Have you ever written a bonus check that required a dip into your line of credit to cover? Did you find yourself swallowing your resentment as you handed over that check? Have you ever given a raise to someone simply because they asked for it? Do you give an automatic raise every year regardless of sales or productivity performance?

Are you concerned about your employees discovering how much other employees make because there is no rhyme or reason to the way you pay? Does your FedEx driver make more in pay and benefits than your highest-producing service plumber?

Sigh. The way you pay may not be OK.

Take heart. You are not alone. Most of the contractors I know are struggling to maintain (or scrap and revamp) an insane and unreasonable compensation system. Let's look at the basic components of a sound, sane compensation and bonus program: a better way to pay.

Who? What? How Much? Your compensation program should answer this question: Who does what for how much? Compensation should be integrated with your organizational chart, your budget and your values.

The organizational chart is a simple representation of the flow of production and information at your company. Define what needs to be done and how the information and production will flow to and from that position. What skills and training are needed to handle that position? (In my November 2004 column, I shared some strategies for putting together a winning organization chart.) Then, consider what you want to pay the people who will be responsible for getting it done.

Plug the dollars into your budget. Budgeting is simply setting goals - in numbers, dollars and percentages - for sales and expenses. Your budget also determines what you will need to charge to support what you want to pay.

Reserve salaries for owners and managers. How much should an owner make? As much as you want and are willing to build a business to support. Consider the amazing, valuable, survival-promoting work that you do and aim high.

How much should a manager make? As much as it will take to entice the right person to handle that position. Remember, a manager, by definition, manages other positions. If no one reports to that position, don't use the title “Manager.” Be realistic. There may be positions at your company that are not career positions. Do you want to create careers and not just jobs for your employees? That's possible if you develop an expanding, growing organization. It isn't possible if you want to stay small. Accept that people will move through your company and on to other things.

Pay everyone else an hourly rate. Structure the pay scale to correspond with achievement and production.

For example, you may offer $20 an hour plus benefits to an apprentice who:

  • Completes your 15-day orientation checklist.
  • Is actively working toward journeyman license status.
  • Graduates from your three-month installers' training program.
  • Successfully completes three field installations, including the finish checklist.
  • Complies with operation manual procedures.
An apprentice can graduate to plumber status and earn $30 per hour when he or she:
  • Has successfully completed the journeyman plumber requirements and passed the licensing exam.
  • Demonstrates skill level by completing your company's skills test.
  • Demonstrates sales at or above goal for 30 days.
  • Delivers those sales at or better than the goal for productivity. You can use billable efficiency or labor as a percentage of sales for the productivity measurement.
  • Graduates from your sales and service training program.
  • Complies with operation manual procedures.

What About Commission?

Pay your plumbers hourly, and structure a bonus for performance above and beyond goal. Here's why I don't like straight commission pay:

“Calls in” for service can be heavy one week and light the next. I don't like putting a service plumber in an integrity-testing position on a light week. Suppose it's Thursday and he hasn't earned any commission yet this week because there haven't been any calls to run. Will he press too hard when he finally gets a call?

Commission pay can make the owners and managers lazy. You may start thinking, “Well, if it's slow, at least I don't have to pay the plumbers.” If you are paying by the hour, you may move faster to make sure they have enough calls. You sell time. If the day goes by without selling billable time, you have lost your inventory of time for the day and you can't make it up later. Paying by the hour causes you to PAY ATTENTION and manage your team's performance.

When you raise your prices, everyone automatically gets a raise with straight commission. Better to require more performance and productivity for more pay.

Incorporate the pay structure into your organizational chart. Then you can use the chart to craft career paths at your company. Employees can see how much each position pays, and what is required to attain that position. No secrets. No mystery. While you may still want to, there is really no need to seal employee pay envelopes. When your pay plan is fair, everyone can know what everyone else makes!

The budget delivers goals for sales and expenses. In order to maintain your position on the organization chart, you need to perform to goal, to budget. Bring in sales and productivity at goal and you get to keep your cool job and terrific benefits.

Instead of commission, build a compensation program that rewards performance to goal, and craft a bonus program that rewards performance that goes above and beyond.

Beat The Budget For A Bonus

There are two ways to “beat the budget.” The first way is to exceed sales goals. If you bring in more than the expected level of sales, you can earn a portion of the extra sales as a bonus. The “house” wins first. First, deliver your goal. Beyond that, the house can share generously. For example, suppose your service plumber has a goal of $25,000 per month, based on your budget. Should she deliver $30,000 in sales, you can share a generous share of the extra dollars.

The second way is to bring in less-than-expected expenses. Could you assign responsibility for expense line items on your budget to positions on the organization chart? Sure you could! Suppose the person in charge of vehicle expense manages your fleet to your written performance standards and spends less than the budgeted dollars. You could share the savings in expenses as a bonus. Those who deliver more - more income or more profit - should make more money. Make sense? That's the basic philosophy.

Ground Your Pay Plan In Values

Are you afraid that your team may go too far to win the bonus game? Are you concerned that your customers may be forgotten (trampled?) by focusing on sales and production?

Good service and good sales are not mutually exclusive events. However, you are wise to communicate your values to your employees. Your actions, of course, will expose what's important to you. I suggest you write down your values as well. Communicate to your team what you will and won't tolerate as boundaries for your honorable game of business. For example:

  • We always present to our customers products and services that are in their best interests.
  • We demonstrate our integrity in everything that we do.
  • Deliberately misrepresenting information is grounds for immediate dismissal.
  • If we don't have a written procedure in place for the challenge you face, ask, “What would I want to happen if I were the customer?”
  • Our prices are based on our costs of doing business. Our prices are fair and it is our responsibility to communicate and demonstrate the value of our services to our customers in every interaction.
  • We recognize and reward productivity and performance, and offer a sane, sound and fair compensation and bonus program to our employees.
Does the compensation and bonus philosophy outlined in this article sound good to you? Does it make sense? Great. Now, how do you start incorporating these ideas into your company?

Are you living with a painfully unfair, unprofitable or nonexistent bonus program? Introduce the change by communicating to your team, “I have not done a good job with bonuses around here. I apologize. I am going to start over. I would like your help making sure we put together an equitable, performance-based compensation program. My intention is to get this plan rolled out within the next four months. Thanks in advance for your help making this happen.”

Tune in next month for “The Way To Pay - Part Two,” where I'll share ideas for creating simple scorecards for measuring performance and calculating bonuses. I'll talk about qualifiers and time frames - to keep you from shooting yourself in the foot with your compensation plan. And we'll take a look at common pitfalls and how to avoid them as you put your new compensation and bonus plans into action.