THE COMPENSATION EQUATION The Complication with Compensation

Part One Of A Three Part Series

BY CHRIS CREW

The idea to offer our members a compensation class came to fruition in early 2022 at our company's signature event, Acceleration Days Workshop™. During the event, we opened the floor up for questions, and one of them was regarding compensation. What followed was a lengthy group discussion that made us realize that if we reviewed the compensation structure of ten different members, we'd find ten different methodologies on how they pay. The worst part – none of them would be cost-effective.

The Creation of The Compensation Equation™ Formula

We ran the Compensation Equation as a two-part class held for our Blue Collar Success Group members. Part one was virtual and covered what we'll be going over in this series. Part two consisted of an in-person workshop that helped attending members customize their own company's plan. The formula and materials we use are based on methodologies that Kenny Chapman, Founder of The Blue Collar Success Group, and I used to create The Blue Collar $100M Playbook™. When putting the Playbook together, we sat down and asked, "how do we get our members to a hundred million?" We quickly realized that compensation was a big part of that equation.

In this, the first of a three-part series, you will see how we created The Compensation Equation™ and the subsequent formula and Playbook. And we will explain how you can do the same. In subsequent installments of this article, we will not only dive into the specifics of restructuring compensation plans, but we will also cover compensation's impact on profits and company culture. First, however, let's examine why most compensation plans don't work.

The Birth of The Compensation Equation™

The more we dug in, the more we discovered that most businesses have either inherited or duplicated a comp plan from someone else in the industry. Even where it seemed to be working, closer examination proved it to be much less advantageous than a custom plan. Case in point — one of our clients had a challenge with their overhead and their direct labor based on their current compensation structure, which was borrowed from a friend in the industry. I asked them to show me the input sheet, and within less than an hour, I saved him a hundred thousand dollars on his compensation plan. He told me that he had no idea how broken his system was. There was a need to dive deeper into this topic, and that's how The Compensation Equation™ workshop was born.

The Complexity of Compensation

We live in a world where people often expect before they deliver, and how we compensate people often affects the results that we get from them. Performance, morale, and retention are a big part of the compensation complexity. For example, you may be paying people based on seniority, which is how the trades have historically operated. The challenge this presents is that it can create complacency and a sense of entitlement. There are other ways to incentivize longevity and inspire renewed motivation in the process. One way to achieve this is through incentive packages that go beyond the paycheck. For instance, after three years of service with your company, a team member qualifies for more time off and is awarded a gift card to a store or restaurant they frequent. Then after five years, you may decide to pay for a short vacation for that team member and their significant other, along with the paid time off.

In another scenario, you may find that someone who has not been with your company as long as their co-worker may be higher skilled. When this occurs, we point out that there are several ways you can pay based on performance without creating animosity. Sales Program Incentive Funds (Spiffs) and bonuses for achieving certain measurable goals, receiving positive online reviews, etc., put the ball in every team member's court.

If you are not able to create incentives for every position, try creating incentive base pay. Start with what are the most important items a team member can do to contribute to the company's goals and compensate for incentivizing that behavior. For example, your apprentices' main objective is attendance and punctuality. For this, you may choose to pay them a monthly bonus based on these requirements. Remember, all incentives must be completely "objective-driven" so that anyone in that position has the same opportunity.

When comparing team members in separate roles, it’s also important to understand what value they bring to the table.

Here is an example: A technician may generate $400,000 a year in repair work while earning between $80K and $100K a year. A properly trained CSR, however, may only get paid $35,000 despite booking well over $1,000,000 a year via phone work. Do you see the inequity there? The way to compute proper compensation for the CSR is to multiply the number of appointments they booked times your revenue per lead. Run this exercise on your CSRs and see just how much revenue is generated through their phone work. If you find that this position is underpaid, you could be having a challenge retaining or acquiring top talent. Remember, you always get what you pay for.

As previously stated, paying commissions should be easy and uncomplicated. How do you know if your compensation plan falls under these parameters? Simply ask a team member to parrot back to you how their compensation plan works. If they struggle to explain it, there's a good chance they struggle to understand it. Remember that when things are simple, they are also scalable. u

After a journey in the HVAC industry that began when he was sixteen, Chris Crew went on to coach a large electrical company helping franchisees achieve success. Later, he shifted to owning an electrical business, growing it in a four-year span to 60 trucks, five locations, and generating $18 million. Ultimately, he sold his shares to join The Blue Collar Success Group® where he now serves as President. Chris Crew offers extensive knowledge about every facet of in-home services. www.thebluecollarsuccessgroup.com

BY RUTH KING FINANCE

Are You Afraid to Fire a Customer?

We’re going to go out of business…but we don’t care if we do — this is what three partners said to each other when they went through their entire customer base and decided whom to fire. It was the end of their fiscal year and they were tired of doing business with some customers who were costing them money.

These were the following types of customers:

• Always complaining

• Always wanting a discount

• Late on paying their bills; not paying without collection calls; and/or notoriously 60 to 90 days or more late

• Consistently rude to their employees, and...

• In one case, the building that their employees visited, was unsafe

Once these partners finished making the list, they were ready to fire nearly 10% of their customers.

Value Your Service Enough to Say No

We’ve always been taught to honor the customer, but to grow as a business, you must understand your value. So, while this move made the partners nervous to do, they were resolute. And they fired them with “ruthless compassion.” What does that mean?

It means they met with each customer they were letting go and explained that they were not going to do their maintenance/service/projects in the upcoming year. They also gave these fired customers a list of potential companies as referrals for future work. The result – to their surprise, profits increased the following year. They realized that they weren’t spending time with unprofitable, draining customers, and they could spend time with profitable customers.

Now, at the end of every year, they review their customer list and decide who, if anyone, should be fired. Incidentally, the list was never as long as it was that first year.

The thing that surprised them was somewhere around the third year, several of the fired customers called to ask if they could come back. The owners agreed with these qualifications. They could return as long as they didn’t complain, paid their bills on time, and treated employees with courtesy. These customers realized how well this company took care of them and could not find another one who performed as well as they did.

Note: One more criterion to the list for firing this kind of customer –the customer is unprofitable. How do you determine whether a customer is unprofitable? Job-cost all their service calls, maintenance work, and replacement/projects.

Here’s an example of a service call that is unprofitable:

Your technician goes to Mrs. Jones’ home. He inspects the home and finds a refrigerant leak. It takes three hours, and he charges $300. The service department’s gross margin is 50% and the overhead cost per hour is $60. The gross profit for the work your employee performed is $300 X 50% or $150. Your gross profit per hour is $150 divided by three hours or $50 an hour. Your overhead cost per hour is $60. You lost $10 per hour or $30 on that call. have 1,000 maintenance plans, that is a $10,000 loss. If your net profit is 8%, then you must generate $125,000 to recover from that loss.

Yes, the technician should have charged more than $300. However, many feel that $300 is a lot of money and won’t pay more. Also, most customers don’t put a value on time. Or, the customer may have complained about the price and was given a discount. Either way, it was a loss. Technicians must charge enough to have profitable service calls.

Use the same process to calculate maintenance profitability.

If you find that a customer’s commercial maintenance plan is losing money, then you need to determine what the price needs to be to break even and have a discussion with the customer. You cannot afford to pay customers to perform a valuable service for them.

Replacement/projects can be job costed as well. Where they become unprofitable is usually when crews take longer than estimated to complete the job. Or the customer complains about the proposal price and the price is dropped to accommodate and keep the customer.

One contractor handled this situation very well. He consistently found the same customer always asking for a discount. He discovered that the people in their procurement department got bonused on the discounts they obtained from customers. As a result of this discovery, he always added 10% to the proposal price. So, when the buyer asked for a discount, he gave them the 10% off. He got the price he wanted, and the buyer got the bonus.

If there is no way to make it profitable, that customer is costing you money. Never be afraid to fire unprofitable customers whether for repeated discounted prices, not paying bills, safety, or any other reason. It doesn’t make sense to keep a customer that you pay to do their work. Value your service and you will attract customers who do the same. u

Here is

the formula to calculate maintenance cost vs. profitability:

If you calculate that your company is losing $10 per maintenance plan and you

Ruth King has more than 25 years of experience in the HVACR industry and has worked with contractors, distributors and manufacturers to help grow their companies and become more profitable. Contact Ruth at ruthking@hvacchannel.tv or at 770-729-0258.

Danfoss

For commercial refrigeration customers looking for a wireless IoT solution to monitor their assets in the field, Danfoss’ Alsense foodservice platform now offers an affordable, flexible, and secure app-based monitoring solution for temperature tracking, refrigeration operation monitoring, alarms, and HACCP (Hazard Analysis and Critical Control Point) compliance. The app works in conjunction with hardware that acts as an IoT enabler to provide end users with real-time data 24/7/365, including instant alerts, location, and automatic data logging. This helps asset owners ensure food quality, and equipment performance and reduce costs due to food waste.

www.danfoss.com/en-us/

Ge Appliances

GE HVAC Evaporator Coils have been tested under extreme climate conditions and subjected to 500 hours of salt spray, so you know they’re going to perform in any region or climate. You can have peace of mind knowing the iconic GE brand carries a legacy of quality, reliability, and innovation. An antimicrobial drain pan helps keep mold, mildew, and other unwanted microbes out of the unit and the air in your home. You can double the standard five-year warranty just by registering your equipment. It’s a simple way to bring peace of mind that your GE unit will keep you comfortable season after season.

www.geappliances.com/ hvac-evaporator-coil

Lochinvar

Lochinvar, an industry leader in high efficiency boilers and water heaters, announces the addition of the NOBLE® Floor Mount Fire Tube Combi Boiler to its current residential line of boilers. The NOBLE floor mount combi boiler brings to market a new, easier-to-install option for contractors and homeowners with models ranging from 110,000 to 199,000 Btu/hr. The floor mount provides customers with the proven performance of a Lochinvar NOBLE combi boiler, but now in a new configuration for more installation flexibility. For additional application flexibility, Lochinvar strategically placed the water connection, venting, and gas connection on the top of the unit.

www.Lochinvar.com

Rotobrush

Rotobrush® International LLC, a global market leader in providing indoor air quality solutions, announces the launch of a completely nall-newduct cleaning machine. The next-generation Beast™ DR features next generation smart technology, more vacuum power, and more control while maintaining the same portability and ease of use that is known with the Rotobrush brand. The BrushBeast DR (Drive) is equipped with smart, patent-pending technology. Featuring a direct drive system that has eliminated the need for pulleys. The brushless motor provides significantly higher efficiency, which also reduces costs and necessary labor for maintenance.

www.rotobrush.com

1. Where is the best place to relax in North Carolina?

North Carolina offers some of the most beautiful places to wind down – cool mountain air, warm sandy beaches, and going to the Symphony in Charlotte. My favorite place to relax is Lake Norman.

2. Are you a dog or cat person?

To say that I am a dog person is an understatement! I am the proud owner of 9 Siberian Huskies. I adore all animals, with dogs having a strong hold on the #1 spot.

3. What’s your secret ambition?

I love being an engineer. I am blessed to have been given such fantastic opportunities to have a career doing what I love to do. A fun secret ambition – to be a Master Jedi. I am quite a Star Wars fan.

4. Who is your role model for excellence?

My grandmother – she was a Rosie during World War II, an amazing woman. She taught me to be inquisitive, to think outside the box, and to never stop learning. Her positivity always opened doors to solving problems, and she was quite the technology fan, well into her 80s!

5. Do you have a philosophy that you live by?

Be the very best version of yourself, and you will set the world on fire.

6. What drew you to engineering when you were young?

My father was a welder, and he was a master at repairing and building things around our home. He encouraged me to be curious. I was always fascinated by how he used tools and techniques to bring his ideas to life. With his encouragement, I developed a great interest in all things mechanical.

7. How did you get into the industry?

Before my time at Trane, I studied Engineering at Mercer University. Going through engineering school, it was typical to be one of the only women in the room. In my first-ever position in the industry, I saw elements of myself in the female Vice President I interviewed with, which solidified my decision to pursue a career in a traditionally male-dominated space.

8. You’ve been in leadership roles a long time, what business principles guide you when you manage the team?

As many mentors did for me, I strive to foster the same “yes you can confidence” in aspiring male and female engineers that an Engineering Director with Trane once sparked in me.

9. How do you effectively communicate with your team?

Effective communication happens when a leader can connect with the team in a way that fosters trust.

10. What has been your most recent "the buck stops here moment"?

I don’t know if there was one moment. However, a professor once gave me the advice to stay laser-focused on developing talent. I am focused on inspiring my team and I know it starts and stops with me. I take that responsibility seriously.

11. What is Trane’s climate commitment to clean energy?

We are committed to reducing our customers’ emissions by providing innovative, energy-efficient heating and cooling solutions. We joined the Gigaton Challenge and are well on our way to our goal. Trane surpassed the requirements for the Department of Energy’s Cold Climate Heat Pump Challenge.

12. What advancements will there be in heat pump technology in the next three years?

Trane’s Cold Climate Heat Pumps shall employ a refrigerant that has a GWP of no more than 750, per the requirements of the challenge. While each of the A2L refrigerants has specific competing advantages and disadvantages for cold-climate heat pumps, the right refrigerant is the one that provides the best value for our customers. These heat pumps will utilize R-454B, a Low GWP refrigerant.

13. How has Trane been able to surpass DOE requirements for Residential Cold Climate Heat Pumps?

When tested at the DOE’s lab, the Oak Ridge National Lab Facility, Trane’s CCHP prototype performed in temperatures as low as negative 23 degrees Fahrenheit, surpassing the mandatory negative 20 degrees Fahrenheit DOE requirement. Our prototype pushed the limits of the testing with high performance even as temperatures moved beyond the trial scope. To stop our Trane unit, they had to manually cut the power.

14. When do you expect the results of your newest heat pump trials?

We’ve moved to field testing. The DOE may decide to extend the field trial testing into a second heating season. If this is the case, we will participate in the second field trial and should have the results by the end of 2023.

15. What trends are emerging for high-efficiency heating?

Climate change and urbanization are two macro trends that are influencing the need for high-efficiency heating. These trends influence the industry and consumer perspectives on the reduction in carbon emissions and dependence on fossil fuels.

16. Are the 2030 Sustainability Commitments attainable?

Absolutely! We are well on our way to meeting the Gigaton Challenge, which is reducing our customers’ carbon footprint by 1 gigaton.

17. Trane set a long-term goal of Net-Zero carbon by 2050. Are there big steps to accomplish this or a series of small ones? Our strategy is grounded in our sustainability commitment as a company. This strategy involves long-term goals as well as short-term goals to meet the commitment by 2050.

18. What is the importance of playing the long game in the climate and energy initiative?

As we continue to innovate and deliver energy-efficient solutions through the electrification of heating and heat pump technology, we know that the world’s need for higher-efficiency solutions will continue to grow, and we are ready to meet the demand. We are in this for the long haul.

19. Besides mandates, can you explain the importance of the industry in understanding the need for a collective commitment to cleaner energy?

One industry can change the world. Through initiatives like the Cold Climate Heat Pump Challenge with the Department of Energy, our industry has the unique ability to join as partners and advance technology to provide solutions that reduce emissions for our customers and the world.

20. What advice do you have for contractors managing businesses regarding clean energy? Get on board with the innovation that is happening around higher efficiency equipment and electrification of heating. It’s important to stay informed. We stay in constant communication with our partners to keep them informed and up to speed on the latest government-mandated regulatory changes, tax incentives, or other opportunities to provide homeowners financial relief to upgrade to more efficient products.

Efficiency. Sustainability. Compliance.

Leading Hvacr And Water Heating

EQUIPMENT MANUFACTURERS recognize AHRI certification programs and equipment performance standards as key to achieving energy efficiency, environmental sustainability, and regulatory compliance.

Through its extensive global network, only AHRI is positioned to provide the best solutions to help stakeholders navigate the ever-changing business environment.

At AHRI, we make life better. Let us show you how.

Learn more at ahrinet.org.