Commission compensation is a minefield for flat rate service firms in particular.

My good friend Jim "Word Wizard" Olsztynski beat me to the punch with his column in last month's edition. His commentary on "Incentive Compensation" was right on the money. In it he correctly identified me as "a staunch believer in hourly pay over commissions."

It's a subject I've never addressed in print before, mainly because I have many good friends around the industry who are on commission pay systems, and I don't want any to think that I am blasting them. However, now that the ground's been broken, it's time to build on it.

As "The Wiz" pointed out, it is possible to operate in an ethical manner paying commissions, and most of the commission contractors I know try to do so. They really have to keep on top of it, though. We're dealing with basic human nature here. When the amount of money a person makes is solely determined by the amount of revenues he or she generates, how do you tell that person not to do everything possible to maximize revenues?


Everyone who has attended my seminars or read my columns over the years knows that I have nothing against selling and making money. But I don't want the service technicians who work for me to think of nothing but selling. Their primary responsibility is to figure out what's wrong and solve customer problems. Sometimes that means a simple inexpensive repair. Sometimes it means a costly replacement. Usually customers are best served by quoting both options and giving them a choice. Often the problem is tricky to diagnose. The service tech may need to take more time than usual to check things out. Someone on commission is always tempted to rush.

I think it is asking for trouble when a service tech can make the most money by automatically promoting the highest priced option. There are many susceptible customers out there who can easily be frightened into buying expensive repairs or equipment they don't really need. Our job as PHC professionals is to give them our expert advice on what's needed to protect their health, safety, comfort and convenience. Let us price our services commensurate with the valuable knowledge and skill we bring to that task, and never apologize for that. But let's not sink to the level of snake oil peddlers in loading them up with goods and services of dubious value.

This is why I have always taught that service contractors should assign their overhead burden to labor rather than materials. It's always puzzled me why time and material advocates consider it a "rip off" to charge more than the "going rate" for labor, but think nothing of doubling or tripling the price of materials in order to make money. Where's the logic in that?

If you put your normal profit margin on both materials and labor, you will remove the incentive for service techs to push materials at the expense of professional service. There also won't be such a great discrepancy between what you charge and what your customers see at the home centers.

Another problem is that I hear my commission-pay friends constantly complain about service techs not showing up for work after an exceptionally good day or week. To some service techs, commission pay provides incentive only up to the point where they reach their comfort level. Once they do that, they feel free to behave like "slackers."

The Red Cape

The biggest headache of all is the PR problem with commissions. If you're an astute service contractor familiar with your costs of doing business, you are no doubt flat rating your service charges with built-in labor costs substantially above the prevailing "slug" rates in your market. This is bound to generate complaints about your prices.

As long as you are providing professional caliber service and operating your business is accordance with government regulations, you should be able to justify yourself as a legitimate business operator. But let's face a harsh reality. The consumer protection authorities don't like to hear that a company pays its service techs on commission. Whatever else you may be doing right with your business, this is like waving a red cape in front of a bull. I know well-meaning contractors who have spent hundreds of thousands of dollars defending themselves against charges of unfair business practices. All service firms are vulnerable, but paying commissions reduces your credibility with the public and consumer protection people.

Besides, nothing that I've seen in four decades of working in this industry tells me that commission companies are any more successful than hourly wage contractors who know how to correctly price their services. If you price your labor intelligently and have a good dispatching system to maximize billable hours, you and your service techs can make just as much via hourly wages as on commission.

Our company's service techs produce almost 80 percent billable time. Partly it's so high because we charge a house call fee that is not credited to work done. In essence, they are getting paid for travel time, as it should be. I've never understood the commission logic of not paying your people while they are in transit between jobs. Are they not still working for you? Aren't they still in command of your vehicle and your inventory? Should they be punished for getting tied up in a traffic jam? Don't you think this promotes road rage and reckless driving?

True, there's something to be said for the simplicity of a fixed direct labor percentage that comes with a commission system. But on the other hand, you have to convert commissions to hourly pay to satisfy the wage and hour authorities. I'm no dummy, but I've seen the calculations needed to do that, and it makes my head spin. So you simplify your financial management on one end, only to complicate it somewhere else.

'm not convinced that fully commissioned service techs work any harder that the people at Blau Plumbing & Heating who are paid by the hour, plus get an opportunity to earn a few extra bucks in spiffs for selling Bio-Clean or other affordable add-ons. Employees gain incentive to work hard from overall job satisfaction, not just immediate sales. Pay them wages and benefits above market rates, and they'll do what's right for themselves, the company and your customers.