Before You Increase Their Compensation... Watch THIS!

you fail to realize that they are not entrepreneurs. And so what to you seems like okay in terms of risk, seems okay in terms of risk-adjusted returns, is not okay for them. Some people would rather have a job that makes $20 per hour every single hour than a possibility of making $100,000 a year in 5 years from now.

We do about $350,000 revenue. I've been a little somewhat stuck. I have 2 kids, a wife, a house. I have a— I have to take a lot of money out of the business every time.

But base pay is the thing you look at. And then I go and I talk to people and like, I just want more base pay so I can reliably increase my budget and my lifestyle for my family. And you haven't tied this to something arbitrary, 'cause that percentage will never come down. Like as soon as you give the 36, like you're, it's not, it's never going away.

Yeah, yeah, you can't take back money once you give it out.

I think when it comes to technicians and for those that are potentially a little more entry level, So your techs, I think that's when I want to think about getting my compensation as close to performance as possible. This is why P4P or pay for performance is so important in my opinion. Now, P4P is not something you just implement overnight. It's not something you hear me talk about like, oh, tomorrow I'm going to go start giving 30% of my revenue to my employees out in the field. It's different than that. The reason is because if you don't have accurate estimates, if you don't have accurate budget hours on every job, it's very difficult for your crew to actually have a standard for how long a job should take. But what I have found when it comes to technicians or any entry-level position, they're not willing to hold their breath for weeks, months, or years before seeing compensation. Now, if you look at it as a continuum, you would have very risk-averse people over here, and on the other side, you have very risk-prone people. Very risk-prone people are entrepreneurs because they're willing to risk years of time, years of effort, tens of thousands or hundreds of thousands of dollars in exchange for the potential upside of the business doing well down the road. But they are very well aware, entrepreneurs, that for a year, 2 years, 3 years, they might not make a single penny from the business. They might actually pour money into the business. It's going to take weeks, months of time working 60, 70-hour weeks every single week. On weekends, on evenings, and that is highly risky. The fact that you're going to do all the effort, invest all of that money, and potentially not see a return. In fact, over 50% of businesses don't even last 5 years. And so that's a very high-risk move. And if that's appealing to you, you're probably listening to the show, you're an entrepreneur. You're way over here being very risk-prone. Over on the other far extreme is an entry-level team member that needs to pay their bills this week. And the reason I say this is because many times we sell out of our own pocket. Meaning, when it comes to customers, we are thinking about how we would think about the invoice or the estimate or the— our sales process. And because we came from limited resources, we think they come from limited resources. When in reality, the customers we're serving do not have the same problems that we have. The other side of the coin is that when it comes to our technicians, our team, our managers, we also sell from our own pocket, which is we, as entrepreneurs, are very risk-prone. We like upside. We like risk. But if you sell in that manner to your technicians, to your managers, to your team, you fail to realize that they are not entrepreneurs. And so, what to you seems like okay in terms of risk, seems okay in terms of risk-adjusted returns, is not okay for them. Meaning, some people would rather have a job that makes $20 per hour every single hour than a possibility of making $100,000 a year in 5 years from now. And you could say, "Well, mathematically, it's just, you should take the risk." You are an entrepreneur. You likely are okay with high levels of risk for high levels of return. But if you approach your compensation at that same level to your technicians and expect them to think about year-end bonuses and it change today's behavior, you're going to be sadly mistaken. Even when it comes to general managers, if you make 60, 70, 80% of their comp based upon bonuses around profitability, around year-end bonuses, quarterly bonuses, keep in mind that if they were okay with an annual bonus being 50, 60, 70% of their paycheck, they would just go start their own business. And so there's this continuum of risk from low risk to high risk. And what I see is the through line is how long are you willing to invest time, energy, and money into something without any— without seeing any return? And the lower level on the, on the, the company totem pole, or like the org chart, or even the amount of pay that someone gets, or the way that they're paid, whether it be hourly, salary, etc., usually corresponds with this continuum. And just because you enjoy having huge upside does not mean that someone as an employee is going to have that same appetite for risk. When you say, "Hey, 50% of your compensation is going to come from commissions or it's going to come from bonuses," be very careful. You very well might attract an entrepreneurial person that is not going to stick around very long. And so I've seen some people be very generous when it comes to profit sharing or the incentives or the commissions that they're willing to give someone. However, they fail to realize that the— that person that likes that commission plan or likes that bonus structure is probably entrepreneurial and has a high tendency for risk. So what does this mean? I need to have a high enough base pay to be able to make sure that I'm attracting people to my organization that are not risk-prone. They are, they are seeking some level of knowing that they're going to be able to pay their bills today. But then I also want to make sure they have enough incentive to keep them motivated for the upside. When it comes to managers, I'm going to tailor this individually to the person. If they really value having a higher base pay, I'm going to tie their incentives to a higher base pay. If they're like, "Hey, I just want to swing for the fences. Give me a commission. Give me a percentage. Give me profit sharing." Great. I will adjust in that direction. Just know if they're doing that, they're usually entrepreneurial and they're probably eventually going to want to start their own business because they tend to be over here when it comes to risk. On the very far extreme is usually our technicians in home services. If someone's making $20, $30, $35 an hour, they usually aren't going to be able to take the next 6 months in between jobs without any pay. They usually don't have a lot of money saved up. They're usually living from paycheck to paycheck or even just within the next few weeks of their paycheck. And because of that, if you think that you're going to do profit sharing or you're going to have some sort of program, end-of-year bonus that's going to incentivize them, usually that's when you'll be disappointed. Like, "Man, I'm throwing money at them. I'm doing profit sharing." It's too far away. The horizon that they're able to think of is shorter simply due to the fact that they don't have enough resources to get through next week's paycheck and to be able to provide for themselves and their family. And so what do you do to solve this problem? When it comes to technicians, that's why I like pay for performance because every single hour matters, every single job matters, and it's going to show up on their next paycheck. When it comes to managers, general managers, regional managers, executives, leadership team, that's when usually they're going to first off have a higher base in general so they can cover their living expenses. But then that's when I can get more creative with tailoring the incentives around profit sharing, revenue bands, etc. But the reason I'm saying all of this is do not think you're going to go get a manager to manage your business for the same or slightly more in base pay than what they're currently making as a technician with a whole bunch of upside for profit sharing. Because if they take that job, they are likely an entrepreneur. Meaning you're going to say, "Hey, look, I'm going to give you this new title and there's all this upside if you do really good, but the base pay is essentially the same." And I say this because I see so many people getting wore out and thinking that they're doing something wrong. When it comes to taking technicians and making them managers. But you have to remember, the reason they're an employee is because they're looking for stability and they want to have their base pay increased. This is a big unlock for me, is that if I am selling out of my own wallet when it comes to incentives, bonuses, pay structures, compensation bands, I will likely want more risk. I will want a piece of the pie with like lots of downside but no ceiling. Most employees don't want that. They would rather have higher degrees and confidence that their base pay is going to pay the bills and they're going to be able to add to their lifestyle. And so, this is just a side tangent and a warning. I've seen this happen. I saw a manager the other day that their technicians were consistently making more on pay for performance on a daily, weekly basis than the base pay of the general manager. But the general manager was given 40% of profits, which sounds good assuming that the location was in profit mode, had consistent profitability, but it wasn't. It was in growth mode. It had just started a few months ago. And so, of course, the general manager gets disillusioned when his whole team is making more money than him on a paycheck-by-paycheck basis. And so, we have to make ensure that we are selling to the role that we actually need. And if you want longevity, If you want an employee that doesn't want to become an entrepreneur and go start their own thing or compete against you, make sure that your compensation says that by ensuring that the base pay is the thing you look at. I have made this mistake and that is thinking about commissions and thinking about percentages and profit sharing and then I go and I talk to people and like, "I just want more base pay so I can reliably increase my budget and my lifestyle for my family." Awesome, heard very much. I will take the same revenue bands and same profitability and just tie it now to base pay instead of percentage basis. And for everyone, that's different. If someone's really heavy in sales, they like commissions. They like big wins. They like having months where they make twice as much as the month before. But for other people, that would drive them crazy. For technicians, the ability to have where every single day, the harder you work, the more money you make, allows them to be able to put discretionary effort in today and get money back this paycheck. For a manager, and the higher up someone goes in leadership, typically, the longer and longer that horizon of discretionary effort comes back to them in the form of more cash. All right, real quick, if you want to do P4P, pay for performance, and you need the software to manage all your projects, the routes, have an app where the crew can be able to see the revenue they're earning each day and get all the reports, check out p4psoftware.com. The first month is completely free, and there's an entire training course of how you can implement P4P in your business if you're currently using hourly, which I believe is a failing formula because it literally is— the longer you take on a job, the more money you make, which is the opposite of the business. That being said, this next caller is really good because we break down the math and some of these numbers and get into the weeds of P2P. But link is in the description. Go check out P2P Software and the free course.

All right. Well, thanks for taking my call. I've been listening for a long time. So I have a business. I'm in New York, a little bit upstate. We do about $350,000 revenue. I've been somewhat stuck in that range. As you know, I have 2 kids, a wife, a house. I have, uh, I have to take a lot of money out of the business every time, but I produce about 35 to 40 budgeted hours a week. The issue I'm having is I have a great employee finally. He's been with me about 3 years. We do pay for performance. He gets 33% of his labor revenue. The issue is that we're just past the point of, you know, kind of us being able to handle it all. I really need more employees. I have a couple part-time employees, but splitting the revenue between two people, you know, it really kind of pisses off the one person who's been rocking, you know, 10, 11 budgeted hours solo for, for a while. So I've been pulling, you know, he— the split's different, it's like 33%, 27% for the, the worker. Um, but I'm trying to toy with some other ideas on paying him more to keep him happy and to keep our revenue going up with the same amount of equipment. Do you have any recommendations on things that work?

Yeah. So two things. The first is when it comes to solo operator or solo person, like a solo crew versus two people, typically they do make less on P4P because there's more windshield time as a percentage of their day because there's more stops. And so also it sounds like this guy's really, really good. Whoever you hire is probably going to slow him down a little bit. As an average. So there's two things you can do. The first thing you can do is just say, hey, whenever you're with two people inside of the truck, you get a higher percentage on P4P. All right, the reason I'm okay with this is what you're doing is you're exchanging CapEx for OpEx. So what that means is instead of buying another truck and a whole bunch more equipment, a whole other setup, that's CapEx. I'm willing to give someone more on operational expenses, OpEx, because I don't have to go buy twice as much equipment. And so I'm okay if you really have to do this. I think a lot of times you don't need to because it's like most people like to work with someone else, that's from a morale perspective. But if someone's— Yeah, if someone's in a pinch, I'm okay with increasing his percentage by, let's just call it 10%. So like instead of 30%, it goes to 33%, for example. If you're going to not have to buy another truck and equipment and you get a half, the amount of trucks and equipment that you buy as you scale the business. So first, that's like the first thing.

And so what's— yeah, what's like a maximum of percentage of revenue that you would pay total to, to accrue? I guess it's dependent on the situation. I mean, buying another truck wouldn't be completely out of the question, um, but again, it's like, you know, vacations, injuries, sickness, it's like you lose a day, kind of everything gets messed up. So we really need to be running 2-man crews. So Um, what, you know, if I'm giving— I try and net out at like 30% because we do use, uh, 72-inch mowers. You know, we do big properties up here. Uh, we're, you know, we're getting well over 100 on most lawns an hour. Um, what, what kind of percentage revenue are you capping at?

Yeah, like, I never want to go over 40%. Never. And right now, what's he at?

He's at 33%.

Got it. So I would do I would do two things. Number one, I would play with the idea of giving him 36 when he's with someone else.

Okay.

That's the first thing you could do. Basically, that gives him about a 10% bump, by the way. It's not huge. So just keep that in mind. It's not a huge bump. The other thing you could do, though, is just give him a manual adjustment whenever he is with— like, let me back up. Is he always going to be with someone, a second person in his crew, or is it going to be like once in a while?

It would be like, like 3 days a week. And then I told him one of the routes that he kind of built through door hangers and has been doing a great job that he crushes, you know, 10, you know, $1,000, $1,200 in revenue that day, that he'd be able to keep that solo as long as we have people trained in the background ready to come up and fill in for a day if we need to, you know.

And is he training, is he training the new employees?

He does, but not well enough because he's still trying to push the pace too much.

Okay, well, that's not a bad thing. I don't want to take that away from him. Let's go.

No, exactly. Which is why I have a hard time, you know, you know, and there's no disciplinary action when he's still making the revenue.

So this is what I would do. I would give him a per-hour payroll bonus as a manual adjustment on P4P whenever he's training a new employee, and he only gets it if they don't have any callbacks.

Okay.

So, for example, he works, let's just call it 8 hours in the day. He's still getting his P4P at 33%. But you say, "Hey, at the end of the day, because you're with someone else and you are training them," is what's called a trainer bonus. Are you using P4P software or just doing this manually right now in spreadsheets?

No, I just built an Excel spreadsheet.

Cool.

I use Jobber.

Yep. So if you do 8 hours, let's say, for example, and you say, "Hey, we're going to give you an extra $4 per hour that you're with someone else." So he's getting an extra $32 per day added to his P4P. If they don't get any callbacks. So now he's incentivized, it'll, it'll balance out his P4P, but he'll also be incentivized to slow down with this person and make sure there's not any callbacks.

And would you, would you maybe like a 2, like a 2-week period at 4 and then like a 2-week period at 2 or something, like a ramp down? Or, or, um, how long would you generally give a bonus for?

I would do something like this. This is what like trainer bonuses we do. So we usually start it at $4 per hour, but then we have a governed amount of time where they're eligible for it. At the end of that time, they lose the trainer bonus. But if the trainee is fully trained up, then they get a one-time bonus, which is usually pretty hefty, like $200 or $400, depending how generous you want to be. If the employee they've trained up is good to go solo.

Okay, now you like that.

Now, in your case, they might not go solo, but if they're trained up and able to go solo, then they get the big-time bonus. And then that kind of softens the blow of them losing this per-hour trainer bonus. But you make it very clear, hey, this is a, this is a 2-week or 4-week stint where during this time when you're training, we're going to manually adjust your P4P by X amount per hour, assuming that, you know, you have no callbacks, no yellow slips. And then at the end of, let's just call it 4 weeks, if that person is good to go and they are capable of being solo, we're gonna give you a big fat check, and then from then on we're back at 33%.

I like it.

But now, but now you've tied this to a trainer bonus and you haven't tied this to something arbitrary because that percentage will never come down. Like, as soon as you give the 36, like, you're— it's not— it's never going away.

Yeah, you can't— yeah, you can't take back money once you give it out. Um, yeah, that's a good idea. I like that.

Awesome.

And then, uh, real quick, uh, I know, I know you got a bunch of callers, I'm sure, but, um, when you do general— I mean, you know, I'm not at this scale yet, but always, you know, plan one step in the future. When you do general manager, uh, percentage bonuses based on profits, you're, are you, you're taking out owner's salary and stuff like that out of that first, and you're using the very bottom number, or how are you calculating that? Yeah, Augusta. You know, what do you recommend?

Yeah, like if an owner is involved in daily operations, they need to take a W-2 salary, assuming you're an S-corp. Now, if I'm hardly there, I'm gonna take a very, very small W-2 salary. It's incentivized for me because from a tax perspective, and so it really just correlates with how much you're involved. If you're still working there full-time, yes, you should take owner salary. It should be part of the wages inside the business, and they should only be getting a piece at the bottom of the pie. But if you're there like 1 hour a week and taking a $5,000 or $10,000 a year salary just to be able to say you're taking one from the IRS, then just— right. That's where like, do what's right. Exactly.

Exactly. Last question on that topic is, you know, we— how do you calculate your depreciation of assets into that? Because we don't figure that out until the end of the year. So I'll be showing $60,000 profit and then it'll go down to $10,000 when I do my taxes because of all the depreciation. Do you do that on a quarterly basis instead, or—

Yeah, you can, you can determine how you want to do with your general manager. If you're using a bunch of debt, that's where you got to be careful, because you could on the P&L look like you are profitable on paper, but then because you're doing principal paydown on the debt, that's off the P&L, and you could be cash flow bad, like not making money. This is why I'm usually a fan of not calling it really pro— it's called profit sharing, But they get a piece of how much cash is in the bank account. Meaning that if I need to go buy a piece of equipment, that cash account's coming down. Right? And even if I go out and get debt, at least it's affecting the cash balance every single month with the payment. And so, I'm usually giving a piece of distributions, not a piece of the profit and loss statement. Because that profit and loss statement can be gamed with depreciation, with all sorts of stuff.

Right. That makes sense. All right, I really appreciate your answers.

Yeah, you got it. What I like to do is say, hey, look, here's a threshold of how much working capital stays in the business. Anything above that we'll consider distributable, distributable cash, and you're going to make a percentage of that. Now, as the business grows, you're going to increase that threshold of distributable cash in the business to make sure you can accommodate how much all of your payments and expenses are going out. I usually like to have 1 month of revenue in the bank account. Anything above that, I'm willing to distribute. That means that if I'm going to go out and buy trucks, I'm going to buy equipment, that's going to draw down the cash balance either now or in the future if I'm doing— taking a debt because the payments still come out of the bank account. Um, that's the most simplistic way to do it if you're doing profit sharing, in my opinion. Um, and it really depends a lot on how much debt do you have, how is the owner involved and taking a salary up above the bottom line. Like, you could make the bottom line look like no profit by just increasing your salary. And so to the caller's point, you've got to be fair about how much salary are you actually taking for the business. Because if someone else is getting a piece at the bottom and you're just taking all of it halfway through on the, on the W-2 wages expense, that's not fair. And you might trick them once or twice, but you're not going to trick them long term. And when they find out, they'll just leave. And so the last thing you want to do is lose a good person over you just trying to hide stuff.