Armed with a passion for helping entrepreneurs and leadership teams simplify, clarify, and achieve their vision, Tom Bouwer has worked with a diverse range of companies from start-ups to Fortune 50 companies. In addition to running three of his own companies in Turkey, he has nearly three decades of global management and consulting experience in multiple industries. This has enabled him to be quick in identifying and solving chronic issues that hinder companies from achieving optimal success. These days, Tom spends most of his time as a Certified EOS Implementer®, helping leadership teams implement EOS in their own ventures.
Compensation doesn’t have to be that necessary evil you throw over to HR. When done right, tt can actually be a tool that you can use to align and win together as an organization. Today, we broke down the conversation on compensation with my good buddy who also happens to be ProfitWorks’ co-founder, Tom Bouwer. In this episode, he talks about how crucial it is to have a philosophy around compensation, setting incentive pools, cost of living adjustments, and striking the balance between protecting the company from paying too much and making it meaningful for employees.
1:13 What entrepreneurs get wrong about compensation
7:54 How a cost of living adjustment is different from a raise
12:14 A better way to give bonuses
25:05 Tom talks about how to effectively get employees to bring issues out on the table
29:01 Incentive and commission plans are not there to manage your people, they are there to change behavior
36:12 Tom gives his take on paying for objectives
42:15 The importance of teaching your employees the business of business
46:44 A profit-based incentive plan is a great way for people to earn more and to make it more impactful
48:21 Tom’s passionate plea to entrepreneurs
“Do not overcomplicate compensation. Have a philosophy and use it as a tool for accountability, engagement in your culture, and your overall purpose for the organization.”
GET IN TOUCH:
MARK LEARY:
www.linkedin.com/in/markhleary
www.leary.cc
TOM BOUWER
https://www.profitworksllc.com/
https://www.linkedin.com/in/tombouwer/
Production credit:
Engineering / Post-Production: Jim McCarthy
Art / Design: Immanuel Ahiable
Wednesday, June 16, 2021
SUMMARY KEYWORDS
people, employees, pay, organization, incentive, philosophy, entrepreneurs, money, compensation, company, profit, cola, raise, adjustment, based, year, mark, comp, benefits, wages
SPEAKERS
Tom B., Mark
Mark 00:00
So we're rolling, cool. We are live. This is you're doing it wrong with Mark Henderson Leary. My name is Mark and I have a passion that you should feel in control of your life. And so what I do is I help you get control of your business. And part of how I do that is by letting you listen on in these conversations between two people who have a passion for excellence in the entrepreneurial world. And talking about subjects you already know something about. And one of the subjects that is so common and so difficult that people talk about a lot is compensation. How do you pay people and I have a lot of opinions on this subject. So today, I've got my friend, Tom Bower, who is an entrepreneur, leadership, coach, facilitator, teacher of leadership concepts, and the author of a book on compensation and just this a great guy. And I'm really eager to talk about this subject, because the questions come up a lot about compensation. So welcome, Tom, how are you my friend?
Tom B. 00:54
I'm great. Thank you, Mark, a pleasure to be with you today. And looking forward to talking about a subject that pretty much everybody hates, and also everybody is doing wrong. So take it from there. Okay.
Mark 01:07
Well, the name of the show, is You're Doing It Wrong. And so that's exactly right. So when people are doing it wrong, what are they doing?
Tom B. 01:13
Well, you know, the first thing they're doing wrong with compensation is a, they're looking at it as a necessary evil, as something to chuck over to the HR department and let them deal with it. Because they think of it as a lot of nuts and bolts. They don't think of it as an extension or a tool that they can use in their culture. They look at it merely as an extrinsic motivator. Am I paying people what they want to be paid? Not as an intrinsic motivator? How do I use this to establish a winning culture within the organization? The second thing that they do wrong, is they make it overly complex. And if you think about it, you really need to break compensation down into five buckets. The first is what's base. So what's your base wage? What's your base compensation, and I'll circle back to these in a second. The second is raises. The third is cola or cost of living adjustments. The fourth is benefits. And then the fifth one is incentives commissions, and that dreaded word bonus, and I'll put all of those things into one lump bucket that all call incentive, so bonuses, commissions, etc, all fall into incentives.
Mark 02:33
Well, that's cool. I actually have a lot of passion around compensation, and I had not broken it down in each of those pieces. I think probably like a lot of people. I try to ignore the concept of raises in Cola, I like to pretend that doesn't exist. And I think maybe that's a realization for me, benefits. Again, that's something that I think it's underplayed, has been underplayed for me in the past, I generally tend to think of the base and the incentives piece only. So continue, man is really helpful already.
Tom B. 03:02
Yeah. So you know, one of the things I think a company needs is they need to have a philosophy around compensation in each of these five areas. And too many times, as I said, they chuck it over the wall to HR and just say, come up with something. I think this needs to be driven just like your purpose for your organization. And in fact, I think it needs to support the purpose of your organization. And let's take base wages, for example. Are you going to pay below market, at market, or above market? What's your philosophy? What's your overall strategy for doing that? If you're going to pay below market? Do you make that up into other areas? If you're going to pay above market? Do you take away some other things? And so, just what's your overall philosophy around base compensation? I tend to like organizations that pay at or above market, and I always get this question mark.
Mark 04:01
And this is based not just on total competition, but based by itself, just by itself.
Tom B. 04:05
They're like, well, how do I know what an appropriate base is? And you know, there's a lot of studies and a lot of websites and a lot of resources. And I would just encourage people that you can find those, not to go into those in detail now to find out what an average person in this position in your market is going to get paid. I think the more interesting side of comp though, comes around raises and Cola, which are really two separate buckets. And a lot of people will, especially employees, will think, Hey, you know, this year I got a 2.5% raise. Whoo. And so first off, it's not motivating. Second is really a cost of living increase. Let's call it what it is. My philosophy because we do quarterly conversations with my employees is I want to give them 510 or $15,000 and as a raise, when they are adding significant value to the bottom line, it's not because they've been there for five years. It's not because they're doing the same job. It's not because they were breathing 200 days last year when they showed up. It's did they add more money to the bottom line? Are they taking on more responsibility? Once they've demonstrated that, my quarterly conversations give me an opportunity to give them a bump in their base pay and their wage, whenever I want, then I can reevaluate that every 90 days or so. And so to me, raises are big chunks that make a difference in somebody's lives, or life. We call it a cost of living adjustment. And you need to have a philosophy around that. Too many organizations that I've seen, just go well, this year, we're going to give raises 3%. And now how do we divide that amongst everybody? Right? Well, first off, that just creates an entitlement, because every year now they're going to expect a two or 3% raise, when really all you're doing is giving a cost of living adjustment, you just haven't called it that. So where are you getting the numbers on which you're basing your Cola or your cost of living adjustment, as opposed to well, we have some extra money, let's give everybody 3%. I don't operate that way. I think raises and cola are very different. If I need to increase somebody's salary to keep pace with inflation, or to keep pace with the market, then I'm going to do that. But that's different than giving them a raise saying, Hey Mark, you have added significantly more value, you're taking on more responsibility, you're running these three projects, which are really going to have an impact on organization, I want to give you an extra $10,000 that makes an impact.
Mark 06:57
So there's a couple things that come to mind. And so in the raise category, I think value is a an easy to understand concept. Intuitively, though, when I think of the Cola side, I think from an entrepreneurial perspective, people feel obligated to pay it in some way, want to pretend it doesn't exist, because in truth, they haven't taken in the cost of living on the revenue side. And those are very, this could be an exact same company, someone can say, You're doing a great job in a high value high margin project, we're going to give you a raise, but then cost a living. It's like, well, what changed, you know, our rates, and our fees are still the same, our clients are still paying the same amount. And the cost of living feels suffocated, because it's obligatory for no particular benefit, do you? How do you handle that? That kind of mindset problem.
Tom B. 07:54
So this gets back to having a philosophy on cola. And also, this gets back to your pricing model. Right? If you have a product or a service where adjusting prices is easy. And we're about to enter into a period of higher inflation, I think everybody kind of has acknowledged that now whether that's 4% or 10%, who knows. But people are going to have to pay attention to their pricing so that they can afford to adjust it because the last thing you want is your employees coming back to you saying, hey, gas used to be two bucks, now it's three bucks. a gallon of milk used to be X now, it's why I need a raise. What they're really asking for is not a raise. They're asking for a cost of living adjustment. And so, I do think that it is entrepreneurial, to say, hey, look, if inflation or if cost of living goes up significantly, we need to adjust people's salary. And the easiest way to do that is with a standard cola or cost of living adjustment. A raise though, is to me when you're adding significantly more value. Does that
Mark 09:11
it's such an interesting, if that makes sense. And I think the interesting thing about that is even though cool, it might be two or 3%. Small, relatively speaking, it's for everybody or something like that, that makes it start to add up as opposed to I've got a rock star, and I'm going to give them 10 grand extra, 20 grand extra because you're like, wow, this person is really adding hundreds of 1000s to the bottom to the top or bottom line. And it's easy to understand if somebody can perform their way to justify it, and it's a one at a time thing. And so even though you're talking about bigger percentages and arrays, Cola, really entrepreneurial organizations, stop short of figuring out what you said. What's the philosophy like if we're going to give people cost of living adjustments? Someone has to pay for that obviously and if the cost of living has changed, the dominoes must have, which means our rates need to match that. And so I think that's really hard for a lot of entrepreneurs to go back and say, you know what, I haven't changed prices in 10 years, and I'm very comfortable with that. I don't want to change prices. And even though people deserve a cost of living adjustment, which is very rational, but people, I think entrepreneurs don't want to have that conversation, because they're afraid to talk about pricing.
Tom B. 10:23
Yeah, I agree. And it is pretty scary when you say, Hey, we're gonna give everybody a 1.5% cost of living adjustment, because what that really means is you just took 1.5 points off your bottom line. Yeah, that's real. Yeah. And so I've seen some organizations where their philosophy is, we're going to look at it every year, but most likely, unless it gets above 3% cumulative over time, we're not going to make an adjustment.
Mark 10:52
Okay, yeah.
Tom B. 10:53
Right. And so it doesn't have to be every year, it can be whenever you want. Some companies have said, we're gonna adjust only if the cumulative adjustment would be 5% or more. Now, keep in mind, though, that what you're really doing with a cola, is you're making sure that that base wage stays in that range to meet your original philosophy around wages in your marketplace. And that's really what a call is. So, yeah, you can go back and adjust everybody's wages. It's a lot easier just to say, if we did it correctly, upfront, and people are in the right bands for the job they perform, then over time, they're going to slide to the bottom end of that band, if we don't make an adjustment. Does that make sense?
Mark 11:42
Yeah, yeah, it makes perfect sense. I love what you're saying. Because it the philosophical part of that opens the door to if we're going to pay above market, we're going to have to figure out how to get above market margin, not necessarily pricing, but margin. It might be process, it might be something, but we're going to have to go upstream as much as we have to go downstream is everybody, every entrepreneur I've ever met, wants to make every employee rich, they want that. But very few of them know how to do that. They start down.
Tom B. 12:14
Yeah, that's very true. And that actually is a nice segue into that fifth bucket around incentives, and commissions and the dreaded B word bonus. And so you know, what most people do wrong, is they come up with a pool of money. And at the end of every year, they decide, well, we're gonna give everybody you know, between 250 and $2,000. Well, what you've just done is you've created a gift. And next year, what's my expectation as the employee? Well, I know I worked harder the last 12 months than I did the 12 months before that. So I better get more than I did last year. Last year, I got $1,000. This year, I better get 12 or 1500. And now all you've done is create an entitlement where they're expecting it without having to do anything to earn it. Now for those entrepreneurs that really want to reward people. Without going down the whole path of an Aesop type program, there's a very easy way to do that. And that is to base and put together an incentive plan based on profit. And we outline that in the book, Profit Works. And effectively, what that says is that there's a threshold, there's a certain minimum amount of profit that a company needs to generate, to stay in business to pay down debt to reinvest. And frankly, to provide owners with a return on their investment to start that. And as all of the entrepreneurs listening know, starting a business is a bit of a risky proposition, it's slightly more risky than putting your money, let's say in a checking account, so you're kind of expecting a slightly higher return on your investment. That's the minimum threshold. And let's just take an example and say, we want to generate a profit of a million dollars. That's our kind of minimum threshold. And that can be 5%, or 8%, or 12%, whatever your target is of revenue, but that's the number, then what we'll do is we'll create an incentive pool based on every dollar above that. So once we hit a million dollars, we're going to take 30 cents of every dollar beyond that, or 40 cents of every dollar beyond that, and put that into an incentive pool. And that's really the first step is how do you create that bucket of money that's earned? Right, we've set a minimum threshold. This is what the company should do if the employees don't do anything. And then it's all about they do to generate money. Profit the fund have their own incentive plan. Okay.
Mark 15:04
Yeah, the implication very often is that that percentage of the profit is a significant enough percentage to get people excited about it. And the thing you said that I want to highlight is that the barrier to access to that, for the entrepreneur, for the end, for the business or some combination of the two is pretty high, like you want to make sure the company gets its target. And anything after that pays out, pretty handsomely shared but pays out pretty handsomely because of the impact. And we've already gotten kind of what we expected as a business owner or a business, right.
Tom B. 15:46
And so there's a couple of points there that we need to touch on. The first is just we've created a bucket of money, a pool of money, but we haven't talked about how that gets distributed out to the organization. So I can touch on that in just a minute. But the other thing that you just hit on, Mark, which highlights what I said earlier, is that that incentive pool needs to be earned. In order for it to be earned. The employees have to know how they impact profit. And that means that each employee needs to have a number. And more importantly, they need to know why that number is important. I've worked with many organizations where they're like, we've got scorecards and scoreboards and dashboards and metrics all over the place. Isn't it great? I'm like, yeah, let me talk to Sally over here. Hey, Sally, what's your number? She's like, well, that's the number I'm supposed to hit. And I go, so why. And she kind of looks at me and goes, because I don't want to get fired? Well, okay, that's good, that's a good start, that everybody has a number, and that they're held accountable to it. But if they don't know why they have that number, if they don't know how they can change that number to impact profit, then they just have a number. And you're just kind of measuring are they doing their job or not? And instead, what I try to do with my organizations, and what I'd coach your listeners to do, is to have that discussion and say, Okay, if these are your numbers, do you know why you have them? Do you know how they impact our bottom line? Do you know that if you took this from a five to a seven, it would put this on the bottom line, which could then fund your incentive pool. So you need to connect the dots for them all the way through, not just hit this number and keep your job, but hit this number. And if you change it to X, that's gonna put Y amount into the incentive pool, which you'll have a chance to share it. And so there's a lot behind that. And you can create what jack stack would, a mini game brand called a rapid improvement plan. We call them challenge rocks and fitting with the whole terminology of a 90 day ROC, where you're getting a group or a team of employees to really focus on a specific number, and how do they improve it. And I can give you an example of this, with a client of mine, where their monthly projections were off their revenue and profit projections were off by as much as 40%. Now, if you're the owner of that company, and you have to go to the bank, and go, Well, I know I told you last month it was gonna be this, but it really ended up being that higher or lower 40% is not a difference is not something that bankers really like, up or down. You know, they want consistency and predictability. And so when we looked at why it was happening, there were a lot of different cross functional reasons as to why their forecasting was so off. So we got somebody from the finance department, couple people from sales, from marketing from operations, and we put them together on a team and said, what do we need to change that will a make your lives easier? And B, help us be more accurate with our forecasting? Because every one of your employees, your listeners, employees, at the end of the day, they go home? And they want to be able to tell their spouse, their partner, their friends, did they win or not? Right? They want to say did we win today? Did we win this week? Or did we not win today or not win this week, and they want to know how that impacts things overall. They also go home though, and they go, can you believe what these guys do? I mean, that's crazy what they're doing, you know, and so when you go to your employees and you ask them, and we call that holes in the bucket, other people have called it cracks on the table, but go to your employees. and say, Hey, what do you think that we do that's really stupid that wastes and takes lots of extra time that frustrates you. And you'll be amazed at the answers you get back. Because as an executive team member or as an entrepreneur, you kind of think you know what's going on? Right? You've got a good handle on the business, you started it, you know your customers really well. I can tell you that your employees have a lot of ideas that when they're around the watercooler, they're going man, these guys are idiots. And hey, look, when they come up with suggestions, there are three outcomes. And I always tell my employees and employee groups this, we're going to say, that's a great idea. Thank you. Let's go execute on that. We're going to say that's a great idea. Thank you. We're going to execute on that later. Or, hey, that's a great idea. It's not gonna happen. Yeah, you know, and they have to know upfront that you can say no to things just because they come up with an idea. And one of my favorite stories is from a furniture company, a retailer up in the Midwest, upper Midwest, and we were sitting with their employees. And we were asking him, what do we do? That's stupid. And somebody said, Hey, can we fix the hole in the roof of warehouse Number Four? Sure. I don't see why we wouldn't. And well, what's the problem? Well, every time it rains, or snows, water leaks in and damages furniture. So the CEO asked what he thought was gonna be a very simple question. So how much furniture do we have to throw out every year, because of this hole in the roof? Oh, about $250,000. And the employee didn't bat an eye, but the owner just about fell out of his chair. I mean, that's half a million dollars straight off the bottom line, because we didn't spend $5,000 to fix a hole in the roof of the warehouse. And I guarantee you that your listeners and their employees, they will find very similar stories. And similar things, whether they're a software firm, or a retailer or a manufacturer, I've seen it across the board.
Mark 22:15
So there's some things to pull apart there to make sure we don't step over it. Because that's it's a very frustrating concept for an entrepreneur and for employees. And there's some very specific reasons that comes about. And the first is that your employee is in one or two spots, they think you already know, because they expect you to, or they think you might not know, but they don't know how to notify you. Too hard, too complex, right? And so that's the essence of that piece. And that has to combine with the Yeah, the outlines have been really amazing, which is all the million things you can be measuring all the million things you can be doing. You got to map three things, you got to map what's in it for the employee, this bonus, raise whatever, some incentive, that comes back to profit for the company, what's in it for the company, and those are linked, you got to link that. And you link that back to the one thing they do, or the one number that they influence to make that all come about. And if you can do that, you then have to connect the dots, what he just said is, how do you hear from them? And how do you act on those things and make some decisions.
Tom B. 23:27
You know, there's a third reason that employees don't bring things up. And it may be it's part of the thought you already knew, but it's also the one I've mentioned this five times and done anything. So you know. Now the flip side of that, though, Mark, is that you also have to be aware of the anecdotal story where something happened once, five years ago, and they still think it's a huge problem. And so that's why the numbers are so important, because then you can show the employees. Look, that's actually not what's happening all the time. That was an exception five years ago. But you also find there was an exception five years ago, for one customer. And we've now made that a standard rule. And we're spending tons of time doing stuff that we shouldn't be doing or don't need to. So absolutely, you have to connect all of those dots and put it together, what's in it for them? What's in it for the company? And how does their number drive what's in it for them and for the company?
Mark 24:30
And it's the idea of the issues list in EOS. Yeah, we've got an infinite list of issues, some between 10 and 210 at any given moment, and all those things, all those things we're talking about, we put them in the pile and we just take the top one, two, or three at any given time and make the biggest impact we can and the most meaningful, meaty way and everything else is going to have to wait you're gonna have to give those answers that you just said it Yeah, that's the top thing that's fixing a hole in the in the warehouse. We're doing that. You know, there's puddles in the back you know, that's important and that's next quarter. There's something going on with reserved parking that we're not going to do.
Tom B. 25:05
Right? You know, and what I've seen, though, is that a lot of times, once you start to push an operating system, like EOS down into the organization, then the effectiveness, or the ability, or the will, I guess I'll say the willingness of employees to bring up topics or things like this, is it diminishes very, very quickly, because they think that they're pointing out blame from other departments, or they think they're throwing somebody under the bus. And so when you do this in a different setting, where you're saying, hey, let's get 50 of our employees together, break them into groups of five, not by function, but just randomly, and then ask them, what are we doing? That doesn't make sense, that's how you can get a lot of what EOS would call issues out on the table, that then you can start to address and you can start to prioritize, and just as importantly, you can start to then push those things down and say, Look, Hey, you guys raised that as an issue, go fix it, make it a challenge rock. And they'll say, well, but that's only, you know, that doesn't pertain to just our department that crosses four departments, great. Get four people, one from each department together, go fix it. And so you can start to drive that accountability. And also, that that ownership, if you will, down that responsibility down in the organization, because I believe that 99.2% of people want to own what they do. They show up every day wanting to do a good job. A very scientific number, don't quote me on that. But just having worked with hundreds of 1000s of employees, I can tell you, it's probably pretty close.
Mark 27:03
And yeah, I've the same thing. I tell people, right, everybody wants to do a good job, they just don't know what that looks like, cuz you keep telling him 20 different ways to measure it. And they can contradict with each other. So people don't know how to do a good job, because there isn't enough clarity and focus, right?
Tom B. 27:17
And so we've talked about kind of the five basic areas, we skipped over benefits, believe that to a benefit expert, but you still need to have a philosophy. Do we have really rich benefits? Or do we have just standard benefits? Do we have health care or child health care child care that we're going to provide in some businesses that's a great advantage, or are we not but what's our philosophy on benefits. And when you put that all together, then that really describes your total comp, and then you throw in the incentive on top. And I didn't mention this earlier. But when it comes to incentives based on profit, we typically try to target an eight to 10% of wages payout. So if you make 100 grand a year, we're trying to target that payout to be somewhere in the eight to $12,000 range, because that becomes meaningful. That's motivating, right? If you say, Hey, Mark, if we do a great job this year, I'm going to give you 100 bucks, is that gonna change your behavior?
28:29
No, right? No. Right?
Tom B. 28:33
All what it is, it's got to be meaningful for the employee, so that they put in some extra effort.
Mark 28:40
And that I mean, $100 gift card is never a bad thing, if it's given to you, as a reward, a pat on the back for something. But in terms of major commitment to understanding, sacrifice of a years long effort and a reward for a journey taken and undertaken with intent. It's a totally different thing.
Tom B. 29:01
Yes. And I truly believe that incentives and commission plans are not there to manage your people. They are there to change behavior. And that's a real important point. Don't put an incentive plan in place or benefits or a compensation package in place and expect it to magically manage your people. You have to connect the dots.
Mark 29:28
Let's dig into that because I have to get on the soapbox over that, like if people are feeling like they're people or people aren't doing what they want and like we're, gonna change comp to fix. It's like no, that's not how that works. To me, and feel free to challenge this, I say that the variable comp should be intended to reward people for great results when you get that in very long game sense. And you need to manage your people on a weekly basis with numbers and with a scorecard, not things that take food off of their plate at home because if you start messing with some buddies comp, their food, their their wives satisfaction, people will do desperate things and the law of unintended consequences will be really big. So you really got to get people plugged into objective, non consequential metrics. So people can be strategic. And then when the game is sort of wrapping up for the year or the quarter, whatever you sort of take you say, like, how did it go? Oh, we really rocked it. Okay, you get your piece of the pie. Oh, it was really tough. You don't get as much and we all share in that is you? What are your comments on that?
Tom B. 30:30
No, I 100% agree, I'd probably add one thing to that. And that gets into kind of the time span horizon of people and how that pools. Let's say we've created a pool of money, how that gets distributed. And so first off, most employees are going to have a timespan horizon of next paycheck, or at best, end of quarter. And so I believe that your incentive payout needs to be timed around that now, doing it bi- weekly or paycheck by paycheck is too complex, takes too much time, and won't be meaningful. What we found, though, is that if you do that every quarter, then it becomes meaningful. It's a big enough number that's been earned. However, what we do is we bank or hold back half of that quarters payout. So let's say you earned $500, for the quarter, okay, which would put you on track to hit $2,000 for the year, what you would get in q1 would be 250. And that other 250, we would, quote, bank unquote, now that other 250 can still be lost if we don't have numbers the rest of the year. But if we hit in q2, you get another 250. And another 250 goes in the bank, same thing in q3. And then in q4, you balance that all out based on where the numbers finally end up. That's a way to keep it relevant and consistent. And also, we'll be following that kind of 90-day rule that we put in place that quarter by quarter, following rocks and all the other things that follow 90 days. But then you're still protecting the company by saying, we're gonna pay some of it out now. But just keep in mind, we're holding some of it back. And we're gonna balance that out at the end of the year. And then you're just avoiding a huge payout in q1, and then you lose money after that the rest of the year, which doesn't do anybody any good.
Mark 32:37
Well, I like that, because I've seen a lot of companies get concerned if you have a great q1, and then you go negative on q2, and you're like, Well, how do I claw the money back? Do I take it out of their salary, and those people don't even try that. But it creates an effect of sandbagging, potentially, because if you're like, I'm gonna, if I'm going to hit my floor, next quarter, I'm going to or the other way, if I'm gonna hit my floor, this quarter, I saved my deals per next quarter, so I can maximize the benefit. And that banking process allows you to do a little bit of claw back and balance it out without actually having to send an invoice to your employer to pay money back. Right?
Tom B. 33:12
Right, exactly. And so we're really trying to balance two things, they're making it meaningful and fitting their time horizon, but then also protecting the company from paying too much out, and then losing money the rest of the year, as I said, and so you know, the first step there, if you think about it, is creating an incentive pool that's earned. So let's go back to our example of a million dollars. And let's say that we're going to take 40 cents of every dollar beyond that, and put that into the payout pool, if you will. And let's say at the end of the year, we hit $2 million, well, then the pool is going to be 40% of every dollar above the million, we hit 2 million. So your incentive pool now is 400,000. And you can pay that out really what I've seen two ways and you can do hybrids and things like that. But keep in mind, simple is better, right? Simple. Gotta keep it simple. By the way, just a little nugget here. If you want to know if your sales people understand their commission plan, ask him to whiteboard it for you. Hmm, if you want to know if the employees understand their incentive plan, ask them to describe it to you. And if they can't, it's not changing their behavior, and it's not motivating them. So just a little side nugget there. I had to make sure I got in. But let's say you end up with that pool of $400,000. There's really two primary ways to pay it out. The first is everybody gets an equal amount. Doesn't matter if you're the executive VP of blah, blah, blah. If you're the Grand Poobah or you're making 1250 an hour, everybody gets the same amount that works really well in flat small organizations, 2530 people or so the second way to pay it out and this is more common is based on a percent of the wages, just meaning, if you make 100,000, you're gonna get twice as much somebody as somebody making 50,000. And so, you do it as a percent of their wages relative to total payroll, we typically do that on base. If your sales people are on significant commission, meaning that makes up 50%, or more of their total compensation, that I include sales commissions as part of the code base for that calculation. But that's a nuance that you just have to be smart about and just do what makes common sense. People overthink compensation, when it really doesn't have to be that complex. You know, it becomes this black hole of data and HR and legal and what a nightmare. Now, just, if you've got your philosophy set on those five areas, then it can be pretty simple.
Mark 36:03
What's your take on paying for behaviors or paying for specific objectives, like project milestones, or number of dials or anything like that,
Tom B. 36:12
There are certain cases where that makes sense. Certainly, on the sales side, it's easier to draw a direct line between activity-based measures and end results. However, I'm not real big on paying by objectives. Like if you hit for each rock you hit, you're gonna get 500 bucks, because what ends up happening is one person does really well, and they get a really nice kicker, but the company loses money, because no one else hit the rocks, or their objectives. And so to me, it's we either all win together, or we all lose together. And Mark, the other thing that that does, when you put that in place. Well, I'll put it this way. When you pay based on objectives, you create silos. And I literally have seen more people are hiding equipment from other employees, or hiding the keys to the best delivery truck, because they're getting paid based on piece work, not on how the company does. And so you're actually pitting people against each other. Whereas when it's, hey, look, we're creating this pool, we're all gonna get some of it, let's win together, then all of a sudden, it's, well, hey, how do we help each other when, and the side benefit of that is that those employees that don't pull their weight, are going to get coached out by their peers, that peer pressure will come into play, because they'll see Sally, let's say, and Sally's not pulling her weight. Well, pretty soon, she's gonna feel pressure, subtle as it may be, she's gonna feel pressure from the rest of the team to step up, or maybe go someplace else where she can do what she does and be happy being Sally and not contributed.
Mark 38:03
Yeah, I think that goes back to the point of management. A lot of organizations I work with struggle with true accountability, and having managers and leaders in their organization who are comfortable in that spot. And the compensation conversation tends to be a way to enable that. It's like, you know, we're having trouble with accountability. So we need to change comp. And it's like, no, that's not the problem. You need to hire people who can manage people and have hard conversations. And if you've got that, I always call it the wolf pack mentality. If the wolf pack is strong, everybody's hunting and going well. And if there's a weak wolf in the pack, the pack starts to look at that. And this is very Darwinian, and it can be kind of dark for a lot of people. But I think it tells a story of, I guess, it's a cultural choice, you got to be ready for that. And the cultures who say, hey, when somebody starts to look like they're not having a good time, and that they might be about to be eaten by their pack, your job as the manager leader is to pull them aside and say, Hey, I don't think you enjoyed this as much as you thought you were going to, how can we get you to a place in the company or in another company, where you do feel better about your contribution?
Tom B. 39:16
Yeah, Mark. And I think that there's a question even before that, and this is what I coach a lot of employees to ask each other is, how can I help you? Hey, Sally, I see that you're struggling in this area. What help do you need? How can I help you? And I think that's the first question that peers should ask and the first question the manager should ask. And then that leads to the hey, we've given you a lot of how, you still don't seem to really be enjoying this. You know, maybe we ought to talk about another spot for you that maybe is a better fit.
Mark 39:53
Yeah, that's a great point. And I do think those first steps are very culturally driven. A lot of companies are going to have a help-first culture, a very nurturing culture, and they're going to take that pretty far. And they're going to really extend a lot of leash. And at some point, it's like, wow, we're starting to jeopardize our own survival here, if we don't make a different choice here, and you got to decide how short is the leash and your culture is like three strikes in one week, is three strikes in one year and understand how you go to that. But that's a great point, you should, especially as a leader, manager, but ideally in the entire culture, go to that, how do we get all wolves equally strong in the pack as fast as possible. And if that isn't gonna work, we then you know, acknowledge that and make a different choice.
Tom B. 40:37
And that's a great way to kind of circle back and almost wrap it up. Because when we started, I said, you know, you have to view compensation as a tool in your cultural kit in your accountability kit, in your overall philosophy of your purpose as an organization, not just as this evil thing we have to do, they cost us money. And so when you really start to use it as a tool, and you view it that way, and most organizations don't, but you start to view it as a tool, all of those other things come into play. And you can to use your analogy, build a stronger wolfpack because of it.
Mark 41:17
It's interesting how it's so simple. In the end, like you said, it's just about alignment. And how many entrepreneurs have this sort of scarcity mentality, like I can't give them the money, I need the money to run the business, I need to be healthier, I need to you know, I need a little more comp for myself. So I can take some more vacations, who my wife who sacrificed the last 10 years, we work in 365 days a year. And what you describe is no, no, no, we're all on the same page. We're all going in the right direction. You know, comp is a referent, is a measure, and reward from profit. And profit is a reward for the company based on everybody in the organization rowing in the same direction with the right activities. And let's use this as an opportunity to align and win together as opposed to pull it make it a tug of war. Yeah, that's absolutely correct. Well, we covered a lot in a shorter amount of time than I expected. Actually, I'm really excited about what we just covered, because I think it's gonna be helpful. What else you want to add to the conversation? Do we miss anything?
Tom B. 42:15
You know, I think that there's, you know, we talked a lot about some of these different things. And I gave a couple of ideas on how you get some of these ideas out of your employees. But there's another part of that we haven't touched on that I want to spend maybe just two or three minutes on, and that is teaching employees about the business of business. Because if you go to most employees, and as I said, I've done this now hundreds of 1000s of times, and you say, hey, last year, we generated $20 million in revenue, how much of that 20 million is profit. And you'll get answers that typically range from 40% to 60%. And you also have the outliers who go 100% they literally think the owner has a money tree in the backyard, and he just goes out and shakes it whenever he needs cash. And we all as listeners here know that that's not true. The easiest way to explain business finance to your employees is to use 100 pennies. Now I've seen people do this with a pipe, I'd seen him do it with a chair. But a side nugget on this, please, please do not sorry, to all the finance people, I'm gonna apologize in advance. Do not let your finance person teach finance to your homepage. It will be a disaster.
Mark 43:41
Because they will overcomplicate it and make it ruin all the terminology will be so unintelligible.
Tom B. 43:47
It's really simple. Take 100 pennies and put them on a table and say this represents every dollar that we get it. Now, what's our cost of goods sold and explain that now that could be labor, it could be materials, it could be both, but then start taking away pennies for your major cost buckets. And at the end of the day, or the exercise, you should have a couple of pennies which represent your profit. It could be four planes, could be six, could be eight. And they'll be absolutely shocked by that. Then ask them another question. Say when you get your paycheck at the end of two weeks, how much is leftover? And they'll go, well, nothing, my spouse takes it right? Or they'll make a joke out of it. You know, but they're going to be able to relate the fact that basically their paycheck, they got a couple of pennies left over. Now why is a company any different? For every dollar that we get in, we have all of these expenses and guess what guys? We ended up with these six pennies, and we still have to pay tax. We still have to pay down debt. We still have to reinvest in the business. And we still have to pay back the owners return on their investment. And it's a really simple exercise. Build will have a profound impact on the employees attitudes towards profit and towards the organization success. Because most don't just think that, like I said, You've got a money tree or you have a big owners wheelbarrow. And you know, whenever you need money, you just fill up the wheelbarrow and go to the bank and dump it in the back into the plane at home.
Mark 45:24
I love that. And I've never heard it with the pennies. I certainly can't even imagine how the chair fits in. But I've definitely done it on a whiteboard. And two things came to my mind. One is that I say how much we brought lunch in today. How much did that cost? And somebody will take a guess and never be wrong. Like was pizza everybody that's like, was that 50 bucks? It was like $600 in pizza for this room. And then once a snap, that's well, how much revenue do we need to make to pay for this, all this pizza? And people really change their thought. But I do think as you were describing that when you brought it home, how much money do you have leftover? Asking people to kind of do the math on how much revenue the company needs to make to pay their salary, and get really clear on like, wow, man, that's a million bucks. We got to go find a million bucks to pay me. So that's gonna be very humbling.
Tom B. 46:12
Yeah, absolutely. You bring home a and I'll just emphasize that is that every position in your organization should not only pay for itself, but it should know that position of that person should know how they pay for themselves. Yeah. And that's how you bring it full circle,
Mark 46:30
How they pay for themselves, how other people help pay for them. And we're all rowing in the same direction. Everybody's got a little piece of the pie. And that's super powerful. Yeah. Look, man, what else do you want to add to conversations? This is super, super gold. That was gold. So if you got more gold, bring it on.
Tom B. 46:44
You know, I think that's probably enough for your listeners and my guests a little bit. So if I were going to do something, you know, I look at those five areas and say, do we have a basic philosophy around these five areas? And then we get to the incentive area. What's our philosophy there, because as you said, In the beginning, Mark, most entrepreneurs want their employees to get wealthy because of this endeavor. It's not that they don't want people to make money. But a profit based incentive plan is a great way for people to earn more. And to get something that is impactful. If I give you a 50 cent an hour raise, guess what, your spending is just gonna increase every paycheck to spend that money. But if I give you 4000, 6000, or $8,000, in pretty much one lump sum at the end of the year with a little bit interspersed throughout the year, all of a sudden, now that's a car payment, or paying down an extra mortgage payment, or two or three, or putting some money aside and funding your kids college fund. Now that can really start to change lives. I'd rather give people 4000 bucks for $10,000, than a 50%, or sorry, 50 cents, or a $3,000 raise, because that just gets spread throughout the year and it gets lost. You give them a nice chunk. And now listen, they can do something with it.
Mark 48:16
I agree. Awesome stuff. What is your passionate plea to entrepreneurs right now, man?
Tom B. 48:21
My passionate plea is do not overcomplicate compensation, go back, have a philosophy on each of these areas and use it and this is my plea, use it as a tool for accountability, engagement in your culture, have it fit with your overall purpose of the organization, not just a we have to do this because we have to pay people usually love it, man.
Mark 48:49
That's incredible. Because what you can tie together is, every time I've worked in an organization who is trying to put a compensation plan that's complex, it's complex, because they're afraid, or they're trying to manage or they're trying to do too much, or they're just, they just want to put all these safeties to prevent them from from having a downside. And it ends up just being a disaster because no one understands that, even they don't. And the solution, as you described, is figure out why you're doing this. Get your philosophy together. This is an extension of your core values. This is an extension of your core focus and your purpose and make sure that all lines up and make sure that when somebody comes in your organization, they get what you give, philosophically across the board, you're not just pulling levers on the bit, especially something like benefits. You're not just pulling levers on the basis of trying to recruit one individual you have, you know why you're doing it and people who come into the organization get it along with you. Tom, I'm super grateful for the time. I'm so excited to share this with everybody and it will be a tool for teaching for my clients in addition to all the people who download this who don't know me and don't know you. So it's exciting to have this in the toolbox. And I'm grateful for the time and if somebody wants to continue the conversation with you, check it out and see how you're doing. Have somebody find you,
Tom B. 50:01
You know, it's really easy they can go to Tom Bower which is Bo u w er comm or probably even better email me, which is Tom at profit works llc.com and either one of those you can find me and I can, you know, continue the conversation and by the way, you know, Mark just like what you do with this. My time on the phone is always free. I love it when people call me up or send me an email say, Hey, I have a question on this. You have 30 minutes, and amen. That just makes my day. So please to your listeners. Use my time, you use me as a resource, and please reach out to me.
Mark 50:45
Awesome, man. I'm so grateful. Such good stuff, so useful. That's our time for the day. If you found this valuable, please give us the feedback good and bad. Get it in the hands of people who could use this, share it and let people experience it and get the value out of it. And we will see you next time on You're Doing It Wrong with me, Mark Henderson Leary.
51:05
This is you're doing it wrong with Mark Henderson Leary for more episodes and to subscribe, go to leary.cc