Compensation AND Contribution
Compensation is often seen simply as an expense to be managed in a business. Let’s reframe that thinking. Instead, let’s view compensation as an investment in the outcome. Think of it as productive payroll. You spend money on payroll, you receive a positive resulting outcome.
Over the past few weeks, we’ve been discussing recruiting, hiring, interviewing and selection. One serious reality in the world of hiring is the question of compensation plans. Follow our link below to read all the many options in the world of Compensation options in the workplace today. This can be overwhelming to employers and owners. Often Payroll is the most expensive expense in your P&L statement.
It's a fact that most of us feel we are not paid enough. We always want (deserve!) more. But this should become a two-way conversation—a “win-win”. Not only should we be talking about compensation; we must also set expectations and measure an employee’s contribution. Variable contribution is a reality. So then, should variable compensation. This may not be a popular opinion, but it certainly bears consideration.
As business owners we try to balance the books on a monthly basis. The most controllable expense is often payroll. Layoffs, hiring freezes, wage increase freezes, and low hourly rates are all tactics used to manage payroll costs. This is only one side of the equation. Payroll costs will remain balanced when there is the appropriate contribution from the payroll dollars spent.
For retailers: Instead of stating, “we pay $12/hour. After 90 days you can get a $1 raise. After 6 months you can get another $1. The longer you stay the more. You can make…..You should try, “We pay $12/hour, we expect that you will generate $120 in sales for every hour you work. If you exceed that hourly amount we’ll have lots of opportunity to increase your pay. The more you generate the more we can pay you.
Compensation AND Contribution.
All too often we look at payroll defensively. As in, we must be careful about how much we spend therefore we schedule defensively. What if we scheduled with productivity in mind? In other words, “Jen, Nancy and Bill each generate over $250/hour every hour they work. Let’s schedule these very productive sales people in our most important time slots—and pay them accordingly!
Here's a section on this from my recent book, “Leading Change: How to achieve superior results with Gentle Pressure Relentlessly Applied.”
In October 2001, the classic business book, Good To Great, by Jim Collins was
released. In it, he identifies only eleven US companies that were performing at the highest level. There was one retailer in that group. Ever heard of Circuit City? In 2001, Circuit City was the leader in the electronics superstore world. They had hundreds of locations around the US and billions of dollars in sales. It certainly didn’t hurt that they were being singled out as one of the eleven best corporations in the country (Collins 2001).
But in March of 2007, CEO Philip Schoonover, motivated by his need to reduce expenses (and perhaps to earn a $7-million bonus), decided to terminate his longest-tenured, most experienced, and highest-paid employees—3,400 of them on the same day (Cohan 2021). He replaced that workforce with 2,100 entry-level, minimum-wage employees. The result should be no surprise. Customer complaints dramatically increased, customer loyalty dramatically decreased, and the tech-hungry public quickly fled to Circuit City’s competition, Best Buy. Circuit City declared bankruptcy less than two years later. Their stores were all closed and the company failed.
Schoonover had a problem he needed to solve. He needed to increase profits and reduce expenses. He made the mistake of choosing cost savings at the expense of great customer service. Prior to this move, Circuit City’s legendary expertise and service was its very identity. Their slogan was “Welcome to Circuit City, where service is state of the art.”
There’s no question that many factors played into Circuit City’s demise—rising competition, public interest in all things technology, inflated inventory, etc. There’s also no question that the CEO’s “approach” to cutting costs directly led to the failure of this one-time industry leader.
Compensation challenges are going to become even more important in the coming months and years. Read through some of these links to get our take on optimizing this expense. Offense, not defense!
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