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Performance Based Compensation

April 10, 2017
Each contracting company is different, so there is no absolute way to setup PBC. Your industry niche, your employees, and your company’s culture all play a part in designing the best PBC plan. With that in mind, we will provide several examples to get you thinking about how to create the perfect plan for your particular circumstances.
Image: iStock/ThinkStock.

For the purposes of this article, Performance Based Compensation (PBC) is a process of paying employees for a specific outcome or paying extra for work that goes above and beyond the normal call of duty. If you think about it, most business owners are paid strictly on PBC. If an owner performs well, they thrive financially. If they perform badly, they don’t get paid as well.

The main idea of implementing PBC is to reward top performing employees and provide a clear incentive to do more than what is required to simply keep their job.

Each contracting company is different, so there is no absolute way to setup PBC. Your industry niche, your employees, and your company’s culture all play a part in designing the best PBC plan. With that in mind, we will provide several examples to get you thinking about how to create the perfect plan for your particular circumstances.

Let’s start with the service department. To reduce unbillable time, consider paying technicians two rates; one for unbillable time and one for billable time. Your unbillable rate might be 50 percent below the street rate while billable time would be 30 percent above it. You might pay technicians a set fee for drive time that is equal to their billable rate multiplied by their typical drive time. If travel time is difficult to average out, consider creating travel zones that allow for different travel time. Let’s say that the street rate for an average service technician is $25.00 per hour (direct cost with no overhead) and drive time between calls averages 30 minutes. Here is how it might look on paper.

Travel compensation per service call: $16.25

Compensation per billable hour: $32.50

Unbillable compensation per hour: $12.50

Unbillable time covers training, meetings and drive time not charged. It also covers call-backs on that technician. For warranty work and call-backs not under that technician’s control, you would pay them their billable rate. If you use flat rate pricing, consider paying the technician a flat fee for travel and diagnostics plus the “book time” for the task. Here is an example:

Travel and diagnostics: $32.50

Replace stock fan motor and capacitor: $32.50 (1hr book time)

Paying technicians a higher than average flat fee for each repair and holding them accountable for call-backs creates an incentive to maintain an organized well stocked truck with the correct tools and equipment. If you simply pay them by the hour, they have no financial reason to be accurate and efficient. Be sure to clearly define what a call-back is and is not.

You should also pay bonuses for selling service agreements, creating sales leads and other desirable activities. Create a complete list of bonuses and incentives. Here is an example to get you started:

Service agreement sales bonus: $10.00 (per system)

Humidification or filtration system: $25.00

Wi-fi thermostat: $15.00

Sales lead resulting in sales presentation: $25.00

Sales lead resulting in a sale: $50.00

Should a technician be paid to sell equipment?

This is one of the most popular questions we get. If a sales opportunity presents itself during a service call, we prefer that technicians pass the sales opportunity to a sales person who can respond immediately. If that is not possible, we recommend creating a menu of replacement and accessory pricing for your technicians to follow. Be careful not to create technicians that are more interested in selling than making appropriate repairs.

PBC for the installation crews

A PBC plan for this department can be more challenging. Consider creating a comprehensive list of installation scenarios or tasks and label each with a set number of hours you will pay out for that work. You may also create a list of fees, but it may be easier to offer your existing installer a raise and begin paying them a higher hourly wage multiplied by a set number of hours for a given scenario. Here is another example to consider:

Residential replacements

Complete residential HVAC system change-out (standard): 16 hours

AHU change out (horizontal): 7.0 hours

Condensing unit change out: 3.0 hours

6” x up to 25’ supply run (open accessible area): 1.75 hours

Single cold air return duct drop: 2.25 hours

Flue vent stack replacement (up to 25’): 3.25 hours

Residential new construction

Residential system rough-in (12 drops): 12.0 hours

Each additional duct drop rough-in: 1.25 hours

Each additional duct drop trim-out: 1.0 hours

Residential system trim-out: 6.0 hours

Install electronic air cleaner with trim out: 1.0 hours

Complete system start-up: 1.25 hours

Your list will likely include far more scenarios. My actual list includes about 100 different scenarios.

PBC for the office

The key to designing this plan is to think about what the office has some control over and can easily understand. Since CSRs often lay the ground work for service agreement sales, one of our favorites is to set aside $10.00 for each agreement sold (per system) and split those funds out evenly to each fulltime office employee.

Company-wide profit sharing

You should consider some type of PBC for the entire company that is based on specific financial performance. Your plan will depend on what type of financial information you see as important and what type of information you are willing to share with the company. Keep your plan simple and easy to understand. If your plan relies on numerous formulas, caveats, or things that are out of the average employee’s control, the plan will be seen as “rigged,” in favor of the owner.

As we have seen, there are a lot of different ways to pay and incentivize your employees. You must think about your company and your people before deciding what works best for you. Whatever you decide, make sure that your compensation plan can withstand the “newspaper test.” If your plan was somehow published in the newspaper, would you be ashamed or embarrassed? Of course, the answer must be “no.”

James Leichter is a founding faculty member at EGIA Contractor University. EGIA Contractor University has assembled the most experienced and dynamic faculty ever put together. Faculty members have personally built some of the most successful contracting companies in America. Visit Contracting Business for more information and to learn about the Contractor Leadership Live event.

Leichter is longtime HVAC contractor, consultant, and public speaker. He is president and CEO at Aptora Corporation, a maker of contracting business management software. Also, Leichter is the editor of MrHVAC.com. If you would like a complete list of bonuses and incentives, go to www.mrhvac.com/bonusus to download an example.