[RE-wrenches] [RE Marketing] sales commissions

All Solar Inc. allsolar at scswifi.net
Fri Feb 12 08:38:39 PST 2010


WOW.
That a lot of info.
I couldn't even read it all. :)


  ----- Original Message ----- 
  From: Antony Tersol 
  To: gilligan06 at gmail.com ; RE Marketing for home scale RE industry 
  Cc: RE-wrenches 
  Sent: Thursday, February 11, 2010 2:47 PM
  Subject: Re: [RE-wrenches] [RE Marketing] sales commissions


  Every once in a while, there's a posting that's worth saving.  This one goes in the "Organizing your business" folder.  Thanks Matt.  With this much wisdom available for free, what could I get if I bought you lunch and a beer?


  On Thu, Feb 11, 2010 at 1:11 PM, Matt Lafferty <gilligan06 at gmail.com> wrote:

    Is it OK to be chicken sh#$ with salespeople who are full of bull sh#$ ?

    I don't know if this qualifies as the "wisdom" you were asking for, Marco,
    but here's my take on the topic:

    I am in favor of being fair and supportive with employees. To a fault.
    Outside salespeople are different animals and may need to be treated
    differently than other employees. More often than not, in my experience,
    outside salespeople with commission-based compensation are the biggest "Me
    First" SOBs in the business... Regardless of whatever business or industry
    it is. If they are a Pure Salesperson, they came from another industry where
    they had the same attitudes and practices. They do whatever it takes to get
    their commissions and they snake around in any manner possible to ensure
    somebody else deals with all the headaches they cause. A commissioned
    salesperson is a hired gun by nature. Quite often they have little to no
    loyalty to the employer or the customer. If things get slow or they're not
    making the $$$ they thought they would, or they simply get bored, they move
    on. But not before they get everything they can from you. If you (the
    employer) are paying for their cell phone, 3G wireless, car, laptop, etc.,
    they will use all of them in their quest to find their next job. Seen it
    happen more than once.

    I can think of precious few individuals who are the exception. That being
    said, I still believe in treating them fairly and honestly. After all, these
    are the folks who get your company in the door with your customers. They
    would tell you that you don't have a business if not for them. Depending on
    your business model, this may be true to some extent. It may also be
    completely untrue and, if it is, you need to adjust their attitude.

    In answer to Marco's question about commission payments for expansion
    projects, I believe several factors come into play... Some of which have
    been mentioned by others and some have not.

    For the edification of Mainlanders, I think it is important to understand
    that Hawaii's current incentive structure favors expansion of PV systems
    over multiple years. Year One plus Year Two systems equal a total project.
    Asking the question of how best to deal with commissions in this environment
    is fundamentally different from asking it in other regions. Keep that in the
    back of your head.

    For the purpose of general evaluation, regardless of the region, I would
    first address the question by asking if this is an infrequent situation vs.
    one which is common or expected to be common? In the case of the Aloha
    state, I would check the "common" box. This creates the need for a company
    policy on the matter vs. dealing with it on a case-by-case basis. In areas
    where actual future expansion is rare, I'd say the salesperson's
    compensation should be what it always is. If your company did the original
    installation, I might even recommend an extra spiff. Times are tight. Going
    back and mining your existing customer base is good business.

    So.... Let's make a Company Policy. Since it appears that
    commission-based-on-actual-project-profitability is not what we're doing, we
    need to address three scenarios:

    Scenario 1: Your company did not do the original install.
    Scenario 2: Your company did the original install and this salesperson is
    the orginal salesperson.
    Scenario 3: Your company did the original install and this salesperson was
    not the original salesperson.

    Scenario 1 is easy. They deserve full pop. Pay them like it was a
    stand-alone job at whatever kW you're selling. Doesn't matter if they were
    the original salesperson or not. If they were the original salesperson, buy
    'em a beer, too. Then tell them to get back out there and keep bringing in
    their old boss' customers! (Note of caution: In Scenario 1, pay close
    attention to the job costs and adjust your prices upward if needed. When
    calculating job costs, be sure to include a number that covers warranty and
    service reserves. Following others onto a jobsite has potential downsides!)

    The other two scenarios require a look at the actual compensation structure
    and what the salesperson actually does for their paycheck. If less than 50%
    of their gross compensation is commission-based, I say give them the full
    commission in both scenarios. Treat it like two separate jobs and call it a
    day. For purposes of calculating gross compensation, include any stipend or
    base-salary, as well as any commissions and employer-paid benefits
    (Retirement, Health Insurance, Vacation Pay, Performance Bonuses, Etc.). For
    the purposes of defining "commission", I include any base "per-job" and any
    "quantity-based" wages. Quantity-based wages include things like $/W or % of
    anything. I would not include performance bonuses on the commission side of
    the equation, but you may think otherwise.

    The greater the percentage of gross compensation that is commission-based,
    the more I would start weighting what they actually do for their paycheck in
    figuring out how to deal with the expansion compensation. How much of the
    design work do they do? Project management? QA/QC, permits, incentive
    paperwork, final delivery and customer orientation? Do they support the
    whole team or skip out when it's time to empty the trash cans and wash the
    coffee cups?

    If all they do is get people to sign stuff, and whatever preliminary
    "design" they hand off to the design staff is always way off from what it
    really should be, that's one end of the scale. (This is probably the person
    you wish you could fire but, for one reason or another, haven't yet... Maybe
    they're the only person doing outside sales besides yourself and you don't
    think you can afford to lose sales right now, for instance.) If they bring
    good survey info and a preliminary design that actually works back to the
    office after their first site visit, and they help out all the way thru the
    project, and are good with communication, and are good team players overall,
    that's the other end of the scale.

    Anybody who is pulling all of their own weight, and maybe more, deserves
    full pop in all scenarios. If, for some reason, this "breaks the bank" on
    these expansion projects, your current compensation structure is wrong in
    some way, and you need to take a look at it. Any sales compensation
    structure that does not generally track the profitability of the jobs is
    ill-conceived and needs to be revised. Compared to profitability, sales
    compensation might be a little more on some jobs and a little less on
    others, but the trendlines should be pretty much parallel. Revising the
    compensation structure might include a revision to your pricing strategy,
    too.

    For Scenario 2 projects, test your current compensation structure against
    treating the aggregate job as a single project. For example, if the project
    ends up being Year One @ 3kW plus Year Two @ 3kW for a total of 6kW, how
    much would they have gotten if it was a single 6kW? Subtract whatever they
    got paid for the first 3kW from that and how much do you have left? Is that
    a reasonable amount for the actual work they need to do for the Year Two
    phase? Be sure to consider that, had the incentive structure been different,
    they likely would have sold the people the full 6kW the first time around.
    If the expansion was discussed and accomodated in the design of the original
    system, in fact, they did sell the full 6kW in Year One. Year Two, they
    really are doing paperwork for the sake of formality. The expectation,
    substantial planning, and relationship building all happened Year One. In
    these cases, the effort on the part of the salesperson is weighted far more
    heavily in Year One. It is certainly reasonable to expect the compensation
    trajectory to be similarly weighted. If the "remainder" from the test case
    is not sufficient, how much of a flat-fee would you need to add to account
    for the extra time compared to a single project?

    Here's how I'd approach that: Assuming similar margins, a 6kW job in 3kW
    pieces over two years is more expensive for everybody than a single 6kW.
    Pencil it out. How much more expensive? If it was a single 6kW project under
    your current compensation structure, what would your salesperson cost as a
    function of % of revenue? Multiply that percentage by the total Two-Phases
    price. This is the gross project sales compensation. Subtract Year One
    compensation from this number and you have your Year Two compensation. If
    they snivel about Year Two being too little, explain that Year One was
    obviously too much and all Year Ones from now on are gonna be compensated at
    a lower rate to allow for Year Two compensations to be better. Stand your
    ground and back it up. (This scenario could very well happen if you
    front-load profits in the Year One phase and run lower margins in Year Two
    phases. If you are doing this, you should consider that a bunch of Year Two
    jobs in a single year without an offsetting amount of Year One jobs just
    might bankrupt you! Consistent, increasing margins are your friend!)

    Scenario 3 projects are a little more difficult, but not by much. Where is
    the salesperson who sold the job in Year One? If they are still with the
    company, why aren't they taking care of their customer? Unless they are on
    their way out of the company, they need to get their hind-end out there and
    take care of this customer. Then follow Scenario 2 rules.

    Due to the unique nature of an expansion, consider an hourly or flat-fee
    arrangement if you have a different Year Two saleperson. This is about the
    most qualified lead you could hope for, after all. Not a lot of specialty
    "salesmanship" necessary, but they don't have the personal relationship with
    the customer so they have to make that happen. If the job was handled
    correctly the first go-round, this is an exercise in paperwork as much as it
    is anything. If there were "issues" from the first phase, particularly if
    they were caused by the salesperson, then the new salesperson is gonna have
    some extra cleanup to deal with. A decent, professional hourly compensation
    in these cases should be fair to both of you.

    Managing a business that has the diversity of tasks associated with
    Incentivized Grid Connected PV is a challenge, to be sure. The size and
    model of your business matters. If you are running a business that is
    basically Sales, Engineering, and Project Management, you have a different
    set of challenges to balance from one that does turnkey, in-house
    integration. If you have an organization large enough to have very defined
    sets of responsibilities for everyone (i.e. Sales, D&E, Procurement, PM,
    Construction, Delivery, Admin), you probably have more leverage in keeping
    the salesperson in check and keep them focused on the sustainability of the
    company. They are more replaceable in this type of organization than others.
    In fact, the salesperson is the MOST replaceable, LEAST valuable commodity
    in this type of organization. Sales is sales. There's another vinyl-siding
    salesperson out there who will be happy to take their job... If you're
    running this type of organization, get that point really clear in your head.
    I wouldn't club people with it until they deserve it, but I would make sure
    they know I know from Day One!

    In an organization where everyone has to wear multiple hats, you need a
    cohesive team more than the former organization does. I am for
    team-building. Successful teams are built of individuals who pull for the
    team. This starts at the top. If everyone is compensated according to their
    value to the team, they will work toward the progressive edge and all boats
    will rise. I am for structuring a sales compensation package with a modest
    base salary and commission based on per-project profitability, with a
    profit-sharing spiff at the end of the year. Not every hired gun is gonna
    think that's a great idea 'cause they want the money in their hand today.
    Lazy-ass wannabe hired guns will slacker themselves and your company into
    mediocrity. You don't want either of these on your team. Both of these
    personalities are poison. You want the steady straight-shooter who takes a
    longer view of things than just their next paycheck. Consider that changing
    incentives create a boom-bust cycle. We all have to make hay when the sun
    shines, but remember that the rain is gonna come. Be straightforward about
    that with everyone. Make sure the company keeps building a warchest to keep
    people employed during the down times. Share the wealth, but make sure it's
    real wealth and not just a monthly bubble!

    The matter of how best to compensate the salesperson for an expansion
    project really depends on your existing compensation and company structures.
    One area I didn't specifically address above is a non-employee/contract
    salesperson. Frankly, I think they fit under the Scenario 2 & Scenario 3
    models. If your pricing and compensation structure is too heavily weighted
    on Year One and they aren't chasing down the Year Two projects, you need to
    change something. Either raise the price on Year Two to cover, or drop the
    Year One compensation and hold something in reserve to carry to Year Two
    compensation. I like the latter... It tends to reinforce that this is an
    ongoing business and that there's still a carrot out there to go get. It's
    too late to get some of the Year One compensation back for use against Year
    Two if Year Two is here now! This is where you (the boss) have to lean on
    them and impress the point that they already spent the dough and really
    don't have that much to do for the Year Two balance. And put a help-wanted
    ad on Craigslist.

    There are fat years and there are lean years in every business!

    Some general guidelines and considerations for Salesperson compensation
    structures:

    *  Don't let a salesperson hold your gonads.
    *  If you are keeping good books and tracking everything pretty tightly,
    sales compensation that is tracked to profitability is the best and fairest
    for everybody. (If the salesperson is a shark and you let them price stuff,
    the possible exception to this could be the customer.) This model is really
    good because it inpsires the salesperson to help reduce costs where they
    can. Overall project efficiency drives lower costs more than any other
    single factor. Accuracy at every step is the BEST way to increase
    efficiency. Encourage accuracy and thoroughness. Discourage actions and
    behavior that requires anything to be repeated or re-done on a project.
    *  If you are giving the salesperson latitude to drop the base price on jobs
    without getting too far into their own pocketbook, your profits will be
    lower than they should be. You probably have the ratio of "per job" base-pay
    to "quantity commission" skewed too heavily on the "per job" side. This
    symptom also shows up if they are commonly "missing" stuff on projects that
    should be an adder, but you end up not charging for. This model is bad for
    your business and salespeople that take advantage of it are lazy scumbags
    that are already looking for greener pastures. Kick 'em to the curb, revise
    your pricing & compensation structure, and get new blood.
    *  Determine what role(s) the salesperson is expected to perform in your
    company. Really give this some thought... Do you expect them to know or
    learn the ins and outs of solar from a technical perspective? Do you expect
    them to do site surveys and hold them accountable when their info is
    inaccurate or insufficient for design or construction? Do you expect them to
    participate in non-sales team meetings and show up in the office on a
    regular basis? Do you plan to provide sales-tech support/engineering? How
    much and when in the process? Where do your leads come from? Do you need
    somebody that mostly answers phones or someone who is out there beating the
    bushes? What is your primary market? Residential, commercial, utility? Do
    you need somebody who can walk in the door, hit the ground running, churn
    the deals for 6 months then move on? Do you need someone who plans to be
    there for the long-haul and build a business with you?
    *  Do you want/need a Pure Salesperson for your organization? Pure
    Salespeople are those ones that can "sell ice to an Eskimo". Pure
    Salespeople, by nature, are NOT engineers (if they were engineers, they were
    lousy engineers). They can't stand and don't see the importance of technical
    details. They don't care about accuracy in anything other than making sure
    their paycheck is as big as possible. A Pure Salesperson is self-centered
    and has ADD about all things that don't smell like money in their pocket.
    This characteristic has upsides and downsides. Depending on the depth,
    direction, and maturity of the rest of your organization, the upsides may
    outweigh the downsides. In some companies, you might want that shark and
    have the back-end to deal with the headaches they cause. Personally, I don't
    like these types, but I give them their due. Think about it like this: We
    all hate lawyers, but when the sh#$ hits the fan, we want the most ruthless
    scumbag possible on our team and we pay for it. Pure Salespeople are that
    ruthless scumbag. Do you want that same level of ruthlessness on your team
    every day? Do you have the back-end to deal with the fallout?
    *  There is no "magic number" that salespeople should be paid. You need to
    evaluate their role in your company against your margins and revenues. Be
    sure to consider your other marketing... On the whole, your gross "sales
    costs" include your "other" marketing costs. The salesperson is not the only
    one selling your company. Your entire company sells your company...
    *  If the salesperson's compensation is largely commission-based, it is
    common for them to push for you to pay for as much marketing as possible.
    Set your marketing budget and don't budge it. When they hit you up to
    sponsor another Home Show or Trade Show, offer to co-op the cost with them
    (including any hourly staff that you have to pay to be there). You can come
    up with a spiff program that reimburses them based on profitability of leads
    that come from the show. What's good for the goose is good for the gander.
    *  I am for accountability. Listen to the rest of your team. If a pattern of
    laziness or inaccuracy by the salesperson starts showing up, nip it in the
    bud. Be direct. If your design team is constantly having to re-do stuff that
    should be done by the salesperson, start docking their pay to compensate for
    the extra design costs. Same with admin. Hopefully your design team is
    catching stuff before you roll crews with tools and glass. I wouldn't allow
    more than one case of stuff not fitting before I start taking away
    paychecks. Just 'cause you're getting paid on commission doesn't mean you
    get to be a forkup.
    *  If your sales comp plan isn't directly tied to profitability, start
    newbies out cheap. Set the target compensation and ramp their pay based on
    performance. The goal is to get them up to speed and effectiveness as soon
    as possible. If, for example, they are going to be expected to do survey
    work and initial design/configuration, YOU are going to have to provide
    training and support necessary to get them to the point where they can
    actually achieve that in a manner consistent with your standards. Depending
    on too many factors to count, this can take quite a bit of time and
    everybody might starve meanwhile. Figure out if it's gonna work or not
    earlier rather than later.
    *  Sometimes the right person might require modifying the position. For
    example, you might find that the "right" person has zero technical ability
    but has other qualities that make them the right person. Maybe it's your
    wife or girlfriend or out-of-work brother-in-law. This might mean you have
    to send a separate survey/design person to every site prior to signing
    papers. Under most models, this person would not deserve the same level of
    compensation that someone who could do all the survey and preliminary design
    work would. Adjust the job description and compensation accordingly.
    *  Your salesperson has the potential to cost you more money than anyone
    else in the company.
    *  Your salesperson has the potential to make you more money than anyone
    else in the company.
    *  Matt's preferred structure for system sales: Modest base salary + %
    project margin + annual bonus based on company performance.
    *  Matt's preferred structure for PPA sales: Modest base salary + % actual
    annual operational margin paid 1x per year for Years 1-5.

    Pray for Sun & Super Salespeople!

    Matt Lafferty


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