Thinking about performance pay but don't know where to start?

Question

I run into a lot of owners who want to set up performance pay and don't know where to start. My answer is always the same: figure out your labor cost first, then build everything down from that number.

Labor cost is your tech wages divided by revenue. For HVAC and plumbing, around 20% is healthy, for landscaping and window washing, anywhere from 30-35% is healthy.

Find the weekly revenue each tech needs to hit that number. Example tech at $35/hour:

$35 x 40 hours = $1,400 weekly wage
$1,400 / 0.20 = $7,000 weekly revenue target

Under $7,000, he gets his hourly. Over $7,000, he earns a bonus on every extra dollar. Keep that bonus rate at 20% or less and the bonus never pushes your labor cost past 20%.

His production goes up, he takes home more, and as long as your bonus rate is under 20%, his labor cost percentage goes down.

Once you know your number, you can layer in tiers and spiffs without guessing.

Do you know your labor cost percentage off the top of your head? And if you're already paying performance pay, what does your structure look like?

hugehomepros · Answer

I'm rolling out something I spent a lot of time working through. I have a few bonuses. One that's supposed to cover their basic job duties. One that is tied to job profitability and I use a software called Protiv to keep track of it. This one is the one that incentivizes doing good work efficiently. It takes in to account callbacks which count against them for future bonus pay outs. Then I have bonuses for new customer referrals and I have one for them issuing change orders. I put all my guys in clear job classifications and how they can get more of a base pay.

homeownership · Answer

I like the idea of starting with the labor cost first instead of picking a bonus amount and hoping the numbers work. I would also want to balance the revenue target with quality. Things like callbacks, customer satisfaction and rework could be part of the equation so employees are rewarded for producing more without feeling pressured to rush through jobs. Do you usually recommend including quality metrics along with the revenue target?

micahlasovsky · Answer

Remodeling is the hardest trade to build performance pay for and this is one of the better setups I've seen. Did you look at milestone payouts? On longer projects, waiting until completion to see a check can make it hard for the crew to stay motivated mid-job. It's well thought out and generous as is, just curious

micahlasovsky · Answer

Yup, almost every plan i build for clients has a callback aspect attached. It depends on the situation, but it's usually the most effective way to keep incentives from negatively impact outcomes. How it impacts commissions is a case by case basis. Every situation and shop is different

Five star reviews are generally a separate bonus but always should be rewarded.

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Thinking about performance pay but don't know where to start?

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