Performance pay is one of the more segmented parts of the home service industry. Every home service company has a slightly different way of managing its system. There are four main methods of thinking about a framework: punitive, labor cost reduction, hourly difference, and goal-based. Throughout this article, keep one thing in mind:
Your employees are the value of your business.
Compliance-based performance pay
Punitive performance pay is when an owner creates a system that focuses on punishing an employee to drive a desired behavior. When an owner focuses on punitive rewards, the result can be active harm to employee morale and retention.
This model can take a lot of different shapes, but generally it looks like this: an employee gets a reward if they complete a set of non-tangible actions. These include things like:
- An ironed uniform
- Taking care of company equipment
- Following a checklist or scorecard
How you frame that reward is variable, but generally it can be a scorecard, some sort of color system, or a sheet you check off.
At the end of the day, you are rewarding actions simply for showing up. You'll end up having foot soldiers that follow directions, but don't treat the business like it's their own.
Labor cost reduction performance pay
Labor cost reduction performance pay is when the owner uses a commission-only payment plan to pay their employees less during low-revenue cycles of the year. This model only fails when it's used to avoid paying a living wage. This model is the opposite of the hourly model, which ensures employees are financially secure throughout the year, regardless of their performance.
The entire purpose of performance pay is in the name: to incentivize better performance through pay. Reducing labor costs is a short-term gain, but with this mindset, employee retention will plummet, and revenue will follow.
A healthy and effective performance pay system must align all goals. Reducing labor is at odds with incentivizing revenue-driving behavior. You must shift your mindset.
Hourly difference performance pay
Hourly difference performance pay is a model where you commission the difference between expected and actual labor time. This is popular because it is simple to calculate, simplifies your budget, and incentivizes speed. If the expected time for a job is four hours, and your team completes it in three, they receive an hour's pay worth of commission.
This model prioritizes speed above all else. It also relies on the assumption that employees are tracking their time accurately and honestly. In large commercial jobs, this model is effective in ensuring margins, but in smaller, residential jobs, it can incentivize the wrong behavior.
When incentivizing speed, crews might take shortcuts to win the bonus. If incentives are not tied to the quality of work, you will be forced to take punitive actions to redo work that should have been correctly incentivized in the first place. As with the labor cost reduction model, this lowers morale and retention.
Goal-based performance pay
Goal-based performance pay is when you incentivize revenue-driving behavior. This differs from the other three models because it isn't a formula, but instead a philosophy. You empower your employees to feel like they have skin in the game...because they actually do.
A great performance pay plan gives your employees ownership of what they're doing. They control how and when they make additional income by following a plan that is designed to drive revenue.
Here's an example: a performance pay plan designed to drive upsells will increase your business's revenue and your employees' income. In addition to their hourly wage, if they receive a 50% revenue share for every line item they "upsell", you both win.
- They get more income
- They feel like they win when the company wins
- You get revenue that you would have otherwise missed
When you shift your thinking to "how can I encourage my employees to perform better?" everything changes.
At TeamBuyIn, we are on a mission to get your employees to act like owners. When your team is empowered to own their work, it reduces your need for oversight because when one employee wins, everyone wins.