The upsides of commission-based pay are compelling when taken at face value. It's virtually beyond dispute that incentive compensation motivates people to work efficiently and maximize revenues. Many commissioned service plumbers and technicians earn more than they could via hourly wages, and their companies make more money as well. Commissions mean predictable labor costs for financial management purposes. An incentive plan also engages the pay equity issue. Because people get paid in accordance with what they produce, many argue that this is the fairest method of compensating service techs.
All of these arguments I acknowledge and respect. I want to state loudly and clearly that there are many admirable PHC service companies out there that pay their technicians via commission. Please don't overgeneralize what I'm about to say.
Which is, that like many other people in the industry, I've never been a big fan of commission compensation for PHC service personnel. While granting the advantages just cited, I agree with those who think they are outweighed by troublesome downsides.
My misgivings have to do with commission compensation systems that generate all or almost all of a plumber's income. Hardly anyone objects to awarding wage earners a cut of the action for selling service agreements or add-on products such as Bio-Clean. Selling per se is not wrong, and without such rewards it would be hard to get service techs to ever sell anything. Trouble arises when these so-called "spiffs" represent the main course rather than icing on the cake.
The problems I see with straight commission pay are as follows.
- Overselling. This of course is the main criticism leveled against commission compensation. It's said that
service techs will sell people things they don't need, and be biased toward replacement over lower-priced repairs.
This doesn't have to be true. Honorable incentive-pay companies have management controls in place to discourage service techs from acting sleazy. Restraint comes from making them handle their own callbacks without compensation, from requiring them to quote both replacement and repair options, and following up service calls with phone calls to customers to check on their satisfaction. I've even heard of companies that debit commissions in response to customer complaints. Abuses pretty much disappear with a determined effort to prevent them.
Problem is, too many commission-pay companies are not very diligent about policing conduct in the field. The temptation is great to wink and nod at questionable sales practices when it is in your economic interest to ignore them, and especially when managers and service techs are under pressure to meet sales quotas. It's not just a problem in the PHC industry. The Sears automotive unit took a public relations beating a couple of years ago when many of its managers and mechanics were found to be systematically cheating customers. Investigators fingered incentive compensation coupled with ambitious sales quotas as the root of that problem.
Commission proponents tend to cover their eyes and ears whenever it's suggested that their people might cross ethical boundaries. One time I brought this up in a purely hypothetical way to a contractor, and he indignantly waved a printed code of ethics in my face, as if words on paper were all it takes to sway service tech behavior. Proponents usually counter that service techs on hourly pay sometimes oversell, too, which is undeniable. Yet, it's hard to take seriously anyone who argues that incentive pay lives up to its name in spurring service techs to increase revenues, but has nothing to do with pushing them over the edge.
- Complexity. The St. Louis Rams' playbook has fewer variations than commission plans for PHC service techs.
Some are based on a percentage of revenues, others of gross profit, some of net profit. Some have escalating
percentages at rising volume plateaus. Some have different percentages for material sales than labor, or pay
more for certain types of jobs than others. Incentive compensation is a specialty within the management
consulting field, and every consultant seems to have a different pet formula. I could probably eat up the rest of
this space simply listing all the permutations of incentive compensation plans that are out there in the industry.
Commission formulas tend to grow more and more complex over time because contractors are always tinkering with the arithmetic in order to achieve greater motivation and fairness. Some end up with pay formulas that look like a mathematician's doctoral dissertation. They confuse even the service techs who are supposed to be the beneficiaries, which undermines the motivational function.
Commission compensation also requires companies to convert to hourly equivalence, and adjust when necessary to assure compliance with wage and hour laws pertaining to minimum wage and overtime pay. All of these problems are surmountable, but they sure do complicate bookkeeping.
- Conflict. Techs on commission get displeased when assigned to jobs with little revenue potential. Their
dispatchers not only have to worry about time and distance factors and technician capabilities, they are under
the gun to allocate calls on an equitable basis. Conflict over favoritism, real or imagined, is common in
commission-pay companies.
Then there are the inevitable disputes when techs think they've been shortchanged on their paycheck. The more muddled the commission plan, the more this happens. All of this further complicates an already complex business.
- Identity crisis. As you all know, it's hard enough recruiting technicians with sufficient technical know-how. Tell
this scarce labor pool that the job you offer pays straight commission, and the few good ones available tend to
react as if you were the devil trying to buy their soul. The vast majority of PHC trade workers regard themselves
as plumbers or technicians, not salesmen. I'm not saying that service technicians shouldn't be expected to sell,
or that they can't be trained to do so effectively, or that you can't eventually convince them to work on
commission. But it is like trying to force a square peg into a round hole.
Many contractors say they give higher priority to interpersonal skills than mechanical ability in hiring service technicians. I don't entirely disagree with this philosophy. Most PHC mechanics were trained on the construction side of the industry where scary looks and a surly attitude don't matter. Whether you pay wages or commission, it's worth some tradeoff in technical ability to find someone people wouldn't mind inviting into their homes.
Sometimes, though, the tradeoff goes overboard. It does not do this industry proud to be represented by major league salesmen with minor league plumbing skills.
- The litmus test. Recently I was discussing this subject with a contractor who offered what he deemed the "ultimate litmus test" on commission vs. wages. He told me to ask myself, deep down, whether I would want a commissioned plumber to work in the home of an elderly mother or grandmother whose mind might be failing.
One could intellectualize this question and say it depends on the individual, but I got his drift. You all know what a vast majority of the American public would say.
Let's clarify something that's probably on some of your minds if you've read this far. This essay is strictly about commission compensation. It has nothing to do with flat rate pricing. Critics often lump the two together, but that's fuzzy thinking. Some flat rate firms compensate their service personnel with hourly wages, while others pay commissions. These are completely separate issues.
Unlike flat rate pricing, which is all but essential for a service firm to prosper, there's no such ultimatum attached to
commission pay. If you look at the most successful companies in the industry, you'll find both commission plans and
wage payers among them. PM's popular columnist Frank Blau, perhaps the industry's most influential service
contractor, has achieved great success over the years paying high union wages (plus spiffs). He is a staunch believer in
hourly pay over commissions.
Turnabouts
It was also interesting to learn that Jim Abrams, co-founder of Plumbers' Success International (PSI), is a convert to wage-based pay. The Contractor's Success Group organization that he founded in the early 1990s has gained a reputation for aggressive sales tactics, and Abrams used commission plans during his early career as an HVAC contractor. Why the change of heart? His explanation in an interview published in last month's issue was, "(Commission-based compensation) is not the best thing in the world for the customer."PSI colleague Mike Diamond, whose $16 million Los Angeles area company is one of the nation's largest PHC service empires, told me that it is his goal to convert to wages from a long-established commission system. This is in keeping with PSI's planned roll-up of plumbing service firms a few years from now. Prior to launching an IPO, the group wants to be hitched to a unified system of operations that will include wages rather than commission compensation for service techs.
What I read into these changes of heart is the realization that success in the plumbing business ultimately depends on gaining customer trust, goodwill and recommendations. I've never heard of a PHC service firm promote the fact that its technicians work on commission, because everyone knows most of the American public would shy away. As a general rule, it's good to change business practices that make customers feel uncomfortable.
