Over Pay or Over Hire?

Posted on June 9, 2013 by John F. Dini

Many employers chase the Holy Grail of pay-for-performance. Whether it’s commission, piece work or production bonuses, we all want a system that compensates employees appropriately for the value they add to our business. Most of us also believe that better employees should be able to earn more than those who produce less.

Of course, that isn’t a universal truth. I’ll never forget the front page newspaper story when the Ford plant in Edison, NJ went on strike over incentive pay. The President of the local chapter of the United Auto Workers was quoted as saying “We would rather not work than agree to a system where one union member is paid more than another just because he does more work.”

Eventually he got his wish. That plant is now closed.

bonus-schemeMost employees, however, like getting rewarded for good performance. They also like to know how much they can expect to make. The problem between the two arises when employees are dependent on incentives for a large portion of their total compensation. That’s when we run into the “over pay or over hire?” problem.

First example: A local residential carpet cleaning company advertises (as is necessary to compete in the market) “Any three rooms for $99.” Of course we all know that is a losing proposition, and that the company hopes to get additional rooms, furniture, drapes or ductwork cleaning to make up for the loss leader. The owner can’t afford to pay employees to do $99 jobs all day, so he pays them a little bit (say $10 an hour) and a substantial percentage of any add-on work. A typical employee can expect to make $17 or $18 an hour after a month or two of on the job experience.

Here is the dilemma. Employees who are accustomed to making $17 an hour won’t take a $10 job. Those who expect to make $10 are thrilled by the incentives, but as soon as they start hitting the higher hourly number, they begin voluntarily reducing their hours by calling in sick more often. Appointment commitments to customers become a nightmare, and the employee is eventually terminated. It has happened with dozens of hires.

Second example: A home care company pays site managers around $30,000 plus incentives for running a strong operation. Those incentives can raise their compensation to $50,000 or more. One of the requirements of the job is that the manager occasionally has to go into the field to provide bathing or toileting assistance to a patient when the assigned caregiver doesn’t show up. These clients are dependent on the company, and not rendering the service as promised is unacceptable.

Dilemma 2: A $30,000 manager can’t juggle the business development, management and compliance duties required to earn incentives. The $50,000 managers refuse to accept the menial (and unpleasant) tasks as part of their job.

There is nothing wrong with incentives. There is also nothing wrong with requiring employees to perform in order to earn wages commensurate with their value. The problem arises when the amount of the incentive compensation raises the job to another class of employee.As Pat Riley, the President of the Miami Heat famously said, “You can’t make a duck into an eagle.” (Even my fervent support of the San Antonio Spurs can’t make me pass up an appropriate quote.)

No amount of incentive pay will, by itself, raise an employee to another level. No amount of potential pay will make an employee accept work they see as unrewarding or beneath them. Except for salespeople, incentives should be a modest part of the compensation package.

The real solution is one that too many owners avoid. Pay employees what the job should be worth, and then hire, train and mentor people who have the necessary capabilities until they succeed. Incentives can’t replace good management, no matter how much owners may try to pretend that they will.

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Posted in Leadership, Management | Tagged , , , , , , | 2 Comments

2 Responses to Over Pay or Over Hire?

  1. Bill Cox says:
    June 9, 2013 at 8:07 pm

    Amen, “pay for performance” I often cited as a panacea for improving business performance, or worst yet, a “best practice” we all should adopt. It makes me want to throw up! There is no substitute for engaged management, but I do have to admit that “pay for performance” does require management to establish operational metrics and when an owner manager puts his own money on the line, he does tend to be engaged.
    Those of us aware of the 1920’s experiment at the Bell Labs Hawthorn plant should recall that the study showed us that productivity improves when management has key metrics to measure output and is engaged with the productivity. Out of this study, we learned (or should have learned) that there is no substitute for management paying attention to positive results – Results have to be measured and it takes metrics to measure results – Amen.
    Proponents of the virtues of “pay for performance” often cite numerous success stories of businesses that thrive with a culture using these tools. However, consider, is there causation or a correlation between such performance. In other words, do the businesses that are performing well do so because their compensation formula is some incentive plan, or because the business is among the larger population of strong businesses that have ENGAGED management with METRICS – AMEN.

    Reply
  2. Tom Morton says:
    June 17, 2013 at 5:02 pm

    Another excellent post, John! Thank you

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Can Your Small Business Survive Disaster?

Posted on June 2, 2013 by John F. Dini

Memorial Day weekend served up numerous reminders of the vulnerability of small businesses to disasters. Boardwalk vendors were reopening on the Jersey Shore and Coney Island. San Antonio was underwater, and a large portion of Moore, Oklahoma was swept away by tornados.

Only about 35% of small (under 100 employees) businesses have insurance for interruption of business income. Most carry property and casualty insurance, which will pay for repairs and some ongoing expenses while you are closed, but there are many other ways to be impacted.

A motorcycle repair shop in New Jersey was undamaged by Superstorm Sandy, but with impassable roads and thousands of his customers dealing with lost homes (and lost motorcycles) his business was essentially shut down.

A fire in a local office building caused heavy smoke and water damage. The professionals who owned firms in the building had to be restrained by police from running in to save their records.

post sandy businessesOnly about 25% of small businesses that lose their records to disaster survive. Keeping backups off site and testing them are a requirement for any business, but there are so many other ways for a small business to suffer.

In the office building fire above, a financial management firm had complete backups and redundant offsite capabilities. They were functioning the next day, working remotely to issue month end statements, pay bills and reallocate client assets.

Unfortunately, battles between insurance companies and contractors kept them from moving back in for months. Their culture suffered from lack of communication. Potential clients didn’t want to meet in a planner’s house or restaurant to discuss their confidential finances. Business suffered, but not in any way that was insurable.

Planning for an interruption in business is straightforward. Redundant records and cash reserves need to be in place, but alternative sources of supply and temporary space are decisions that you can make on the fly. For many small businesses however, the biggest threat has nothing to do with the disasters; it is the incapacitation of the owner.

How well could your business function without you? If you were in an accident, or needed surgery, do you have a contingency plan that allows your business to survive for weeks or months in your absence?

If you are a Baby Boomer, don’t be surprised if your bank asks you for such a plan at the next credit line renewal. Bankers can read risk reports as well as any health insurance company. Older folks pay higher health premiums because they are at greater risk. Age is starting to impact lenders’ attitudes towards extending credit as well.

You should have two plans prepared. The first is for planned or unplanned absences of two weeks or less. That plan is driven by assignments of your responsibilities. Who signs checks? (And just as important, who checks the signer?) Who handles your daily functions? Which of those tasks can be left undone for two weeks, and which ones can’t?

The plan for more than two weeks incapacity is focused on decision making. Who determines courses of action for which you hold the liability? Who has the final say on hiring and firing? Who grants or refuses a concession to a major customer?

If you are fortunate enough to have a solid second-in-command (SIC) you are ahead of the game, but is he or she  able to take in the entire scope of what you would consider when making a decision? Sometimes financial executives can’t see beyond the profit margin, or sales managers can’t see beyond the transaction. In those scenarios, I often recommend shared decision making.

I once worked with a manufacturer who took extended trips into areas where he was unreachable. He left decision making jointly to his sales manager and plant manager. If the two couldn’t agree, the CFO could make whatever decision he wanted. It worked for years. The two managers disliked the CFO, so they would always work out a compromise rather than hand him the authority.

When considering your disaster readiness, don’t forget to include yourself in the plan.

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Is “Follow Your Passion” Really Bad Advice?

Posted on May 26, 2013 by John F. Dini

It’s graduation season, and honored guests clutching honorary degrees are speechifying at commencements all around the country. In a recent story on National Public Radio, quotes from celebrities including Ellen DeGeneres, Oprah Winfrey and Michael Bloomberg all included the same catch phrase: “Follow your passion.” The exhortation has become so common that the news story was about one poor Ivy Leaguer who found himself unable to enunciate his passion.

Fortunately, the fact that he made it as far as graduating from an elite institution probably bodes well for his chances of eventually doing, and being able to afford to do, what interests him. For the rest of the class of 2013, like those for several years before them, the ability to follow their passion will often be impeded by their desire to eat.

unemployment-line-now-hiringUnemployment for new college graduates remains stubbornly high. In a luncheon with an official of the Federal Reserve a few week ago, he noted an anomaly. Unemployment is at the highest sustained rate in 70 years, while the number of help wanted ads are also at an all-time high. The reluctant conclusion is that we have a workforce unable to fill the positions available. From an employer’s perspective, I see three reasons for this disconnect.

1. Just a “college degree” isn’t enough

For years, I and many other employers would use “college degree preferred” as a litmus test to identify people who could set a goal, plan to reach it, and accomplish what they set out to do. With the advent of helicopter parenting and institutional success measured in six-year graduation rates, a Bachelor’s degree often means someone who had the financial means (or the debt capacity) to hang around long enough to amass 120 or so credits. Two day a week class schedules and having mom fill out your course choices online (or pay a consultant to do it for you) doesn’t develop much strength of character.

At the same time, technology and pressure on profits have caused employers to back away from being the trainers of first resort. For many jobs, like entry level sales and retail branch management, systems have replaced decision making, and those jobs can be “dumbed down” to people who don’t have a degree-holder’s salary expectations.

2. A college degree isn’t what it used to be.

The quest for paying customers has caused colleges to expand to unprecedented levels. Here in Texas, UT now operates 9 campuses under the UT brand, enrolling 192,000 students. Texas A&M runs 8 more, with 83,000 enrollees. No one outside of academia pretends that all of those students are receiving the same level of education as ten or twenty years ago.

A part-time employee of mine showed me her class schedule a few years ago. By credits earned she was a junior, and taking upper level courses. Her choices included titles like “The Role of Women in Architecture,” “Non-traditional Literature,” and “Minority Contributions in American History.” When asked why she wasn’t focusing more on her business major she replied “Because these are all required for graduation!” I’m all for expanding people’s horizons, but not at the expense of teaching them what they need to know.

3. There is no “right” to succeed in your passion

The Constitution enshrines the “pursuit of happiness” as a basic human right. It does not make it anyone’s obligation to ensure that you succeed. We’ve raised a generation to believe that success is the inevitable outcome of effort. In a recent interview with a couple who were protesting high school teacher salaries, they complained that their wages were insufficient to support $300,000 in student loan debt. His Master’s degree was in comparative literature. Her PhD was in philosophy. Who told them that was a good investment?

Employers are scrambling to fill positions in programming, engineering and skilled trades. They share stories of graduates with little or no pertinent skills who want to focus their job interviews on salaries, advancement expectations and benefits. There is a fundamental disconnect between what our education system is providing and what our employment market is seeking. Perhaps “Follow your passion” isn’t the best advice we could be giving.

 

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5 Responses to Is “Follow Your Passion” Really Bad Advice?

  1. Ray says:
    May 26, 2013 at 9:02 am

    Brilliantly put. It is exactly the same in the UK. Graduates with no experience of the real world assuming because they have a degree employers will welcome them and throw money at them. We have all time highs in numbers of graduates but the majority of degrees are in media studies and the like that are of little use to the average SME who will have to invest considerable sums of money to train them and educate them in what business really needs.
    We have the same ‘Follow Your Passion’ message across here and a dumbing down of standards where school children and college graduates are not allowed to fail. They have no idea what failure means or how to deal with it and are now facing it. Many sadly are being woken up with a jolt and big debts for a degree that isn’t worth anything.
    On top of that many SME’s and bigger businesses have job vacancies we can’t fill because the applicants have little to offer and expect too much.

    Reply
  2. Lara August says:
    May 27, 2013 at 10:59 am

    I need to take a deep breath before replying because there is some truth in what your are saying, but there is also fault to the logic. It might just be the title that rubs me wrong.

    We have had trouble hiring recently. There are literally a hundred or more applicants for each position, and few are actually qualified. However, these aren’t even for entry level jobs – we are requiring a minimum of 3-5 years of experience for most positions, and they STILL aren’t qualified. I think that this is because most SMBs can’t or don’t provide proper entry level training. My own management team even came to the realization that we were not in a position to hire recent grads, due to a combination of our lack of internal training resources and the cost/lack of availability of those resources externally. So my business is admittedly perpetuating the problem. So on the point at colleges aren’t preparing students adequately, I agree, but I think both colleges and businesses need to adjust.

    Now on to the point about passion. When I was headed to college, my dad pulled me aside and asked what I wanted to study. A straight A student, I replied, “a doctor or lawyer, and I’m leaning toward law.” I’ve never seen such a look of disappointment on his face. To everyone, including myself, I was an artist. I had always loved art and excelled at it in school and in competitions. He asked why I didn’t plan on studying art and my response what that my art teachers warned us not to wind up as “starving artists”. One of my favorite teachers recommended that I study business if I wanted to be an artist. My dad was then disappointed in my teachers and mentors. He hauled me over to the early-stage dial up Internet access that we had at home and managed to find a really cool chart showing income ranges for various professions. He showed me very wealthy and very poor salaries for each position. And then he asked, “where are you going to fall on this spectrum if you are doodling in the margins of your law books? Are you going to be one of the greatest lawyers?” He was right. I was meant to study art. I have an older brother who is a journalist. We have both “made it” in or professions and are at the top of our income categories, and I am thankful to my father for being so supportive of our dreams.

    I don’t believe that passion and entry level job preparedness should be inextricably linked in this discussion. I can’t give up on the idea of self-actualization, but maybe those dreams do need to be tempered with encouragement to pursue a double major or minor in something that will help with the first few years out of college. If I had received a business degree, it certainly would have made entry level job searches less painful, and would have benefitted me in my role as a business owner. Maybe in 1996 that wasn’t as crucial as today. I think the caution is: let’s not overly stifle the passions of an entire generation and wind up with a well-trained entry level, and later, horribly mediocre working class.

    Reply
    • John F. Dini says:
      May 27, 2013 at 11:39 am

      Of course we haven’t stopped needing artists, or journalists, or philosophers. I think “follow your passion” has been overused to the point where kids leaving for college just pick their favorite extracurricular activity or high school class and choose that as a “profession.” If you love philosophy, or art, or music, then by all means go for it. But “love” means you read about it on your own, practice it instead of going out on Friday night, and focus your decision making in higher education on schools where those who excel at it go. You don’t pick a mediocre course load at a local diploma mill and think that six years later you’ve earned the right to a job. One major problem is that there is no vetting process. A basketball player finds out whether he can make the grade at each point of passage. If he is passionate, he may still play basketball for a Division III school and enjoy it, but he doesn’t think that’s going to put him in the NBA. Unfortunately, there is no vetting process for philosophers until much later, when they can’t get a job.

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  3. Brad Elmhorst says:
    May 28, 2013 at 7:42 am

    I encouraged both of my children to find work they were passionate about. Both found desired career paths in their senior year of high school, both went on to college and graduated within their chose fields. My Occupational Therapist, immediately employed after college worked two different positions (clinic based & home health) prior to finding, four years and a marriage later, her passion as a neo-natal OT. My Film Editor, living at home worked contract jobs throughout Texas, worked in a warehouse, odd jobs and faithfully made monthly payments on his student loans, while living at home. Two years & 5 months elapsed until he found a full time editing position.

    My point in all this is following a passion has to be balanced/realistic and adaptive. Following one’s passion is not bad advice. It just needs to be balanced with the individual’s commitment (true passion, not a passing fancy) and their resources to stay the course and adapt.

    Reply
  4. Zbig Skiba says:
    September 25, 2014 at 5:03 pm

    A wise man once said “I think owning a business is the most interesting thing you can do.” That sounds like passion to me. As does “Awake at two o’clock.” And since when is entrepreneurship a profession with a strong, predictable income stream? Sounds like lots of people following their passions.

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Boomer Business Owners’ Retirement Accelerates

Posted on May 19, 2013 by John F. Dini

Pepperdine University, in cooperation with the International Business Brokers Association and the M&A Source, publishes a quarterly Market Pulse Survey on the sale of small businesses in the United States. The most recent report, covering the fourth quarter of 2012, shows that “retiring Baby Boomers” is for the first time the number one reason for selling a small business in the United States.

I’ve written since 2007  in this space and elsewhere about the impact of Boomer business owners leaving their companies. You can download my e-book on the subject at www.theboomerbust.com. (The password for my faithful readers is “Woodstock.”) The Market Pulse Survey is just the latest indicator of a crest that is building, and which will have a huge impact on the American business landscape.

hedge mazeIf you are as acutely aware of the impact of Boomers on the American economy as I am, you begin to see it in a lot of places. I attended a luncheon with an official of the Federal Reserve a few weeks ago, and a question was raised about the recovery of residential housing. He pointed out that the introduction of 30-year mortgages with only 20% down transformed the US into a country of homeowners.

Home ownership grew to over 60% of households by 1960, fueled by larger families (Boomer children) and the GI Bill. It stabilized at around 65% from the 1970s through the late 1990s, when it began climbing again, largely as a result of political pressure to let the Federal Government (through their proxies, Fannie Mae and Freddie Mac) make mortgages available to a wider portion of the population. By 2007, the percentage of homeowners had reached almost 70%.

Residential housing markets began cratering in 2007, largely because too many people had been financed into homes they couldn’t really afford. They weren’t just the poor, but also included millions of Boomers who “traded up” in their quest for material success. (See the e-book for more on that Boomer drive.) The presenter pointed out that the population of homeowners was now stabilizing at much closer to 65%, which is assumed to be the normal equilibrium.

What if that is only a “Boomer equilibrium?” After all, the growth in home ownership occurred in a 50-year long expanding economy fueled by Boomers, first as household size increased, then as they became consumers. Aren’t we working with an assumption that the following generations will repeat the Boomer quest for more? Will GenX and the Millennials really get in line to splurge on ageing McMansions, or will they be satisfied with a more reasonable standard of functional shelter?

If the housing market suffered so badly in adjusting from a temporary high of 70% back to a more “normal” level of 65%, what will it look like if the next normal is 60%, or even 55%? (Prior to WWII only about 40% of US households owned their homes.)

The Market Pulse Survey also found that it is increasingly a buyer’s market for small businesses. That trend will inevitably accelerate, especially as we reach the 2018-2023 period, when Boomers turning 65 years old out number the GenXers turning 45 by 4,000 a day. If you are a young business owner, or plan to be one, the time is coming when you can pick and choose your opportunities.

But I’d be cautious of businesses focused on high-end residences.

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Posted in Exit Planning, Exit Strategies, Life After | Tagged , , , , , , , , | 3 Comments

3 Responses to Boomer Business Owners’ Retirement Accelerates

  1. lawrence says:
    May 19, 2013 at 12:48 pm

    I don’t stay in the usa but I agree with you on the matter their is a big differ from.genx and the land wil provide a harder operation to the genx than before or ever

    Reply
  2. Tom Morton says:
    May 19, 2013 at 6:00 pm

    Great post — as per normal — thanks John.

    I am intrigued by your “Woodstock” password. Is this a reference to Snoopy’s indefatigable secretary? Or to your misty memories of a certain festival in the ’60s?

    I think we should be told…….

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Three Rules for Small Business

Posted on May 12, 2013 by John F. Dini

A few days ago a discussion on LinkedIn’s “Small Business Accelerator” group asked “What are the three things a small business owner should focus on?” As challenging as any business is, the basics remain the same for everyone. We provide goods or services, get someone to buy and pay for them, and keep score. The “rules” I contributed were very simple, and involve employees, customers and reporting.

Rule #1: Develop a process by which good employees are given the opportunity to grow, and poor ones are allowed to find opportunities elsewhere.

Of course, this is much more complicated than it sounds. Small business owners often consider a paycheck and benefits to be investment enough. That isn’t true. Good employees are precious, and they are becoming more difficult to find every year. If you can’t give them chances to grow, to add to their market value, then the best of them will find a company that can.

3 simple rulesWhen an employee shows the behaviors you value: a solid work ethic, dependability, problem solving and initiative; supporting additional training or education is a must. Ironically, the result is that they are worth more, and you can’t expect their gratitude for your investment to offset their expectation of market compensation commensurate with their increased skills. If they are really worth developing, then your investments will pay off on the bottom line.

On the other hand, too many small businesses settle for employees who are merely “good enough,” often because their pay rate is more manageable. You aren’t saving money as much as you’re filling a space that could be used for a top performer. Set goals with realistic time frames, and expecting each employee to know, track and reach those goals. If they can’t, then you have to find someone who can. It’s uncomfortable, but you owe it to your good performers. They deserve to be on a team where everyone shares their values.

Rule #2: Understand why, really why, your customers do business with you.

Few small business owners dig into their customers’ motivations. They are usually too happy just to have the customer. The owner tells himself “We give good service, we are fairly priced, and we stand behind our products.”

Those are merely the basics that every customer expects. Unless you have a unique differentiation, they are probably choosing you for another reason. Customers seldom say that they choose a vendor based on an ability to satisfy their minimum requirements.

The other claim I hear is “We are in a relationship business.” I’m not denying that customer relations are key, but…Duh! Everyone is in a relationship business. Unless you can clearly enunciate what benefits the customer receives from the relationship, you are in danger of the next “nice guy” taking the business away.

Rule #3: Know what the key measurements of your business are, and track them exhaustively.

Financial statements are historical records. While profitability is essential, it’s hard to correct retroactively. True performance indicators are measurements that indicate how you are generating profit, and why. “Indicate” is the important word here. You don’t want numbers that merely show a fact. You are seeking measures that show a trend, a change, or a place to dig deeper for causes.

Are your employees as productive as they were last month or last year? Are your customers spending more or less per transaction than they in the past? Are buyers gravitating to products or services that have lower margins? Are you deviating from a reasonable return, defect or complaint rate?

The best measurements take what you are doing now, and put it against what you did before. Any measurement is useless unless you can determine whether it is better or worse than another.

Running a successful business is never easy, but if you focus on these three rules, it becomes a lot easier.

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One Response to Three Rules for Small Business

  1. David Cunningham says:
    May 12, 2013 at 2:07 pm

    John, The beauty of this article is its simplicity. Rule #3 is of particular interest to me because I recommend another simple tactic that helps in identifying the priority of actions to improve the generation of profit. I am referring to the 80/20 Pareto Principle that approximates to “80% of your profit comes from 20% of your customers” or “80% of your costs come from 20% of your operations.” This is an oversimplification but applying the thought process across a company does reveal where to apply resources. Richard Koch’s book The 80/20 Principle is the reference work on the subject.
    Another comment is more controversial. I like to see business owners measure the value that they are creating in their company and track its change year over year. This is preparation for the day when they will depart, but it is also a check on the health of the company and the industry it is in. The measurement includes a standardized process of a three year forward projection and calculation of the Net Present Value of the cash flow, plus a simple terminal valuation at the end of the third year, discounted to the present. If this valuation is growing, the owner has added comfort in his/her commitment to the company and supports making suitable investments. If it is declining, it is time for a serious look at future plans.

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