Incentive Pay Will Work For You
Pay For Performance: Performance-based pay is what I am talking about. It's a system where people are paid based on what they produce. Using a performance-based pay system, you know who is making money for the company and who isn't.
This information is valuable to any manager while assigning jobs or determining who stays on the payroll and who gets let go. Those employees who just showed up and tried to get by will now be easy to identify. You will not only pay employees just for work that brings revenue into your business, but you will be sifting out the people who don't produce. Both of these benefits will make your business more profitable and easier to run. At the same time, you will be increasing the pay of your best people more than you are now. They will appreciate the system as much as you do. Competitors will soon understand this concept too. So don't wait too long to implement a performance-based system.
Why hasn't every business switched to an incentive system based on performance? I think it is because of the uncertainty attached to changing the way they pay their people. Plus there are rumors of penalties or Labor Department rules that say you will face fines or assessments or damage awards from employees if you pay by any method other than a straight hourly rate. To some extent, I suppose, some cautions apply. If done improperly (like anything else) you may unnecessarily expose your company to law enforcement scrutiny. That's where I think I can help you out, by getting you started down the right path.
Of course, I can't replace advice from legal counsel knowledgeable about labor law. So consult with them to be sure your plan is well thought out and permissible in your state. I have faced federal authorities in a dispute before, so I am familiar with some of the intricacies of the rules and their interpretations.
After significant legal expenses, I was able to wind my way through the labor regulations and pay my people in a way I knew was fair and legal. Fortunately, you don't have to face the same battle. Once you understand the rules, compliance is relatively easy.
The Law: The section of the labor laws that addresses the performance compensation issue is known as "7i." Section 7i offers an election for employers to pay workers based on a commission structure instead of hourly. However, there are some limitations.
For example, you must guarantee the employees receive 1-1/2 times the federal minimum wage, which comes out to about $8 an hour. Meeting the requirement for paying that minimum rate has not been a problem. If your employees are out working, they will earn at least that amount if they receive a commission for the work they complete.
Translating the minimum legal requirement and computing what your commission rate should be is the next step. You are probably paying your people for driving, for going to the supply house and for waiting, or for any number of tasks that do not directly produce any revenue from customers. You must begin paying them when they arrive at the first job and keep paying them until they leave the last job. However, about half of the time they spend during the day is non-revenue producing. That means if they receive $15 an hour, your actual cost for them to be working at a customer's home is really closer to $30 per hour.
Consequently, if your flat rate labor charge for jobs is about $100 an hour and you pay a commission of 30 percent of the charge for a one-hour job, your technician will receive about the same pay he does now at $15 an hour. Let's see how that works.
Reviewing the computations, we see the commission is $30 (30 percent of $100) and half of the technician's time is non-revenue producing, so he earns the equivalent of about $15 an hour on a one-hour job that covers about two hours total time, counting driving and other non-working time. You may want to reduce the percentage of the commission if your flat rate labor charge is computed at a higher rate. For example, if you calculated a $125 per hour flat rate labor charge, you may want to offer your technicians a 24 percent commission on jobs completed. That amount would still provide a $30 commission on a one-hour job.
The Labor Department wants to verify the amount employees receive for commissions will be equal to or greater than the amount they would have earned on an hourly rate at 1-1/2 times minimum wage - no overtime is required. These figures need to be demonstrated over a three-month period to satisfy the department's standard. So you need to pay your people the greater of the following:
- the amount they receive in commissions;
- or approximately $8 an hour.
Obviously, if a technician is only receiving a commission of about $8 an hour, they may be paid the legal minimum - but they are going to be reluctant to continue working for that rate. That is all, however, you have to guarantee the employee and demonstrate to the Labor Department.
Incentive pay can work even if you haven't switched to flat rate pricing. Though it may be easier to implement using flat rate pricing, you can still pay technicians on performance basis when charging customers using time and materials pricing. However, customers may be more likely to question the labor rate as being excessive when the hourly rate is broken down in T&M pricing. They forget the hourly labor charges are not the amount the company or the technician gets to keep, since the company has substantial fixed costs for overhead expenses. When flat rate pricing is used, the accounting for hourly labor charges is included in the price of the job from the customer's perspective. Technicians can always look up the value of the job to them in the form of commissions in internal company publications.
One of the challenges in paying employees on an incentive basis is that you may find some employee attempting to increase his personal income at the expense of the company's reputation. It is essential that all technicians for example, be trained to sell only work that is legitimately needed by customers. We have all seen media "sting" operations, where unsuspecting technicians are secretly video taped and caught selling unnecessary service and repair work to customers. Is speed the answer? Should your technician zoom through the job he is on so he can attempt to scoop up one more commission before the end of the day? Some companies believe technicians should work quickly and move on to the next job. I disagree. Let me tell you why. I believe the technician should examine the customer's entire home, looking for work that may need to be completed in the near future. Rushing through a job doesn't permit thorough inspection.
Our average invoice is one of the highest in the industry - nearly twice the industry average. The reason we enjoy that position is not because our technicians hurry through jobs, but quite the contrary. It is because they take their time to inspect every customer's home for problems, safety concerns and failed devices. Customers are happy because the cost and inconvenience of an additional service call are avoided. The technician is rewarded by receiving a higher commission because he sold more work. Neither the technician nor the company makes money while the technician is driving to more customers' homes, only when they are working. Their thoroughness pays off for them and for the company.
Future Success: The future profitability of any company depends upon the management's ability to increase the productivity of the company's resources. One of a service company's most important resources is its technicians. When they are more productive we prosper. By offering a chance for technicians to increase their earnings we encourage them to produce more for the company. By paying only for performance we cut our non-revenue generating costs. It's a double win for the company and technicians.
Soon only companies that control their costs and motivate their people to outperform the competition will be the industry leaders. Incentive pay systems will permit industry leadership. As long as you follow the rules, it will work for you.