To Improve Performance, Revise Your Pay Structure

Editor's note: This is the sixth in a series of case studies about business turnarounds. The name and identifying details of the company used as the example have been changed.

Problem: Workers Are Watching the Clock

The profits at an $8 million construction company in Rhode Island—Clamshell Construction—are half the industry standard, at 5% of sales. The owner, a jovial, well-meaning guy named Jack who's been involved in commercial construction for three decades, just can't seem to get his workers to finish the job. In many ways, Jack is a good leader. He works long hours, hustles for sales, and is a stickler for quality control, but getting his employees to follow through on orders is like herding cats. They don't care.

We recently sent one of our turnaround consultants to a Clamshell work site outside Newport Beach to observe. He discovered that start time was 6:30 a.m., but the workers just sat around drinking coffee and eating doughnuts for the first hour. When he asked why, they told him it was because it was still too dark, and therefore unsafe, to start pounding nails, etc. Quitting time was 3:00 p.m., but these guys disappeared at 2:30 to beat traffic. This is happening at all of the projects on Clamshell's roster. Jack's paying welders and carpenters union wages, and the hour and a half these guys shave off each day is adding up to hundreds of thousands of dollars in lost labor costs. Because workers weren't putting in a full day, projects are running overtime, damaging Jack's relationships with his clients and further running up his overhead costs.

And it's all Jack's fault.

Solution: Enforce Pay for Performance

Every small business should implement some form of pay-for-performance plan for all of its employees, whether it entails giving a financial reward to the office manager for finding ways to cut down on administrative costs, or penalizing the head of sales for losing clients or failing to follow through on new business. A guaranteed salary guarantees mediocre performance and ensures your office building will be deserted when the clock strikes 5:00, regardless of project deadlines.

Every employee contributes in some way to the bottom line, some more directly than others, so you have to tailor pay for performance to the nature of the particular job. And that does not just mean incremental bonuses for a job well done. When the company doesn't do well, and the purchasing department is to blame for overordering supplies, for example, those employees need to feel that loss in their own pockets. It's the only way a small business owner can be sure those stupid mistakes won't be repeated again.

In the case of Clamshell Construction, a new pay structure for Jack's project managers will soon improve work ethics around the building sites. We're advising him to tie a percentage of the field superintendents' compensation to the value of the hours paid. So if these guys can get work completed in a timely manner, or even under time, the project managers can earn 10% to 25% more on top of their base wage. They can start by having workers start their day at 7:00 and finish at 3:30—no exceptions. At the end of each week, project managers will face a performance review and be forced to make a full account of man-hours and what was accomplished on each job.

Conventional wisdom says it's impossible to control aggressive and unruly union workers in the construction industry, but we've seen pay for performance work in this context time and time again. We predict Clamshell Construction will increase productivity by more than 12% by getting in an extra hour and a half per worker at no extra cost to the company. Despite the downturn in the construction industry, Jack will be able to double his bottom line at the existing volume of business over the next year.

Failure to pay on the basis of performance is one of the biggest reasons companies lose money. If you don't tie 20% to 100% of an employee's compensation to his performance, you should fire yourself. Extraordinary performers should be paid extraordinarily well, but middle-of-the-road workers had better improve fast or a dwindling paycheck will be the least of their worries. If the deadwood decides to walk, so be it. In our experience, good workers always prefer pay for performance to traditional salaries because it enables them to do their jobs better and gives them the opportunity to make more money. Who in their right mind wouldn't want that?

With Samantha Marshall.

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