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Spreading the Wealth

Nov 1, 2008 12:00 PM, By Brad Dawson, LTV Dynamics

Contractors who resist the urge to hoard profits can reap big rewards by establishing a shared compensation arrangement

Amid-sized electrical contracting firm was on the constant lookout for a strong business development resource. Time and again, the CEO interviewed potential candidates, believing that a qualified resource should cost the firm no more than $50,000 a year with a small commission based on closed sales. While the idea of maintaining a low fixed salary was prudent for a business development position, the CEO added an additional wrinkle that immediately reduced the size of his candidate pool — he limited the upside compensation. So no matter how much revenue the employee generated, the cap for that particular position was $75,000 — the CEO's opinion of high-end compensation. Needless to say, the only candidates interested in applying were those who were either happy with the $50,000 base salary or those who exhibited no real hunger to be a top-level producer.

Does your electrical firm follow the practice of limiting the compensation of its employees, regardless of their contribution to the bottom line? As an owner, do you feel a sense of short-term entitlement that allows you to sweep the majority of firm profits into your pocket each year, leaving your staff to fight over meager bonus pools? If so, your firm could be heading for trouble — a brewing discontent that will push away productive employees and replace them with clock watchers.

Many electrical contracting firms follow the “caste” system of compensation where a select few employees — usually owners and a few key management types — receive the predominant share of operating profits, leaving the majority of workers to toil for their base salaries. This inequitable compensation-sharing arrangement eventually boils over into high levels of discontent, resulting in complacency. Employees work enough to keep their jobs, and owners are dismayed when employees choose life-balance philosophies over working a few hours of overtime. Fortunately, there is a solution that provides benefits to both the owner and employee — sharing the booty.

Breaking your business down

Shared compensation is based on recognizing the quantitative contributions of each employee. However, the expectations for contribution are dependent upon which segment of the organization the employee works. For example, if would be difficult to assign the same contribution measures to your marketing or business development person and bookkeeper. While both people are important to your operations, the expectations of each position are vastly different.

Most electrical contracting firms logically break their workforce down into the following business segments:

• Sales and marketing — these employees are evaluated on revenue and profit generation (i.e., marketing or business development manager, sales manager).

• Delivery and operations — these employees are evaluated on chargeable hours, customer feedback, and overall delivery excellence (i.e., electricians).

• The sales and marketing solution

  Finance and administration — these employees are evaluated on cost containment and increasing the corporate value of the enterprise (i.e., bookkeeper, office manager, purchasing clerk, human resources).

Each business segment must be viewed independently when crafting a shared compensation plan. Where most business owners salivate over sales success and high levels of chargeability, very often it is the bookkeeper that ensures the profitability of the firm. So, how can each individual share in your business' success?

Many owners of mid- to large-scale electrical contracting firms are stymied as to the parameters that should be in place for an effective shared compensation arrangement for sales professionals. Many believe in the commission-only philosophy while others, such as the CEO mentioned earlier, are more comfortable limiting any upside surprises. Remember, the goal of sales and marketing is to generate profitable work for your business. Don't make the mistake of providing bonuses to salespeople based on their level of activity (i.e., number of sales calls, participation in networking organizations). If these activities do not produce profitable work, they are of no value to you — the owner.

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