Chapter 9 - You Have a Bad Pay Structure ( Total Business Turnaround Book )

Hey everyone, it's Mike Andes. Today I'm reading chapter nine from the Total Business Turnaround. And before we jump into talking about pay structure, we're going to talk all about pay for performance in this complete chapter. And if you want free training and you want it in video format, I made this completely free. It's called P4P University. So listen to this episode. But then definitely go check out p4psoftware.com training and little fun fact. If you go just to Peter psoftware.com and watch the webinar, I'll actually give you another book completely for free. I'll strip it out to you. It's a hardcover. You don't even have to cover the shipping cost. I'll send it to you for free if you just go watch the webinar. Cause I genuinely believe this will completely revolutionize your business. And I wanna tell you the story about that in this chapter. So let's dig into it honestly. If you didn't fix your pay structure, so many things inside your home service business will just take care of themselves. Chapter nine. You have a bad pay structure. Why you don't have a million dollar business. Reason number nine, you have a bad pay structure. Carter owns Rough Cut Lawn care in Sacramento, California. He was spending up to 80% of his total revenue on employee wages. That was just the money he spent on his employees out in the field working. It didn't include non revenue producing work. This work includes office tasks and meeting clients for estimates. In the past, he had six full time employees. By the time I arrived, he was down to two. Each worked approximately 30 hours a week. The business was only making $10,000 in recurring revenue per month. When I arrived for the turnaround episode, he was selling trucks and equipment. He was doing it to to keep enough cash in the bank for payroll. He only had two trucks left after selling the others off. His biggest problem, the more he worked, the less money he made. His salary expenses were enormous and his labors were inefficient. It would take his crew two to three times longer than expected to complete jobs. Projects that should have taken 10 hours took 20 to 30. He knew he could do these jobs by himself in eight hours. The work also lacked quality. Callbacks and customer complaints were a common occurrence. These factors led me to make a rare and rather drastic.

Lay everyone off, go solo. Why? For one thing, 30 to 35 budget hours a week is comfortable for one full time employee. Carter could do the work himself. It would lower his labor costs, help him hit capacity faster. Once he did that, he could raise prices. He could hire more employees later, when his prices were higher. As it stood, his prices were too low. Wages would take a big cut of his earnings. Even if the employees were efficient and stopped wasting time. A price increase was in order. His fixed monthly expenses were around $6,000. This covered rent and debt payments. He owed $95,000 in his trucks, equipment, credit cards and personal debt. Going solo and laying off his employees, he could earn up to $12,000 per month after he raised prices. That $6,000 per month of profit would speed up his debt repayment. Having no employees would bring down his expenses. These steps would put him in a position to hire new employees within 12 to 24 months. Here's the kicker. He had 200 unanswered leads from the website we had built for him at lawncarewebdesign.com 200jobs from his spring rush he'd missed because he was too busy with ineffective staff. 200 leads was enough to grow the business a lot. This is true because he only had 50 recurring customers. Carter missed out on those new leads. He was too busy being on job sites, supervising to make sure projects went well. Micromanagement, maybe. But if he didn't, the work didn't get done on time or to the satisfaction of the customer. A cycle ensued. The more underpriced jobs he acquired, the less money he made. He had to bring down his costs and rebuild the business. From there, he could work on growing profitably. Many business owners make this mistake. They think that they can grow their way out of a bad business model. Unfortunately, the opposite is true. Your problems get bigger as your business expands. When I started working in lawn care, for the first few years, I assumed that no one could match my level of effort. The reality? I had a broken compensation model. I needed to align incentives better. I wanted to pay employees based on performance, not hourly rates. I paid my very first employee $12 per hour. He was full time alongside me in my second year of business. He was then offered another job. So I had to match the pay. $14 an hour. It felt like a lot at the time. But that employee was a hard worker. They set my expectations high for future employees. My next five hires were disappointments. They had a much lower capacity. Their work ethics and efficiency didn't compare to my first employee. My revenue kept increasing, but I wasn't seeing profits. The goal of home services is to sell labor. Take $20 an hour in wages and sell it to the customer for $100 an hour. Unfortunately, there are a million little things that chip away at profitability. Keep in mind the clock starts ticking the moment your employee's shift begins. Wages are being paid, fuel costs loading up the truck, unloading at the property, brakes. After all that, there may be only $20 $30 per hour left. This money must pay for insurance, sales and admin. It must also pay for labor, trucks, marketing and licensing. It must cover all the other business overhead. You can only hope there is profit left over buying and selling labor is the cornerstone of the home service industry. But we can't find good workers and the labor market is brutal. How do we as owners respond to that? Feel like victims? Blame lazy workers? Or can we put the problem back on ourselves and start taking steps to get the most bang for our buck? It's important to give your employees a reason to work hard. Clearly, job stability isn't enough of a reason for many people. They know they can get another job tomorrow. Standard compensation models guarantee that the employee makes the same whether they're working efficiently or not. What's the solution? When I come across businesses that are struggling with inefficient employees, I prescribe P4P pay for performance. In other words, the harder employees work, the more money they make. Simple. Makes sense. Good, hard working employees prefer it that way. All businesses pay their employees to stand around and do nothing for some part of the day. The goal is to keep that amount of time as low as possible. When employees know that they get paid for results, they work harder. Paying by the hour incentivizes employees to take as long as they can. For many, their motivation is to do as little as possible without getting fired. The longer the job takes, the more money they make. Your interests as the owner are the opposite. You want to get as much done as you can, preferably yesterday. The quicker you complete tasks, the more revenue you generate. Your incentives are not aligned with those of your staff. But how much should you give employees? This is where the 25% rule comes into play. When I started Augusta, I would charge $40 an hour to the customer. This wasn't enough to afford an employee. I needed to charge at least $60 an hour to afford a team member to cover another person's wage. At $40 an hour, I felt like I was making pretty good money. But if more than half of that goes to labor and taxes, your profit goes way down. You also have to assume that employees will likely be 20 to 30% less efficient than you. These factors would eat up all of my profits if I was charging $40 an hour. Over 10 years in business, the rate more than doubled. I saw the importance of pricing. I Recommend Using the 25% rule. The 25% rule is that you pay your employees no more than 25% of what you charge the customer. If you charge the customer $80 an hour, you can afford to pay your employees up to $20 per hour. If you charge the customer $100 an hour, you can afford to pay your employees up to $25 per hour. It is important to track your budget hours compared to your clocked hours. From this, you will be able to tell if you are hitting your target hourly rate. You should be able to track budget hours versus clocked hours within your CRM. Copilot has a feature that lets you do this. It's important in that it will help you make sure your jobs have the correct prices. It's also an easy way to track crew efficiency. You can compare and contrast how long it takes each crew member to to complete specific jobs. If it takes the Average team member 1.5 hours to complete a job, but one employee is doing it in four, that's a problem. They don't have enough training or they are underperforming. Remember, we are selling labor. It behooves us to track our product the same way a factory production facility would. They measure, weigh, and analyze everything there is. We can do the same by making sure our team's labor is as efficient as possible. Labor is our product. Your efficiency score is your budgeted hours divided by clocked hours. For the sake of this example, we have to assume that budgeted hours assigned to each job are accurate. In reality, there will be human error involved. Some jobs will be higher, some will be lower. That's okay as long as your budget hours are accurate on average throughout the system. For example, if someone clocks 10 hours and completes seven budgeted hours of work, their efficiency score is 70%. You can track this every day for every team member. This will determine which team members or crews are most efficient. This information can make a huge difference in how you price your services and manage your staff. During the first five years at Augusta, the business was growing. I cycled through almost 50 employees. I had an office manager and an assistant. We brought in over $1.5 million per year in revenue. And yet there was almost no money I could put in my bank account. Team members would ask for bonuses because they'd hit a rough patch in their personal life. People requested raises and pay advances. I would grant these requests based on how busy we were. If I couldn't Afford turnover. There was a good chance I'd cut the check or give them a raise. This didn't seem fair. There were other employees working very hard who got no extra compensation. They hadn't requested raises, so they didn't get them. We couldn't afford them. Simple as that. I grew tired of micromanaging. I hated tracking all the trucks or having dash cams to ensure efficiency. When I showed up to a job site, I found people on their phones. I wondered were they working or scrolling social media. It was stressful. Also irritating for me and my team. No one wants to feel like their boss is breathing down their neck and micromanaging them. Another thing that bothered me. I kept finding out how bad former employees were only after they were gone. That's always how it goes. Someone gets fired, then the stories come out. This is particularly true when the person was controversial. My question is, why didn't you tell me before? Why weren't you incentivized to ensure that only high performers stick around? I remember taking my team to an off site meeting at a two day seminar. The purpose was to learn more about project management for landscape jobs. On a lunch break, I told them that I wished I could pay them based on how hard they worked. The problem was balancing all my concerns. I wanted the work done efficiently. Doing it well was also necessary. We still need to complete non revenue producing tasks as well. How would employees get paid for those activities? Equipment maintenance, safety meetings, blade sharpening, oil changes, things like that. My question was how can you make people work fast without losing quality and without losing team spirit? Wouldn't this tear apart the team culture where we always helped other colleagues? Over the next several months, I created a system called P4P Pay for Performance. You can get an in depth tutorial on how the system works for free@p4psoftware.com it's like this. Your staff gets a percentage of the labor revenue they earn your business. With this system, your pricing structure directly impacts their earnings. Let's say on P4P your employees get a third 33% share of labor revenue. I raise prices from 80 to $100 for a specific service. It would effectively be giving my team an extra $6.67 to do the same work. Now your staff have a reason to work fast. But also make sure the customer is happy. They want the customer happy. This avoids callbacks. It also keeps the customer from leaving when prices increase and employees get more money on P4P. This is hard for some entrepreneurs to swallow. You mean when I raise prices, I Am giving some of that profit away to my employees. We as owners take on all the hard costs, the risk, debt on trucks, equipment, administrative overhead. We want to reap the rewards. P4P gives the best of both worlds. You make more money, your employees are happier, more efficient and make more money. Also remember that P4P is a function of labor revenue only. You don't have to share a piece of the total revenue with employees. We remove material costs and other fees. Then we split the labor revenue with employees. The beautiful thing, pay structure becomes simpler. It's no longer about who knows the boss, who went to church with them, who works hard when the manager is around, who has been around the longest, or who is willing to ask for a raise. Now anyone who is hungry and hard working can hop in and start earning. A hard worker who understands the P4P system can earn more. They can out earn someone who has been there longer but drags their feet. The senior person takes too many lunch breaks. They also stop at the gas station ten times a day. They don't deserve to earn more than a young and hungry person. This is not a subcontractor model. This is not commission pay. There is a guaranteed base pay per hour. That base pay exceeds the government required minimum wage. Overtime pay remains, but everything else above that is a consequence of effort. Work harder, earn more, beat those budgeted hours. The key to efficient labor is alignment of incentives. Get everyone pulling in the same direction. High quality, efficient labor. Some business owners do worry about paying employees to work faster. What if quality dips in the haste? We found the opposite to be true at Augusta. We implemented what we call yellow slips. If a customer complains, the team has to go back and fix it. No new labor revenue is being produced during that callback visit. The team member gets no extra pay on P4P. They are returning to a task that should have been done right in the first place. In some cases, a team member fixes someone else's mistake. The difference comes from the negligent person's bonus. Still, the person who made the mistake has to read their yellow slip to the team. They do so at the next morning meeting. This reinforces learning from mistakes and taking ownership of the job. My primary concern was that this would negatively impact our work culture. In fact, it improved it. Everyone was speaking the same language. They could hold each other accountable. It was in their collective interest to produce a high standard of work and make more money. The team wouldn't put up with low performers on their crew since it directly affected their paycheck. What's more, my top performing team members were no longer discouraged. No longer would they work twice as hard as inefficient employees but bring home the same pay. There are ways to put in place P4P even with non revenue producing tasks. For example, manual adjustments compensate for things like oil changes and equipment maintenance. They also cover admin work and cleaning the office. You can learn more@mikeandys.com P4P I have a free online course called P4P University. It explains how this system works. Again, it's free, no strings attached. You can even get my book about P4P sent to you for free in the mail by going to p4psoftware.com and watching the webinar. Note that this system will not work if your prices are too low. When you are undervaluing your services, the rule of 25% becomes impossible remember, that was Carter's problem at Rough Cut Lawn Care. He was paying too much and not getting anything for it. He could only achieve the rule of 25% by downsizing, hitting capacity and raising prices. He needed to charge at least $100 per hour since his location required he pay $25 per hour base pay to attract good labor. At the time, he was only charging customers $60 per hour. Paying his employees $25 per hour meant that he failed the 25% rule. When your prices are too low, you don't have enough profit left over to share. P4P is impossible. You can't make a million dollars a year by paying people to stand around. Inefficient labor can drive you to bankruptcy. Simple. When it costs more to do a job than you will earn from it, your business loses money. When you earn more than a job takes, you can afford to reward your employees. Then you can incentivize that performance again and again. Solving your efficiency problems will allow you to get back to growing your business. No more micromanaging. When you see someone on their cell phone, you won't care what they are scrolling. They make less money if they waste time on non work activities. I only step in when they are lowering team morale or are hitting base pay on every paycheck. This process helped me go from making zero annual profit to $280,000 in distributable cash in one year. Why? It's simple. When employees have a reason to work hard, the business makes more money on each job. It can take on more jobs. The effects compound. Every job becomes more profitable. Work gets done sooner. You take on more work without having to hire more people. You take on more work without having to buy more trucks or spending more on advertising. How do you diagnose a bad pay structure? For me, it's a straightforward question. Do you pay employees based on time? When I go in for a turnaround and discover that employees receive hourly pay, we need to fix the pay structure. Profit sharing and bonus programs are great, but they are usually based on monthly or quarterly performance. P4Pmeasures daily performance. It lets employees see immediate impacts on their paycheck. I also look at their labor efficiency score. Remember, you can calculate this by dividing your budgeted hours by your clocked hours. An efficiency score under 50% is bad. Around 70% is average. Above 90% is the golden benchmark. That's where you want to be. It means nine out of 10 clocked hours are producing revenue. You are a lean, mean, efficient machine. Carter's efficiency score was 40% disastrous. His crew only completed four budget hours in a 10 hour workday. Changing pay structure is the only way to take control of your labor efficiency. You won't stand around feeling like a victim of the labor market. That is, if you are willing to change your pay plan. Yes, paying by the hour is straightforward, easy to calculate. Everyone understands it. Calculating budget hours and tracking efficiency takes more time. That's why I wrote an entire book on how to implement the P4P system. It works. Paying for performance drives efficiency boosts revenue. It also improves retention. People like taking pride in their work. They're happy when good performance produces a better paycheck. Bottom line, Higher employee efficiency and motivation brings you closer to a million dollar business. P4P will help you do just that.