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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 $52,000. Once this is repaid to the company by selling $104,000 of gross profit work (to essentially repay the company for their salary), the sales commission is 7% of gross profit.  

energy efficiency consultant

We strive for 50% gross profit on each job, although some jobs are higher and some jobs are lower.  In fact, our gross profit for HVAC replacement rarely exceeds 20%.  We previously paid commission on total revenue, which created a lot of overall issues.  Connecting gross margin or profit to our commission more tightly aligns the company and the seller on the project.

Finally, we put a lot of time and thought into the $52,000 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.   We also attended a Junto Institute training on sales that really focused on the higher desire of the average millennial to have stability over high earnings. This really changes the dynamic of the modern seller, especially those that are mission focused like our overall company.   

Additionally, we also did not want to make the base 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.  We also really appreciate the fact that new analyst repay their base salary before earning commisions, which makes it easier to hire and train new analyst (with less risk)

Sales Commission Structure – Rates

sales commission structure tied to gross profit

I feel very strongly that good incentives for sales professionals should increase after a certain level is met, not decrease. This seems counter intuitive 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.

After a sales person hits a certain level of sales, their gross profit commission rate goes from 7% to 14%.  We really want those that are hitting their stride to really go after it when they hit their momentum, and believe in setting the 

Commission Not Based on total revenue

In our business, we have decided not to base commission on total revenue, which was a shift from our past in 2018 and 2019.   In general, the ol d sales commission structure on revenue helps drive top-line growth, which a salesman or saleswoman could control. However, we hope our move to being paid on gross margin will help both parties grow stronger and be more aligned.

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.

We also track and make public internally the P&L or profit and loss of each job. We work this information as a team, making sure we learn from our mistakes and grow.  We look for ways to improve in our efficiency through number of installers, product selection, incentive basis, and other creative ways to manage the costs of the project.  With the analyst/seller completely involved, we hope to drive profit up and not through higher client costs, but through efficiencies.  

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 approved 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).

Grassroots Selling of Energy Efficiency

Verde sells energy efficiency. We are not a not for profit, nor are we a government agency. Therefore, we must sell to survive.

I think of our sales team as a grassroots organizing campaign of energy efficiency analyst, whose roll is to get out in the streets and educate and convince folks that energy efficiency is important. I liken us to early campaign staff in Iowa for a Presidential nominee. We must get the word out to succeed. Of course, money helps compensate and motivate – so we hope our sales commission structure does motivate folks so we can accomplish our mission as a company.

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