Understanding Incentive for Commissions

Hey everybody, it's Jim Johnson here, the head coach at Contractor Coach Pro. And I thought I'd actually kind of shoot this little short video today. I keep seeing this thing about how to pay salespeople in the construction trades, especially in like home services contracting and even more specifically when it comes to insurance restoration work. You see a couple of different structures, one being what's called off the top or off of the total revenue of the job. And that tends to be around 10%, depending on what kind of things they offer, vehicles and salaries and stuff like that. But just for sake of argument, let's just go with 10%. And then the other one that I see commonly is what's called a 1050 50, where this person gets paid based off of the gross profit of the job. And so the job will have a 10% overhead. That's where the 10 comes taken off. So let's say it's a $10,000 job. We take $1,000 off, that's 10 off, that's 10% goes to the house or the company. And then the cost of goods sold, labor, materials, whatever other expenses directly related to the job are taken off, leaving profit. And somewhere usually around, you know, 30, 35% of the job, if you're average and upwards of 45, 50% of the job sometimes can be the profit. And then as a salesperson, that full responsibility of that job, I want to be real clear about that, fully takes responsibility from beginning to end. You will see a compensation structure called 10, 50 50. So 10% off the top, nine grand, take expenses off, leaves $3,500. That $3,500 is split between the house or the company and the rep. And I see a lot of people talking about this. So first thing you need to consider when you're thinking about paying your salespeople is why do you pay them or the other? And I'm going to give you a real simple rule. If you as the company are in charge of the profit, in other words, especially if you're doing insurance restoration, you're doing supplementing and stuff like that for them, you're negotiating costs with your suppliers and crews, you're saying that, hey, this is how much we charge for something. If you're retail, in other words, you say, hey, you can't go below this line. That puts you in charge of the profitability of the job. Or on the other hand, if you're allowing for that rep to be totally in control, control of the profit of the job. He understands cost for both labor and materials. He Understands his overhead costs, understands everything about it, understands gross profit margin and is responsible for it. Those are the two different ways that you decide how you're going to pay. If he's not responsible, the company is. You pay him off of the total revenue of the job. It's that simple. If he is totally responsible for it, it's the other way around. You got to pay him on the profit, because if you don't, he'll mess it up. And think about it. Think about if he totally in charge of the profit, but he got paid off of the revenue. So he goes out to sell a $10,000 job. Homeowner says, hey, I got somebody down the street that'll do it for 9,000. He goes, so can we, because all he loses is 100 bucks. Company loses $900 in that kind of a model. But if it's based off of profit, he's sharing a big loss in that burden. So he'll stick to his guns a little bit better. Where the other hand, if we're doing a revenue model and he's got to be paid off the top, we control those numbers. And, hey, we can't go below this. The homeowner says, hey, I got somebody down the street that'll do it for nine. You go, hey, they can't do what we do. We do it differently. Let's make sure everything lines up. Let's make sure that they are providing the exact same value that we are and that you think that value is worth $1,000 more or not. And so you have to stick to your guns a little bit better that way, because the company is saying, hey, we can't go below these particular numbers. So now we understand why we pay what we pay them. It's because either they are in charge of or they are not of the profit. I actually prefer not. The reason being is I have a lot of control as an owner of my business over my expenses that aren't necessarily something I want to share with everybody out there on the planet. And that's because I actually spend more than what most expect. You know, overhead of 10, 50, 50. So saying overhead is 10%, our company ran about 17 and didn't need to share. Why that was we did early on, and we changed over to the gross revenue model because that way a guy knew what he was getting paid right from day one. Every check he brought in, we would be able to pay him on that. Now, let's talk incentive. First off, we got to understand what incentive is. It's the thing that makes Us do everything we do. For example, I'm doing this video because I have some incentive to do so. I have this incentive to hopefully help this industry. I've taken from it for many, many years. Want to get back to it now. And this model that I keep seeing thrown out there over and over makes zero sense to me. I come from a real sales background where there was actually like quotas and stuff like that and requirements and expectations and goal setting and all this other fun stuff. And when I came to this industry and got introduced to it, they told me how we got paid, and I went, so I get paid like that whether I sell one or fifty. What's the minimum? What am I supposed to sell? Well, as many as you can sell one, sell 20, doesn't matter. And I was like, man, that just weird. Doesn't make sense to me. Seems cool. Like they're gonna pay me a top commission for doing nothing more than selling a job, which is nuts to me. And then once I kind of clicked to that, I went, man, there is so many such an opportunity in this industry. I see commonly this kind of growth model, like, you sell a certain amount and will raise your commission a little bit. But that stair stepping just grows over time. So let's say I will. I'm willing to pay you 10, 50, 50 as you hit some goals, and I may expect you to hit those goals during a year's worth of time. Sorry for the cars in the background, but this is an important video and I really needed to do it. So doing it here at my office outside where it's kind of nice and enjoying it. So we're gonna let that truck going up the hill here. Goodbye. But so if I understand incentive correctly, people do things because they have the right incentive to do so. You brush your teeth because you don't want your teeth to fall out. You cut your hair because you want to look decent and maybe meet a girl someday, or vice versa. You want to get your hair done so you meet a guy someday. Everything you do is based off of incentive. Great book about this, Freakonomics. If you've never read it, go read it. It'll change your life. And the way that you interact with people and understanding how you can get people to do what you want them to do. And then for the right reasons, not just for the wrong reasons. And if you ever feel like for whatever reason, nobody's doing what you want them to do and you can't understand why, I guarantee you it's the incentive that's the only reason Their incentive is not there. They don't see what's in it for them. They don't see the financial benefit. They don't see this vision that they're a part of. There's a reason that they're not doing what you want them to do, and there's a lot of them. We actually coach on what some of those reasons are and help contractors kind of get that figured out. But let's get back to this commission thing. So I got into this industry and did pretty well. We had our own company, did good, and decided to move into the software thing and got involved with acculinx and started going around asking all these contractors like, you know, what was your revenue last year? How many sales reps you have? And that's kind of a selfish question at first, because I was trying to figure out, could you afford acculinx and how many users would you have? And I kept those notes, though, all those notes, all that data, and I started to notice a pattern that contractors, no matter where they were, their sales reps were averaging about $500,000 in sales. I was like, why is that? That's strange to me. I mean, I know that per square and per job in Minnesota and Wisconsin is significantly different than Texas or Alabama or Arkansas. Why in the world are they selling the same amount on average? Because I take the revenue divided by the number of reps, and sure enough, almost every company is between 450 and $550,000. I couldn't. I didn't get it. I didn't understand because I knew what my guys were. My guys were a little over $800,000 on average, and I wasn't putting two and two together quite yet. So I started asking a few people, and I went to a couple of universities and colleges and started asking statistics and economics folks, and they didn't know. So they say, hey, go talk to human behavior guys. Human behavior guy is first question out of his mouth and clicked to me right away, goes, well, what are they expected to do? I was like, wow, nothing, really. There is no expectation. You can sell one, you can sell 100. Doesn't matter, just sell them. Go sell as many as you can. And when you don't have an expectation, you leave it to human behavior. And human behavior tells us that we will do as little as we have to do to survive and pay our bills and our own version of what survival is. But the average normal American here needs about $65,000 or so to survive. And so he sells to that number, and that's why you see this $500,000 approximately, maybe a little higher, because those commissions kind of relate to that 55 to $65,000 in income. And so, and I also noticed the ones that were doing it off revenue, ones that were doing off profit, ones doing off revenue guys are selling a little bit more, but not necessarily a lot more because it was all based around the same numbers. So this tells us that if we understand incentive, if we apply that incentive correctly and say, hey, the more you sell, the better I'll pay you, the less you sell, the less I'll pay you, people will do more. Crazy enough, the way it works. And so I coached a lot of contractors on this, a little over 300 at this point. And the belief systems are amazing. The things that I see that are out there differently range widely. I have one guy, a coach, couldn't believe anybody could sell over $350,000. Can you believe that? That's what his brain told him. That's it. Then we have another guy that his company, nobody's allowed to sell less than 1.5 million. Which I thought, wow, that is impressive. Just met one recently said, I expect at least 2.5 million. How does that happen? Why is that so wide ranging? Why do they believe so differently? It's right here. They believe it. And once they believe it, if they can apply incentive to it, they can achieve it. So how do we do that? Well, I kind of like the concept of what we call quota expectations and goals. So let's figure out a number that we want a guy to sell on. Expectations. I expect a rep at my company to sell this much. Whatever that number is. I kind of like the number of a million. I expect that low side, the point where I would fire you because I don't want you on my team and you're a waste of my time. You're a virus to Everybody else. Is $500,000. And then on the high side, goal, I want you to sell 1.5. Very believable, very achievable. Based on today's numbers, average job being around $15,000. All kinds of achievable to hit even the goal. Not hard to do in any way, but so you break that up over about a 10 month time span. That's usually what we coach or 40 weeks is maybe a good way to look at it as a workable time. What do I have to do to get those numbers averaged out? So if you're looking at 500,000 over that time, you're looking about $50,000 a month, a million. You're looking $100,000 a month, $1.5 million $150,000 a month. So there's my numbers. Quotas, 50, expectations is 100, goal is 150. So everything below 100,000 is going to be paid at quota. And so quota is the lower end of the spectrum. And say, I'm going to pay you off a profit as we're talking, I'm not paying you 1050. 50, I will pay you 10, 30. You're a low producer. You're not working hard, you're not busting your tail. You're not putting the time, the effort, the energy to learn what you got to do to become a master and go out there and serve more people to be great. So why would I pay you like you're great? It makes zero sense. And so maybe you want to do a little bit more and you want to hit that hundred thousand dollar mark. Great, you hit the $100,000 mark for the month. I'll pay you 40% because you're hitting what I expect. That's what I expect. But those guys that really want to bust tail that 20%, those guys that really want to kill it want to go out there and get that 150,000 because it is achievable and it is believable, I'll pay you that 50% that everybody wants because you deserve it. So that's how incentive works. What will happen is you will have people that will walk into your office and literally quit because they're not hitting quota. And quota is the minimum. Man, you're not even on the team. You're not a bench player. Bench player means you're making quota expectations mean you're in the game and I'll give you some leads and stuff like that. And heavy hitters that are hitting the goal, man, you get all the easy, easy leads. Go close them because I need them. We spent good money on them. Why would I give those to a bench player? Somebody just hitting quota doesn't even make sense. Push your team, push yourself, push them to be champions. Let them know there's an A, B and a C team and you want every single one of them on the A team. But it's their job to get with you and work and work hard to be the best. And if they are the best, you'll give them the right incentive, they'll make great money, they'll love working for you, and your culture should be king. And they want to be part of it because they are on board with you going to where they're headed. And so the reason I'm posting this is, like, somebody said, hey, I think that Jim Johnson guy gets paid to tell you stuff like that. We tell people stuff like this all the time. I've done this video before, a long time ago. I've shared it at events and things like that all the time. So I want to, like, put it down again, give it a video. I'm actually going to put it out there on our podcast as well. I'm going to post this on Facebook. I'll post it wherever I can get it. YouTube, so you guys can watch it and start to understand a little bit about how you might be able to apply this to your business. Because here's one thing I know after coaching a little over 300 of you, very few of you will actually do this, but it'll be sitting there, be in the back of your mind, and you know you need to do it. You know you need to implement. You know that, you need to understand it clearly if you need that kind of help. That's who we are. That's what we do. We help contractors really achieve these goals that they're after. We kind of look at it as empowering you to believe in you, and we give you these tools because you got all this stuff, this stuff that you know that you want to do and you're trying to execute and you just feel like it's not getting done. That's where coaches come into play. They help you get those things done. They help you work on those fundamentals. They help you implement the things that you. You're trying to get into your business and hold you accountable to getting them done. You think about your coaches in high school or wherever you were, or whatever teachers you had. If you didn't turn in or show up, you didn't play, you didn't score. So that's what coaches are for. Boy, I sound like Dr. Seuss. That's great. So, guys, if you need a coach, if you're thinking about a coach, you may have never really even considered it before, and you think, hey, maybe this guy might be able to help us. My team here is awesome. We've got finance coaches, we've got culture coaches. We've got coaches that know the whole shooting match, like Nathan and Jenny. They help quite a bit. If you think about it, and it's something that's like, hey, kind of speaking to you a little bit. There'll be a link down below. It's an application. We don't take everybody we take ones that are ready. They got the right leadership, they're ready to go, they're working, willing to put in the hours and time, the work of the effort because it's not easy. This is if you, if it's a get rich quick thing. You see a lot of those out there, those loud guys that you see out there all the time. Yeah, man. Go follow them if you want to. You might get a tidbit or two, but they're not going to help you run their business because they don't care about you. And we do. It's part of our core values. We're here to love, serve and care. We're going to do that for us, you contractors, because we care about the consumer. We want the right guys out there working. So if we can help you in any way, you can get a hold of us, go to contractorcoachpro.com follow us on Facebook. Same name, Contractor Coach Pro. Join us in our free training room where I'm going to put this video at the contractors training room group on Facebook. Follow us on YouTube and most of all, follow our podcast, Contractor Radio. This is where you'll be able to save and download and subscribe to stuff just like this to help you with your business. Because we do love and serve and care for you guys. The contractors hope to see you in the future. It's been Jim Johnson, head coach here at Contractor Coach Pro. Have a great week. Remember that incentive and make sure you apply it to help people become champions. We'll talk to you later. Bye.