6 key elements of manager compensation plans

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With inflation raging and the economy sputtering over the past several months, I’ve been asked by many clients and friends: How do we become more efficient? How can we continue to grow our company?

The obvious answer is to become a best-in-class company, which includes having the best team led by the best managers. But how do we keep these managers motivated?

One big motivator is adequate compensation. To this end, I’ve listed below my six elements of a strong management compensation program:

1. The plan needs to be built to retain competent managers. Over the long term, managing a pest control company is easier when there is low employee turnover. In many cases, the wage a manager makes, as well as the corporate culture of the firm, can dictate the employee turnover rate. If managers see their work as a career as opposed to a job, they are more likely to stay and grow with the company.

2. The plan needs to provide predictable and competitive compensation, comparable to similar job functions at similar companies. The total compensation package needs to provide a livable paycheck week after week. In many markets, pest control is seasonal. Companies that prosper are able to smooth out their revenue and mitigate cash flow issues created by seasonality. While managers usually can make more money in the warmer months, if they are not adequately compensated in the cooler months, they may leave your company to seek a more stable paycheck.

3. The plan gives each manager a chance to earn a higher income. Commissions and bonuses can be motivating. They need to be easily calculated. If an incentive program is not easy to calculate, there can be ill will. Nothing is more demoralizing to managers than the promise of incentives — but when they start work, they encounter a dysfunctional work force and no systems in place to accurately calculate incentive-based pay programs.

Dan Gordon, CPA

4. The plan needs to deliver secure employment. The beauty of our business is that if we build our company using a recurring service contracts model, we can provide steady employment. After all, the managers we want live pretty stable lives. Part of this stability is a predictable paycheck.

5. The plan rewards for loyalty as well as technical competence. Many companies use a compensation grid that breaks their managers into a few ranks (size of office, etc.). Within the ranks, there are minimum and maximum wage rates and bonuses. As managers move to the next rank, they will earn more.

6. The plan provides for leadership and a clear vision of the company’s goals, including profitability. For most companies, management labor measured as a percentage of revenue should be in the 5 percent to 12 percent range (for a mature company or office). This includes only compensation; it does not include benefits or payroll taxes. Once we add benefits and payroll taxes, we can add another 2 percent to 3 percent of revenue into management costs. Typically, management benefits include health insurance (the employee usually contributes a portion to monthly premiums) as well as 401(k) or other retirement plans, and a company car. If managers are allowed to take their cars home (which is usually the case), it needs to be determined whether this is a convenience to the employer or a perk. If it is a perk, then there may be some tax implications for the employee, as the IRS may consider this additional compensation. These guidelines should be considered when designing your compensation plan.

When the economy is strong, it’s easy to show great results. As the economy weakens, the companies that have the best managers will thrive.