Higher Commission For Higher Rates

June 1, 2003
There have been many contributing factors to the problem of plummeting rental rates the past few years and an essential supply-demand imbalance is probably

There have been many contributing factors to the problem of plummeting rental rates the past few years and an essential supply-demand imbalance is probably the primary cause. While non-residential construction has indeed been down, most rental people see market saturation as the primary cause for the rental rate drop.

But another factor that shouldn't be completely overlooked is the way rental sales people are compensated. Some companies pay a straight salary, or a salary plus commission. More often than not, the commission is based on a percentage of volume. The salesperson brings in a certain amount of business and his or her commission is a percentage of the volume he or she brings in.

However, some owners I've spoken to recently are questioning that approach, which, they say, contributes to the rate problem because the sales person feels pressure to bring in more and more volume.

Let's say a unit should be renting for $1,500 a month to bring in the kind of return on investment management requires to remain healthy and profitable. The competition, however is renting the same unit for $900 a month. While the management of the company really wants $1,500, perhaps it determines it can accept $1,200. Still, if the salesman is free to make decisions in the field based on his perceptions of current market realities and a philosophy of “do what you need to do to keep the customer” he may opt for the $900 rental or go even lower rather than try too hard to maintain customer loyalty by offering superior value-added service. So he rationalizes his decision that it's better to lower the rate than lose the customer.

But the salesman also has a family to feed and is, therefore, motivated by his commission. Better to have X percent of $900 than nothing at all, right?

One owner, Don Ahern of Las Vegas-based Ahern Rentals, came up with a different approach. Ahern's staff had been compensated based on a team approach, with each sales person paid based on a percentage of the entire company's volume. But, Ahern thought, what if sales staff were rewarded for renting at higher rates? The result has been a far more motivated sales staff, Ahern said.

I'm not sure of the details of Ahern's system, so let me propose one of my own. Suppose salesman A rents the unit for $900 a month, approximating the current market value but well below what the rental company requires for an acceptable ROI. In addition to base salary, the salesman earns, let's say, 10 percent for his effort. But if he can rent the unit for $1,100, closer to the company's book price, his commission would go up to 15 percent, so he'd make $165 instead of $90. If he can rent it for $1,300, he'd bring in $260 with a 20 percent commission, and if he can rent it for $1,500, he'd get 25 percent, or $375.

The result would be higher margins, a better-compensated, more professional sales staff and a customer base trained to value quality service rather than just the lowest price. Of course, the rental company has to back it up with quality service or the salesman can't deliver the higher rental rate.

You may argue that extra value-added service would cost you more and if you are paying more in commission, you aren't gaining much. But a company based on quality will get more business in the long run, and enhanced quality might lead to a more loyal customer base that would be less likely to jump every time a competitor offers $15 off and a free pizza.

Another result could be a more loyal sales staff. Turnover is expensive. The costs of recruitment, training and re-training, and the loss of customers that might follow the salesman to his new company, the damage to your company's reputation when customers sense instability and employee dissatisfaction, are likely to far outweigh the costs of added commission payments.

Would such a system work? I'd be interested to hear from anybody who tried it, successful or not. And a new policy might be better than the status quo.