Needing help with establishing a commissioned sales program

My employer runs a very successful 50 year old roofing company, but they pay salary. They want to go to commission only, but they haven’t come up with a plan. The motvation is that they want to expand, but they don’t want to bring “deadbeats” in on salary. There are two of us selling now and we run the whole show (scheduling, ordering, inspections, etc…). I still manage to close 40+ percent. The two of us work together and even in this economy (and distracted with all of the details of production, therefore not focusing on sales full-time) we are on track to sell just over $ 1,000,000. The problem is that the overhead is so large that with only two people doing the work, there is no room for pay increases. The company used to have a large commercial/ressidential paint division that shared the overhead, but that is gone, so we carry the burden. I want to present a working model to them so that they will get on with the program, hire more sales people, get a production manager and I can start making more money. I have read about percentages for commission, but who is paying for the workers comp and the matching social security, unemployment, etc…? If the salespeople are independent, then they receive a 1099, furnish their insurance and that answers that question. If they are employees, then are the items above paid independent of the percentage by the company or deducted from the gross commission? In other words, do the sales people get the whole percentage and does their paycheck look like it would if they were paid normally, with only their share of the taxes deducted ? Also, I would like info. regarding having a sales mgr. and how he is paid, if anyone has such a situation. Any help is appreciated.

Bully Bull,

Lot’s of questions to answer, lot’s of things to consider too. It’s great that you see an area in the company that you want to provide a solution for. That’s a big value add to your company and a mark of a leader!

When ever you get ready to expand with sales reps, you need to be sure the business foundation can support it. There’s more to consider than just your posted questions here- although this is a good start.

I am not a CPA, accountant nor am I disposing legal advice- just have been in business for over 18 years and have hired/fired sales people along the way. Have done it every which way you can think of.

First-look at the overhead. If it’s already tight, how can you reduce unnecessary expenses? Or- how can you get creative to increase cash flow? (for example- can you sublet out some of the building/space that the paint division took up?) Reason to say this is that it can be very expensive and costly dollar wise and time wise to hire and train sales reps so some extra breathing room with cash flow will help.

Second, with the shift in economy, better sales people are available. Not too long ago, the idea of offering only commission was like a four letter word!! I come from old school values- and my sales trainers were the best of the best. They weren’t afraid to get out there, roll up their sleeves and Get-R-Done! Recently though, many people who call themselves sales professionals- may talk a good talk upfront on commission- but many really lack the confidence and drive to do what it takes. They will tell you one thing in the interview, and if you have them start selling for your company, many will sing a song of “I need a draw now…” Make sure you interview very good- there are some of the more confident and competent reps available who WANT to work on commission, you just need to be patient to find them. Desperate hiring ALWAYS backfires!

With that, I’ve had plenty of jobs where I was a commission only employee… and we’ve had the same in our company. Company takes out all taxes, work comp, etc, out of the commissions paid to company. Be sure to have received payment from client before paying commission! Otherwise, you now have a ‘draw’ situation and that can get tricky if the rep later does not produce. They get paid, often cannot repay the draw- and you’re out $ for a sale that could bounce.

If you go 1099- which upfront sounds easier, you have a very fine line to walk so be sure to really understand government regs on this one. As a 1099 rep- meaning, you and that person are agreeing that they are working for you independently- you cannot tell them what to do, how to do it, when to do it, where to do it. They should come to you ready to go. Technically, they need their own business license and need to invoice you to get paid. (Again, check fed and state codes in your area- this can be a potential audit area if the rep does their taxes incorrectly.) If you can find that person, great! If they actually perform- that’s even better!

Sales Managers need to know how to sell too. Usually, most companies choose to pay a manager a salary plus a bonus on sales their reps produce. Some companies may have that manager also selling (can be done if they companies internal systems are strong)- with a bonus commission pulling from all the reps totals for the month. Every business does this one different. Those are just a couple ideas.

So, this leads me back to the beginning. Look at your company structure and internal operating system. It needs to be strong and solid. Remember that when you do hire a rep- part of the cost is finding them, training them and then managing and maintaining them. Productive reps need good management.

Regarding the percentage of commission- that is a relative subject. Meaning- each industry is different. I have clients whose companies work on a 50-60% profit margin (not mark up)- so they sometimes will offer incentive’s for the rep and budget at times up to 25% (if the rep gets all their own leads). Other times, a company can only offer 2%- but that can be a lot if the ticket price is high.

Look at operating costs, profit margin, cost of living in your area, and start from there. What is the profit margin your company is willing to work with? If you budget 20% (just for example)- start the rep with 10%, give an incentive for an additional 5% for reaching a certain monthly goal- and then you can even play with an extra 5% if you set a super high(but achievable)goal. Again, each company is different in this area- so look at the existing numbers first.

Sales reps like competition, and rewards - so keep that in mind too for part of your operational costs on this.

Last, be sure they know how to actually close. A new breed of ‘sales reps’ and selling psychology evolved over the last decade. It’s the premise of ‘telling’ and not selling. Consumer behavior did shift- and buyers are more educated now than ever before, so being able to talk, build a strong relationship and do consultative selling is needed- but if they only get to that point, you’ve lost the sale. You still need closers.

I would be glad to refer you to a couple of easy to read yet timeless books on selling and closing if you want. Here’s one to get you started if you’re interested. It’s called “Masters of Sales” sweetmarketingsolutions.com/books.html

Here is another one. It’s called “The Closers”. bfg3.com/products.asp

Anyway, hope this helps somewhat!

D.

I am in the camp that strongly believes any Salesperson worth their salt will be (and want to be) primarily compensated based upon commission. That can either be a direct employee or independent representative.

It doesn’t sound like your company would very well support adding direct sales people at this time, so you’re probably looking at hiring independent sales reps. The upside of independent sales reps is they only get compensated for what they sell. The downside is they are independent and hypothetically, to avoid conflicts with the IRS rules for being a 1099, you have limited control over what they do. I did a quick search on the net and found the following which lists the 20 rules for maintaining 1099 status: barecruiters.com/irs_rules_%20for_1099.htm

With respect to a commission program, it can be based upon sales volume, profit, performance against quota or any number of metrics. I think the ideal scenario is when it can be tied to profitability. I also happen to believe this can be done with roofing. This is not true with some industries, products/services, etc…

The formula we use is one based upon a percentage of the overall job being taken for overhead or office cost. This covers costs provided by the company such as business cards, advertising materials, Xactimate costs, funding the job (purchasing the materials and paying the crews), insurance costs, etc… From there, there is a split of the profits. We pay 10% of the front end or deposit check, 10% of any intermediate checks and the final commission payment is made following a final payment for the job at which time the profits can be calculated.

I have seen this range from 20/30/70 (%20 office cost, 30% of profits to rep, 70% to company) to 0/60/40). To date, our own range has been 15/50/50 to 5/50/50.

To help this make sense, here is a real life example. Say the sales rep sells a $10,000 job and is on a 10/50/50 plan. $1,000 (10% of the job) is taken by the company for the office cost or overhead. That leaves $9,000. Say the job ends up costing $7,000. You then have a $2,000 profit ($9,000 minus $7,000). With the 50/50 split, the Sales Rep’s commission is $1,000.

This will obviously vary depending on the types of jobs your company does but I’ve found that for jobs that are insurance rate funded, a Sales Rep getting the 10/50/50 split will average from 10% to 20% of the total job in commissions. If you have a job where the insurance pays O&P, it is at the higher end. If it is a larger roof job with steep, double steep and high charges, the Rep will average 15 to 18% of the total job. Small, simple cookie cutter roofs will pay 10 to 12% in commissions.

The variance in the split is generally linked to the capabilities of the Sales Rep and the overall portion of the job they are capable (or willing) to perform. A highly capable representative that can make the sale, accurately measure/diagram the roof, write their own Xactimate, handle the Adjuster Meetings, conduct material selection meetings with the HO and pick up the deposit, put together material orders and roofer instructions, discuss supplements with the insurance company, visit the job site during construction, etc. would likely get a split of 10/50/50 or 5/50/50. At the other end of the spectrum, you may have a Sales Rep who only makes the sale and does little after that, so their compensation/commission goes down accordingly.

When taking this approach, I believe it is important to have a reasonably well written Sales Rep Handbook that describes the job function, expectations, etc… For example, our Rep Handbook includes a code of conduct, descriptions for filling out contracts, diagramming/measuring a roof, what to look for with storm damage, do’s/don’ts in conducting Adjuster Meetings, how to chalk a roof and take pictures and several other topics important to us.

One other important issue would be Workman’s Comp and Liability. This is something you probably want to review with an Attorney familiar with local law.

2 Sales People are now selling $1 mil of work? Is that correct?

What is your location? I currently am a Regional Sales Manager in the mobile hydraulic industry in Iowa. I have a part time roofing business on the side. If it is not a conflict would you have a sales opportunity open?