How to Create a Sales Compensation Plan

Sept. 1, 2003
by Jackie Rainwater OK Mr. Residential Contractor, so you want to grow your business, right? Whats the first step in doing that? Of course, the simple

by Jackie Rainwater

OK Mr. Residential Contractor, so you want to grow your business, right? What’s the first step in doing that? Of course, the simple answer is to increase sales. But that isn’t so simple. Not if you’ve never had a professional sales person on staff, except for yourself. So what do you do to hire, train and support a full-time residential salesperson?

You need to develop a plan. A formalized compensation plan will attract talented people to your company and incentivize them to succeed. Their success is your success. And the first step to that is to have an organization that can generate enough qualified leads to support a good salesperson.

At Peachtree Service Experts Heating and Air Conditioning, we learned we needed about 600 raw leads per year per comfort advisor (salesperson) if that advisor was to achieve a minimum goal of $1 million/year in replacement sales.

That goal is what Peachtree uses as a benchmark to measure success in a residential retail salesperson. And the secret to getting those leads and subsequent sales is to get as many existing and past customers under a maintenance agreement as possible. Maintenance agreements keep technicians busy. The more agreements you have, the more technicians and salespeople you can support.

It’s a numbers game: Peachtree’s service technicians run around 1,150 service calls per year. Of those service calls, around 15% result in sales leads. I believe that one technician should generate around 150 sales leads per year. Which means Peachtree needs about four technicians per salesperson to get the 600 leads per year.

Setting Up The Organization

Why sell maintenance agreements? You can generate most of your sales leads from technicians while they’re in the customers’ homes doing maintenance work. While there, they can look for old equipment, equipment that isn’t delivering the comfort it should, equipment having mechanical problems, or the need for accessories such as humidifers and air cleaners.

They can talk to customers about solutions your company has to their problems and, if the customer is interested, the technician can turn in a lead, which is then turned over to a comfort advisor.

For technicians to do this requires training. So you need establish a program that shows technicians how to be customer-friendly, how to be an advisor, how to listen, and how to garner interest in the comfort solutions your company offers.

At Peachtree, technicians go through a week-long orientation when hired. They spend two days learning the paperwork, philosophy, and culture of the company. They then spend three days riding with an experienced technician. Beyond that, 40 hours per year are budgeted for classroom and field training.

The company has established an incentive program where the technician who turns in the original lead shares in the reward if that lead translates into a sale. Any lead turned in remains registered to that technician for a 30-day period. If it results in a sale and installation, he receives approximately 2% of the total cost for that job. Those dollars don’t cut into the salesperson’s commissions. The rewards are paid to the technician at the monthly company meeting.

We know that roughly 15% of all service calls the Peachtree technicians go on result in a sales lead. We also know that of all the sales leads generated in this way, a salesperson could land an appointment 75% of the time. Peachtree’s average close rate is 50%. The average job cost is about $4,500. Through tracking those numbers over the course of several years, it becomes predictable as to how much revenue each salesperson can produce in a year.

The next step is to establish “cookbook” pricing. At Peachtree, replacement prices are based on a 52% margin. Once this pricing was in place, the company set up an annual sales objective of around $1 million per sales person. In addition to that, there are also monthly sales objectives.

This is done by taking the annual goal and breaking it down into monthly percentages. These percentages are based on the company’s replacement volume per sales territory during the most recent four years. Those are fairly accurate numbers. We know for example, about 9.3% of Peachtree’s replacement business was sold in May during the most recent four years.

So these numbers were used to set monthly sales objectives. Why do this? Because it’s important to have both long-term and short-term goals and both long-term and short-term incentives in addition to commissions.

(You can download sample commission spreadsheets for various jobs in either PDF or Excel® format. Use them as templates for your company by plugging in your own numbers. Go to

The salespeople always look at that annual objective because they know if they exceed it, they’ll receive an annual performance bonus over and above their monthly commissions. The monthly goals also help them stay on target to meet annual objectives.

The monthly objectives carry small incentive rewards as well. Spiffs are provided for achieving or exceeding monthly goals. Peachtree uses a multiplier based on the car allowance where if salespeople go x% over their monthly goal, their car allowance is increased by x%.

All Peachtree salespeople have a base salary (not a draw against commissions). They receive the same benefits as all other co-workers. They are part of a team. To foster a team culture, Peachtree holds monthly communications meetings. This way everyone (including salespeople) knows how the company is doing. Those salespeople who meet or exceed their goals for that month are recognized at these meetings.

Peachtree also holds monthly sales meetings and includes sales training. Comfort advisors often help each other. For example, someone who is great at closing sales teaches everyone else how he/she does it.

And finally, the company always holds contests where salespeople can earn a trip. These trips come from manufacturer/distributor vendors based on overall equipment sales quotas that Peachtree meets.

Hiring and Keeping the Best Salespeople

To hire the best salespeople, you must be able to pay them what they’re worth. Salespeople who exceed their $1 million goal at Peachtree earn in excess of $100,000 in income, plus they receive a car allowance, and benefits. If they’re selling more than $1 million at 52% gross margin, they certainly deserve the pay. That’s what it takes to get and keep the top producers.

After selling the job, they remain involved with the installation, start up, and final collection of monies due.

In fact, if a job they sell remains unpaid after 30 days, the salesperson’s commission is reduced by 30%. If it remains unpaid by the end of the fifth month, no commission is paid. The salesperson now has a vested interest in closing the accounts receivable portion of a job in a timely manner. This helps reduce problems associated with aging receivables, collections, etc.

Therefore, Peachtree’s salespeople work closely with technicians and installers. They know the installers and technicians are key components to their own success. If the installers do fantastic work, the customer will be happy. Then the salesperson can ask the customer to remember him or her to any friends or family who may need HVAC work done.

Building a Referral Army

Every November, at Thanksgiving, salespeople hand address and mail thank-you cards with a personal note to every customer he or she sold a job to. Thus each salesperson develops a personal referral army.

One advantage to operating this way is that as the company grows and the organization generates enough extra leads to warrant hiring a new sales person, the existing sales force will often find that person for you. They know who’s out there and who’d make a great asset to the team.

Based on my experiences at Peachtree, my advice is to focus on building your maintenance agreement customer base and put into place a lead generation through technician program. Pay your salespeople what they’re worth, and you’ll grow your company at a sustainable rate that benefits you, your people, and your customers.

Jackie Rainwater is a 42-year veteran of the HVAC industry. In 1990, he and his partner, Frank Jones, and an outside investment firm, acquired Peachtree Heating and Air Conditioning in Atlanta, GA. They grew Peachtree from $4 million to $18 in revenues and also grew Peachtree’s maintenance agreement customer base from 4,000 to over 18,000. Rainwater and Jones have subsequently retired from Peachtree and have opened a consulting business. Rainwater was inducted into the Contracting Business Hall of Fame in 2002. He can be reached via e-mail at [email protected].