to compute proper compensation for the CSR is to multiply the number of appointments they booked times your revenue per lead. Run this exercise on your CSRs and see just how much revenue is generated through their phone work. If you find that this position is underpaid, you could be having a challenge retaining or acquiring top talent. Remember, you always get what you pay for.
As previously stated, paying commissions should be easy and uncomplicated. How do you know if your compensation plan falls under these parameters? Simply ask a team member to parrot back to you how their compensation plan works. If they struggle to explain it, there's a good chance they struggle to understand it. Remember that when things are simple, they are also scalable.
After a journey in the HVAC industry that began when he was sixteen, Chris Crew went on to coach a large electrical company helping franchisees achieve success. Later, he shifted to owning an electrical business, growing it in a four-year span to 60 trucks, five locations, and generating $18 million. Ultimately, he sold his shares to join The Blue Collar Success Group® where he now serves as President. Chris Crew offers extensive knowledge about every facet of in-home services.