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sales commission structure
Dec 06 2017

Sales Commission Structure

Incentivizing your sales team is the best way to grow your business, hands down. However, the sales commission structure can be one of the most difficult and nuanced components to get right in a business.  I share this after my experience in starting a growing a sales team.

At Verde, we are very transparent in our sales commission agreement between our energy efficiency analysts and the company.

Base – provides security

It is important to provide a base salary for a sales professional, since it can take a while to ramp up and become successful. Even for the fastest learner, they need time to train and learn.

Providing a base can also help smooth out normal business cycles, which happen to almost any industry. For our company, we often have deadline around increased utility rebate fiscal years. This can lead to wild variations in income for the analysts. Therefore, the base can provide stability throughout the year.

In our sales commission structure, we have a base of $26,000. Once this is repaid to the company by selling $260,000 (at a 10% commission rate), the sales commission agreement goes up to 14%. We currently reset this sales commission structure quarterly.  We find this works better than annually as it triggers 4 times a year where the team is motivated to sell more. When we previously ran with this sales commission structure annually, it only created one large incentive period.  This was hard to bring on new people during the mid-year, as well as took a long time to generate higher sales incentives.

Finally, we put a lot of time and thought into the $26,000 base salary. We did not want to make it too low, where there were times that people could not make rent or take the bus.  Additionally, we also did not want to make it too high, where we make people comfortable with a mediocre compensation. Attracting and retaining highly impactful salesmen and saleswomen is the goal, whereas people that are not ambitious will not be attracted not succeed in this compensation plan.

**Update – we have increased our base salary to $52,000 in 2019.  This is to keep up with trends of millennials that would prefer a more consistent salary over the highs possible with more of a commission basis structure.  We have also lowered our rates of commission to 3-6%, and do not require the base to be repaid – so commissions come on the first job. 

Sales Commission Structure – Rates

solar sales commission

I feel very strongly that good incentives for sales professionals should increase after a certain level is met, not decrease. This seems counterintuitive to people when I explain it.  However, it rewards high achieving individuals in the organization. It also makes people hungry when it is most important, when they have already delivered to the company.

One bonus feature of this is that it also keeps talented folks – the ones that deliver most the organization also receive great compensation. That is important since keeping great people is one of the most important challenges for a company.

**In 2020, we still keep with this concept – after halfway through goals, rates increase.  This allows high performs to get additional compensation when they hit goals or exceed goals.  We also have bonuses and super bonuses, to keep the really high achievers engaged and getting every last energy efficient project complete.  

Not basing profit on commission

In our business, we have decided not to base commission on profit, and instead base it on revenue. In general, this sales commission structure helps drive top-line growth, which a salesman or saleswoman can control. As long as they cannot set pricing, this will not negatively impact the bottom line margins of the company.

In addition, this provides a unique value to our customers. Since what we sell (energy efficiency) has a key indicator of ROI (return on investment), the sales rep is motivated to sell based on what brings down the ROI.  This does not always align with what is most profitable to our company. Ultimately, we hope that this provides continuing value to our customers, both helping the company and the individual that completed the sale.

**Note, we have started providing transparency around the P&L (profit and loss) on each job for the COGS (cost of goods sold – so total revenue less the materials and installations cost of each job).  This transparency drives them to achieve more, although we do not directly translate that to bonuses or commissions at the moment).

Sales Commission Structure – Challenges

One of the key challenges that we faced in our structure is that sales commissions were initially compensated too soon.  We paid commission as soon as the project was closed with the customer. However, in our business, we often have to wait for the ComEd Energy Efficiency Program to preapprove utility incentives for our customer and their project.  This can take anywhere from 10 days to 25 days. In addition, some of the more complicated lighting controls and special order products can also lead to delays.  Our normal backlog of work can range from 20 days to 60 days.

Basically, we were writing commission checks to our energy efficiency analysts long before we received any revenue. In our current growth trajectory, we noticed that this was unsustainable.  At the very least, it was an added financial burden on the company.

We made a switch to account for half of the commission at the time of sale.  This provides some instant gratification).   Additionally, we pay half of the commission at the time of installation and invoice. One downside of this is that it creates added work for the analyst to account and reconcile projects.  Eventually as we scale, we hope to have some custom built software in place shortly to make this seamless.

While best practice is to pay sales folks when the company gets paid, we do not implement this.  We continue to update our sales commission structure, so this and a higher base are both currently being considered.

Solar Commission Structure

Many of our pier companies ask us about a solar commission structure for sales. Solar in Illinois is really challenging, so I will provide some insights without complete advice. Verde has completed one solar sale (an approximately $500,000 system), so we have some experience.

Solar is similar to energy efficiency, but with some minor differences. First – solar is typically larger in scale. Our average energy efficiency job is $18,000 – while solar is much larger in revenue.

solar sales team

Additionally, solar has lower margins if subcontracted. When margins are solar, commissions are smaller. We have a similar challenge around HVAC commissions. Our COGS margins are closer to 15% of HVAC projects, whereas our core projects of lighting and refrigeration have COGS margins much higher. For that reason, it can be a challenge to keep commissions consistent through different job types.

Finally, solar projects have a greater cash flow from the client to the project. If they do not chose a solar PPA to finance the project, a business owner must put out a lot of capital expense to pay for this. The benefits of the solar will come in tax credits, savings in energy, and Renewable Energy Certificates (RECs).

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