Pay in the Skilled Trade Industry

I would bet you haven’t gone a day without seeing vehicles on the road advertising skilled trades such as construction, HVAC, plumbing and electrical service. I’m also sure many of you have had someone come to your home to service you A/C or that toilet that’s always leaking. Have you ever wondered how those specialists are paid? Ever considered the challenges they might be facing within their industry? If you are anything like me, you assumed that those who work in the “skilled trade industry” were hourly workers, with hourly rates determined by the certifications they held.

My perspective changed when, just recently, I had the opportunity to work for a client in the skilled trade industry – specifically HVAC, Electrical, Plumbing, Drain and Excavation teams. As I started working with the client, it became clear that while the skilled trade industry experiencing growth, as a whole, the industry faces many challenges. Like many companies, this client understands the importance of keeping their talent pool motivated and engaged.

In an article written in January of this year, it was noted that the global HVAC system market size is projected to reach 217.5 billion in U.S. dollars by 2025, growing at a CAGR of 6.6%. A long-term shift towards hotter climate conditions coupled with the U.S. migration patterns towards the sun belt will help maintain the uptick in HVAC demand. Similarly, the U.S. plumbing fixtures market size is expected to grow at CAGR of 7.5% from 2021 to 2028. Despite the notable increase in demand, headwinds such as inflation, supply chain, regulation changes and labor shortages continue to impact the skilled trades industry.

Availability, Price Hikes, and Regulation Changesskilled trade - pay and incentives
The HVAC industry itself is dealing with what people are calling the “three-headed monster”, in that there is lack of availability, price hikes in manufacturing, and a recent department of energy regulation on SEER and EER ratings of certain HVAC systems.

Timelines for getting equipment continues to be a challenge in HVAC, plumbing and electrical as many parts are not able to be found and, in many instances, wait times for receiving parts and equipment have gone from days to weeks and now to months.

In addition to product availability the industry has experienced several manufacturing price hikes of 30-40% year-over-year with some increasing monthly. The HVAC industry is also dealing with new regulations leading to price hikes. The most recent change became effective on December 31, 2022, and is requiring that the industry stop selling equipment rated lower than the new regulated minimum for SEER and EER ratings. This regulation alone is expected to add another price increase of 20% – 30%.

Labor Shortages
The demand for both electricians and HVAC technicians is expected to remain strong as the focus on energy efficient homes and renewable energy efforts continue well into 2023. Additionally, with the installation of more sophisticated home automation systems plumbers are now taking on more complex tasks. However, the skilled trades have been suffering from labor shortages for years and according to a recent article I recently discovered that there are twice as many plumbing and HVAC jobs out there as there are people to fill them. This stems from the fact that fewer young people are pursuing the trades as older technicians are retiring or leaving the workforce. This is creating bad news as it relates to customer services as fewer techs means that it takes longer to get to all customers.

In this ever-changing world of uncertainty, many companies are trying to attract talent while simultaneously working to keep their current employees motivated and engaged. There are two ways to address both of these challenges: Pay-for-performance and the Employee Value Proposition (“EVP”).

Pay for Performance

One obvious way to keep employees motivated is through their pay. As previously mentioned, I used to be under the impression that those working in the skilled trade industry were paid an hourly wage for their work. Shortly after I started working with my client, my perception changed. Pay often consists of hourly or salary components, as well as pay-for-performance components such as commissions, spiffs, bonuses, and piece rates. However, most of the employees I spoke with were not clear on how they were being paid, and pay plans varied not only by location but within the individual trades themselves. Additionally, I learned that some people were provided with plan documents while others learned about their pay verbally or via the grape vine. While the organization had pay-for-performance plans in place, they often were not well-received or effective at achieving the desired results.

Pay-for-performance plans are effective, but only if they are consistent, and if employees understand the purpose of the plan as well as the mechanics. Roles in HVAC, Electrical and plumbing industry typically consist of Sales, Installation and Service Technicians. Keeping this in mind, putting everyone on the same plan may not be the best approach. Instead, it is important to create pay-for-performance plans that meet the expectation of the varying roles. Below are a few considerations dependent on the type of role and desired outcome.

Sales teams are selling equipment such as HVAC, electrical panels, and whole-house generators. Therefore, a commissions-based plan that pays for sales performance would be appropriate. Commissions plans can be structured on a variety of factors such as profit margins, types of customers, order size, and/or customer satisfaction. While commissions plans can be highly effective and motivate the right behaviors, companies should ensure that these plans are aligned to the company’s goals and values and that they are fairly compensating the team for their work. Some of the benefits of commissions plans include but are not limited to:

  • Motivating sales – Commissions plans can provide a strong incentive for teams to meet or exceed sales targets resulting in sales team motivation to work harder and be effective at their jobs.
  • Aligning incentives – Commissions plans align the sales team to the company goals such as revenue generation or improved profits. In most cases they also lead to improved teamwork.
  • Attracting top talent – In a tight labor market, commissions plans may be effective at attracting and retaining top talent. If salespeople are highly motivated to earn a high income, good commissions plan maybe a powerful tool to incentivize people to join and stay with a particular company.

While commissions plans can be highly effective and motivate the right behaviors companies should ensure that these plans are aligned to the company’s goals and values and that they are fairly compensating the team for their work.

Installationskilled trade industry pay and incentives
Once the sale is complete, it is up to the installation team to put in the new equipment. A pay-for-performance plan for this team might consist of piece rates. A piece rate plan incentivizes employees based on the number of units they install or produce. In the HVAC industry, this can be used to pay for the number of HVAC units or heaters a team installs. Some of the benefits of a piece rate plan include but are not limited to:

  •  Incentivizing productivity – If installers are paid based on the number of units they install, a piece rate plan can incentivize workers to be more productive and efficient. It can also lead to faster completion times resulting in higher revenue for the company.
  • Encouraging quality work – Install teams might be motivated to do high-quality work to complete jobs accurately the first time eliminating the need for call backs.
  • Clear performance expectations – Piece rate plans give installation teams a clear understanding of what is expected of them in terms of the number of units being installed, which can help to prioritize their workload and keep them on track.
  • Higher earnings – Piece rate plans often lead to higher earnings for those that are skilled and efficient. This type of plan can be a powerful incentive, leading workers to improve their skills and become more efficient at their jobs.

While piece rate plans can encourage quality work it could also result in negative behaviors such as poor customer service or safety concerns as they are task focused. Therefore, it is important that employers consider the pros and cons before implementing this type of plan.

Service Technicians
Service technicians are responsible for responding to equipment breakdowns and performing routine maintenance. In addition, they might be the team installing items such as thermostats. Therefore, it could be beneficial to place a service technician on a plan that rewards billable hours. Some of the benefits of this type of plan include but are not limited to:

  •  Fair compensation – paying on billable hours can be a fair way to pay service technicians for their time spent working on a job as they are being paid for the actual work performed and not for nonbillable work.
  •  Transparency – paying on billable hours provides transparency on how long it should take to perform a certain task. It also allows for visibility into more profitable jobs and points out those jobs where productivity could be improved.
  • Increased accountability and efficiency – Paying on billable hours encourages technicians to be more accountable in terms of productivity and efficiency. Technicians who are paid on billable hours may be incentivized to work more efficiently which might lead to faster job completion times.
  • Flexibility – Paying on billable hours can allow for flexibility within the organization allowing the adjustment of the number of technicians and hours matching workload demands.

pay for performance - skilled trade industryPaying on billable hours could lead to negative behaviors such as technicians rushing through a job to increase their billable hours. Therefore, it is recommended to weigh all the pros and cons prior to implementation.

As service technicians work on older equipment, they might also make recommendations for system replacements. Another measure to include in their plan might be one that rewards the generation of sales and/or requests for proposals. It could be as simple as a percentage of the sales paid upon installation of the new equipment.

When it comes to the skilled trade industry prior to implementing a pay for performance plan it is advised that organizations review them with their labor lawyers to ensure workers are being paid fairly and in compliance with applicable laws.

Pay-for-performance plans often increases employee engagement and when employees feel recognized and appreciated for their hard work, they are more likely to perform at a higher level. However, if employees don’t understand their pay even the best plans will have a negative impact. Therefore, when creating pay for performance plans it is recommended that plans have no more than 3 measures and are easy to understand. Lastly, as plans are being implemented it is important to standardize pay plan documents, communication, and training across the organization, which will lead to increased transparency.

Employee Value Proposition

Attracting new employees and motivating existing employees is not just about the money, you can also attract and retain employees by educating them on their total rewards and benefits available to them. This can be done by marketing the company’s Employee Value Proposition (“EVP”) which is the unique set of benefits that are provided to employees in return for the skills, capabilities, and experiences they bring to the company.

As I worked with the previously mentioned client, I learned that in addition to pay, employees also received several benefits that ranged from paid time off to company vehicles and even personal uniforms. However, most employees were not informed about what they were receiving. One way to market the EVP in a way that is easy for employees to understand is to break it up into two parts including those benefits that are contractual and those that are experiential, and further grouping by compensation, benefits, career, and culture like described below.

skilled trade industry pay and incentivesskilled trade industry pay and incentives

Contractual Benefits
Contractual benefits are those benefits that the company provides once an employment agreement is signed. First is monetary financial rewards, including compensation for performing the work as well as any short and long-term incentive plans for meeting and/or exceeding specific company expectations, such as Annual EBITDA results. It could also include benefits such as health and life, paid time off including holidays, gym memberships, company vehicles, uniforms and other allowances provided for the day-to-day activities involved in accomplishing the job assignment(s). The third element included in this section is work environment, specifically calling out items such as flexible working hours and employee wellbeing.

Experiential Benefits
The second group includes elements that help to build an employee’s experience including career development and company culture. Career Development might include items such as career advancement, training, and continued education whereas culture includes items like your mission statement, company values, the atmosphere and team collaboration. Throughout my career I have learned that culture is very important as when it comes to job satisfaction while people might not like their pay, they may stay because of the company’s culture.

As we move through 2023, we might continue to see challenges with inflation, supply chain and labor shortages therefore companies will need to continue to be creative when it comes to attracting and retaining talent. Implementing, marketing, and educating talent about your organization’s Employee Value Proposition will help to answer the question “what’s in it for me?”, and may even result in attracting and retaining the right employees for your organization.

skilled trade industry pay and incentives

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