I know I have written about this topic in the past, but recent overwhelming interest in this topic tells me it is time to talk about it again. I was lucky enough to speak on this topic at the 2011 International Roofing Expo in Las Vegas and the interest was undeniable. There I was at 7:45 a.m. in Las Vegas and the room was full of contractors who were eager to discuss the topic.
I am not a big proponent of the latest employee compensation gimmick or concept. I want to go on record that the best employee compensation system and motivation system in the world is to hire good people, pay them well and fire the people who do not perform. No pay or bonus system is going to take the place of managing people. Managing people is a thankless and difficult job. Always has been and always will be. If there was a no-brainer bonus system, I would have sold it to contractors long ago and used the money to retire.
With that said, here are some basic rules you can adhere to when employing people:
1. Employment has to be a win for both the employee and the company. If you do not pay people a competitive and livable wage, they won’t come to work for you. If you pay less than the market demands or what people require to live on, they will always be looking for another place to work.
2. Just because you pay a lot does not mean you get a lot. Employee pay might be compared to buying a ticket for the Super Bowl or World Series. If you don’t pay the going price to buy the ticket, they won’t let you in the game. But just because you pay a lot does not mean it is going to be a good game. Another way to look at this is to consider doubling your employees’ pay. I am sure they will take the increase but I doubt they will double their output.
3. Many consultants propose field bonuses. Frankly, I have seen such programs create more problems than they eliminate. If you do have a field bonus system, you must ensure that it does not penalize your best supervisors. If you bid a tough or tight job, you sure as heck are not going to put a weak guy on the job. Your best people can become demoralized by profit and hour saving incentives because you assign your best people to the tightest bid jobs. You must also overcome the age-old problem that if the job made money, it is because the field person receiving the incentive did a great job. If the job loses money, well, you estimated it incorrectly.
4. If you do give performance bonuses, do not distribute the money at Christmas. Yes, I know that is near year end and folks can always use extra money around the holidays. The problem is that Christmas is a time of gifts and this was supposed to be income earned. I am sure some of the readers who awarded compensation found themselves in a dilemma the last couple of years. Business has been tough and cutting folks “Christmas bonus” can be rough, even if the company cannot afford it. Sure, you can explain it to your employees, but don’t underestimate the power of pillow talk. Company owners and bosses always make too much and the family needed the money.
5. Don’t award bonuses and commissions as part of profit. The last thing you want is disgruntled employees because you bought a new truck or built a new shop. Employees do not control the purse strings. It is much better to reward the bonus as a function of gross profit. You should be able to budget and figure stuff out. You really don’t want to negotiate with employees how much rent you pay yourself, capital expenditures, etc.
6. If you do have a commission system, it needs to be tied to the strategic objectives of the company. For example, if your bonuses are only paid on field performance, there is a tendency to forget about the company as a whole and rewards are only short-term focused. Such systems can help create employee shortages, poor capital planning, and impede new customer development, etc.
7. Commissioned salespeople are a norm in many businesses. I have no issue with giving a salesperson a commission but plans need to be well thought out. Each type of commission program carries with it a certain set of problems and issues, none are perfect and you must figure out what works best. Commission-only salespeople tend to be very independent. If commissions are tied to sales and not company well-being, each time there is a material increase, the salesperson gets a raise. Finding good people willing to accept low commissions until they learn the business and build their customer base can also become difficult. You also have to make sure appropriate gross margins and profits are maintained. At a recent public class, one attendee quoted about how a great salesperson sold $2 million and made 10 percent commission and that was more than the company made. Sounds like the salesperson may have been selling stuff too cheap. Remember, both the company and the salesperson need to be profitable.
8. Be careful of compensation situations where sales are temporarily or artificially high. This can cause salespeople to be overcompensated for several years, spoil their normal performance and create an enabled employee. My rule of thumb is to figure out what a good person would make. Once this is established, their base pay should be at least 70 percent to 80 percent of that amount and their total revenue opportunity 120 percent to 130 percent of that amount. So if a good estimator/project manager is worth $100,000, you would pay them $75,000 to $80,000, and in a great year they might make $120,000 to $125,000. History tells us that when you get above or below those numbers, lifestyle and attitude issues can prevail. Remember, it is your money and your risk.
I know many of you do not agree with these concepts, particularly if you are in a sales commission or field bonus culture. And here lies the reality: If your core belief is cast for a certain way to pay, your culture and policies have been set. By the way, research shows that for cognitive tasks, extreme compensation does not equal extreme performance. (Tell that one to Wall Street.) What creates high performers is a combination of someone who is self-driven (which is a hired personality trait), a work environment with a sense of purpose, and someone who desires to master their profession (again a trait that is hired).