Linking Pay to Profits

Our company has long believed that some portion of employee compensation should be linked to profitability. The challenge has been in designing a system that works for all employees and benefits the business. Landscaping projects generate most of our income, and the salesperson, landscape designer, supervisors and crews each contribute to profitability in different ways.

Linking each team member's payout to the project's gross margin (price minus materials and direct labor) has paid off for everyone. The sales staff is now pursuing projects with better pricing, crews are working more efficiently and team communication has improved. Over time, our variable compensation system and business profitability will continue to improve because the same financial metric drives both.  

Andy Vande Hey, Vande Hey Company, Appleton, WI

Attend "If you're not Unique, you'd better be Cheap" on Wednesday, May 4, 2011, at 11:45 AM at the office of Shannon, Gracey, Ratliff & Miller, LLP located in the Carter Burgess Plaza in Fort Worth.

Our speaker is Tom Pryor, Director of the Small Business Development Center (SBDC) for Enterprise Excellence and a growth coach for the Texas Manufacturing Assistance Center (TMAC)--both business outreaches of UTA.

During this program, Tom will :
  
- Define what a good or bad niche looks like.

- Explain three methods to define your niche.

- Provide examples, stories and free resources to assist in your niche defining process.
 

More information   /   Register

Every business has methods, practices, customer lists, etc., in which they have invested resources and which represent value. The prospect that an employee could walk out the door and compete with that information is scary. The trouble comes in crafting an enforceable agreement. When it comes to a non-compete, although the law differs widely among states, courts will typically apply the Rule of Reason. This means that a non-compete is enforceable only if 1) it is not more extensive than is necessary for the protection of the employer's business, 2) it does not harm the consumer, and 3) it does not cause undue hardship to the employee.

What does this mean in practice? First, tying every employee to a boilerplate noncompete gives a false sense of comfort and can actually impair your case against an employee. Only employees who have unique skills, are privy to sensitive information, or have been tasked exclusively with customer relations should be asked to sign a non-compete.

Additionally, if enforcing the non-compete would cause the employee undue hardship, a court may not enforce it. The non-compete cannot be unlimited in scope (geographically) or indefinite; for most businesses, a one-year period is sufficient.

Edward E. Sharkey, Law Office of Edward E. Sharkey, LLC, Bethesda, MD

Hiring the right employee for the job is key to the success of any small business (some might even make it a KPI). To ensure we make good hiring decisions, we have gone beyond interviewing to create a process-driven recruiting approach that systematically eliminates job candidates at every step.

First, we developed candidate profile/requirements that can be measured. During the recruiting process, we use four screening stages: an online questionnaire, a phone interview, skills tests and, finally, face-to-face interviews. At every stage, we ask both experience and behavioral-based questions. This approach takes most of the guess work out of the screening process, and gives us a final candidate pool of highly qualified people.

Barbara Alves, Emilcott, Chatham, NJ

Many businesses sell products and services that require customer training. Typically this information is provided in a printed manual, or may even take the form of a personal visit by a company employee. However, both travel and printing costs are becoming more expensive. An affordable alternative is to provide video training via the Internet on a site like YouTube (www.youtube.com). You just need a video camera and someone who is comfortable training in front of the camera. This not only eliminates the need for traveling and printed manuals, your customers can view the information at their leisure and as often as they like. 

Herbert Golterman, Golterman & Sabo, St. Louis, MO

A Key Performance Indicator (KPI) is a quantifiable measurement that reflects the critical success factors for your organization. You can break it down this way:

Key: Of fundamental importance in gaining a competitive advantage or a make or break component to success or failure (Critical Success Factor) 

Performance: Measurable, quantified and easily influenced by individual behaviors 

Indicator: Leading information on future performance 

They are well defined and measurable, and are tied to key business processes and operational activity that supports the company's overall goals. A good example of a KPI for increasing revenue might look like this:

Annual Sales Goal: $2,000,000
Average sale/num. of sales: $4000/500 per week/day: 10/2
Close rate: 50%
Appointments per day: 4
Cold calls per appointment: 5
KPI: 20 cold calls per day 

Be as specific as possible and make realistic goals.  Once you determine your KPIs, it's important to communicate them consistently and continually. KPIs should also be incorporated into your performance management system, and/or tied to incentives, raises or profit distributions. In addition to providing a snapshot of how the business is doing, KPIs also help you improve your business processes. It's true - we manage what we measure!

Russell Lookadoo, TAB Salt Lake Metro

As a business owner, I catch myself doing what most business owners do - focusing on net profit to determine the health of my business. However, it does not provide any insight into the leading indicators of what that profit will be. Thus, when determining the overall health of the business, we should instead focus on current and future performance using KPIs for productivity, risk/quality, and financial result.

The first KPI should measure the main sources of productivity that drive sales--whether it's number of service calls, widget units produced or billable hours.

The second KPI should measure the main source for risk or quality issues that could result in future unnecessary costs.  This could take the form of inventory levels (tying up capital), number of defects (rework costs), or aging receivables (write-off costs).

The third KPI should be designed to measure the main source that drives net profit.  If you are properly managing expenses and the first two KPIs, then net profit should look great. If not, it provides a basis to dissect the issue and find the root cause.

KPIs and metrics are good when they drive the right behavior.
Focusing on the wrong ones or an incorrect mix will sub-optimize your company performance. With these three KPIs, you should have a greater understanding of what drives your business and a more balanced view of the health of your company.

Don Maranca, TAB San Antonio

 
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The Alternative Board® is comprised of members who are business owners, CEOs or presidents who run businesses in non-competing fields. During a TAB Board meeting, you receive the benefit of the collective experience of the board members, who offer practical solutions to your problems-not theories.

You can learn more about TAB, which has been helping business owners succeed since 1990, by visiting TheAlternativeBoard.com