Whether you call it wage review, performance review, or just plain review, if you have the unenviable task of determining what to pay your employees, you have a choice to make. Your first option is to go by your gut feelings and make an educated guess. Your second option is to review performance and make an educated decision. Of course, guessing is a whole lot easier and if you have been a manager for a while you probably feel you can be pretty accurate in your guessing. Regardless of how long you have been a manager, your guesswork will eventually saddle you with overpaid technicians who believe they are worth more than they produce because you paid them more than they produce.
These technicians believe, and perhaps you do to, that if they leave, the company would collapse. The facts are that these technicians eat away at your profits and become difficult to manage. The right choice is simple, but not easy: review their performance and make an educated decision. If the thought of this makes you nervous keep reading. You will learn eight steps that will ensure you pay your technicians what they are worth.
1. Put your personal feelings aside. This is much easier said than done, but to be truly fair to the technicians and the company you must practice some professional distance. Don’t let socializing with employees cloud your judgment.
2. Pay increases are based on what was done in the past. In my experience most managers will give a pay increase as an incentive for the technician to produce more revenue. While technicians, on the other hand, feel they deserve the pay increase because of their past performance. A raise as an incentive does not motivate a technician to produce more.
3. Decide what your labor cost as a percentage will be. If your company creates a yearly budget you will already know this number. If you don’t have a yearly budget, but you have been profitable, go back and look at your P&L statements for the past couple of years and average your cost of labor. If you don’t have a P&L or you haven’t been profitable, a good rule of thumb for service departments is 18% to 21% cost of labor and for HVAC installation it is 8% to 10%.
4. Accept the fact that numbers don’t lie. As soon as you start trying to justify why one technician’s numbers are at a certain level, go back to the first step and put your personal feelings aside. Yes, I know he ran more warranty calls, he didn’t get the better jobs, the economy was tight, etc., etc. You can come up with as many excuses as you want, but the numbers are what they are, and attempting to justify them for a given individual is a sure sign that you are letting your personal feelings cloud your judgment.
5. Determine total sales, by technician, for the previous year. Virtually every software package I have ever seen has the ability to report a technician’s sales over a period of time. If you don’t have a software package you will have to calculate their sales manually. If your company charges overtime rates, separate regular rate sales from overtime sales. Regardless of totaling the sales manually or running a report, you will need to look at a full year of information. Plumbing and HVAC are seasonal businesses and looking at a shorter timeframe will skew your results.
6. Determine the number of hours each technician worked the previous year. This will come directly from payroll and includes regular as well as overtime hours worked. Note: If your company charges customers overtime rates exclude overtime hours from the total.
7. Determine the dollars per hour each technician generated.Divide total sales by the hours worked to get dollars per hour. Note: If your company charges customers overtime rates, divide the regular rate sales by the regular hours worked to get dollars per hour.
8. Calculate what the technician is really worth per hour. Multiply the dollars per hour by the budgeted labor percentage. The resulting number is what the technician is truly worth per hour.
This can be a very eye opening exercise. You suddenly become aware that technicians who you thought were top producers have been paid 10% or even 20% more than they are worth. Equally surprising are the technicians who are worth much more than they are being paid.
It’s easy to increase the pay of a technician when you can demonstrate they are worth more than they are being paid. The overpaid technician is another matter. Attempting to lower their wages will almost certainly result in losing the technician. A better approach is to let the technician know you value their experience and will work with them to improve their productivity, so they can expect a pay increase in the future. The process to determine the worth of your technicians is not easy, but the reward for doing so is long term success.
Jim Hughes is a trainer and consultant with more than 30 years experience in the plumbing and HVAC industry. He has worked with Fortune 500 companies and some of the fasted growing plumbing and HVAC franchises in the nation. As the owner of Profit Assist, Jim helps small businesses fine-tune their operation and improve their performance so they can earn the profits they deserve.