From file "056_rcs" entitled "profitability3.qxd" page 01
From file "056_rcs" entitled "profitability3.qxd" page 01

Last November, Maine Window & Sunroom's 12 sales reps went from selling on a system where their compensation was partly tied to what they could get for the job to one in which compensation is based on how close to the list price they can get in negotiating deals with homeowners. To some home improvement company owners, that may sound like heresy, but sales manager Brad McCrum says the Kennebunk, Maine, company made the change because it wants salespeople to concentrate on volume, i.e., bringing in more deals per month, rather than just a few big ones. “We're trying to run the business based on predictability,” he says.

Since making this move, MWS' average sale — about $23,000 for sunrooms, $9,000 for windows — is down slightly, but overall company volume is up. “That's the ratio we're striving for,” McCrum says.

Whether company employees or “1099s,” as home improvement companies often call their contracted salespeople, it's no secret that the primary motivation for any sales rep is what he or she can earn. But more than a few replacement contractors express concern that a paid-on-profitability system — which allows reps to negotiate for, within limits, whatever price the market will bear, once the company's profitable threshold is reached —provides the opportunity for sellers to gouge customers. That's why companies regularly cap how much above the profitability threshold (often referred to as “par”) their reps are allowed to go. Several contractors, like MWS, say they prefer to reward reps less on the size of an individual sale and more on the quantity of business they close over a month, a quarter, or a year, and that a system paying on profitability is often an impediment to that.

Holding Reps in Check There are plenty of home improvement companies that pay on the profitability of a job. That is, the more reps sell the project for, the more they make, usually by splitting the difference with the company, often 50/50. (Example: a job returning desired profitability at $10,000 is sold for $12,000, with half the extra $2,000 going to the rep, the remainder to the company.) Similarly, at large design/build companies, sales representatives are often compensated with a percentage of the gross profit on the particular project they sold.

Efforts to move away from traditional ways of compensating reps frequently meet with resistance. “We offer a ‘salary-plus' pay structure, but we've never had any takers,” says Jason Avery, vice president of sales for Invincible Associates in Largo, Fla. However, no two compensation systems in the home improvement industry are exactly alike.

Atlanta-based Dixie Homecrafters, with 19 locations and 288 salespeople earning between $85,000 and $240,000 per year, has been on a profitability-based compensation system “forever,” says general manager Scott Alsup. He thinks that such a system works best on larger projects, such as siding, where measurements may not be as precise as, say, gutters. But Alsup acknowledges that the company keeps a lid on the amount over list that reps can charge (though he wouldn't say what that percentage is). He also scrutinizes every deal Dixie's salespeople close so that there's no question of gouging. “We're in the business to make money, not to cheat anyone,” he says. “If we overcharge, I've taken money away from reps and given it back to customers.”

Carolina Building Group, in Charlotte, N.C., installs sunrooms, windows, siding, and gutter protection, and provides its salespeople with price sheets for each product. The company does not allow reps to charge more than 10% above list, and when they sell at list their commissions are 10%, says sales and operations manager Jack Ramsaur. Conversely, if they sell below list, “it's their dime,” Ramsaur says, noting that a job sold at 15% below list would return only a 2% sales commission. “That pretty much gets them to stick to the price sheets,” he says.

Price as a Starting Point Most homeowners aren't experts on how much a project should cost, and many are reflexively wary of any price, high or low, they get from contractors. “Our sellers spend a lot of time explaining why our prices are sometimes $300 or $400 below our competitors',” says Camille Saleh, sales manager for Cincinnati-based Champion Window, which has 550 salespeople at its locations nationwide (13 of whom report to Saleh at Champion's headquarters) earning between $60,000 and $180,000 per year. “When you're selling on volume and you're less than everyone else, customers want to know why.”

Allowing sales reps to set a price beyond — sometimes well beyond — what the company needs to make its desired net profit, has another function. It gives the rep room to close by offering a series of discount incentives or price drops, a fact that many homeowners are aware of and even expect from home improvement sales representatives.

“The sticker price is a conditioning tool,” says Bob Birner, general manager for Houston-based Amazing Siding, where pricing is structured to take into account the discounts that Amazing must sometimes offer to remain competitive. Even when a project can be purchased at 25% off, a seller can still earn a 5% to 10% commission, and a lot more if he sells closer to the project's full value. Amazing's commissions are on a sliding scale, so that the rep doesn't lose money if a job's measurements turn out to be slightly off, Birner says.