Mike Andes explains why paying a landscape manager a straight percentage of revenue backfires: it incentivizes growth over profit. Instead, tie compensation to both revenue growth and actual profit, so managers invest in equipment and training without sacrificing margins.
All right, next question. How do you recommend paying managers? I was thinking, when I hire a manager to run everything for me, it should be percentage of revenue, possibly about how much should a manager of a million dollar per year company make? Okay, so this is a big question. I talked a lot about the last conference. You definitely do not want to pay someone based upon revenue. It's called a perverse incentive, which means you're incentivizing them to do something that's actually not in the best interest of the business. Okay? Because you could grow, grow, grow, grow and not be profitable. And yet you're paying this person more and more and more and more money because at the end of the day, if you're paying them a percentage of revenue, they are going to go after that incentive. And the perverse incentive, the perverse part of it is that that could run your business into the ground. Just growth is not necessarily sustainable or profitable. So you want to have a good balance between that growth and profitability. So you want to give them percentage of profitability as well as a percentage of growth. That's my recommendation. A lot more. We talked about that at the last conference about creating that balance and what that balance needs to be. But you want to do a percentage of revenue, a percentage of growth. So year over year, revenue increase year over year growth, give them that and profit. The reason you need to do that is because if they do grow, it's going to come at the expense of profit because they're getting trucks, they're getting equipment, they have to get more employees that cost money and it's going to reduce their profit. But you don't want to just pay them on profit either, because if you just pay them a percentage of profit, they wouldn't upgrade the equipment, they wouldn't invest in training the guys if they knew they were leaving in a year. They would just try to keep everything that's old, all the equipment, and not fix anything because they'd be just trying to make it as profitable as possible. So having that good balance makes them think in a very balanced manner, just like you, as the owner would, in terms of profitability and growth and balancing those two things out.
