The Total Package

When you're trying to woo new employees or keep your current crew satisfied, don't start and stop with hourly wages and annual salaries.

November 30, 2005

Tom Swartz
Contributing Editor

When you're trying to woo new employees or keep your current crew satisfied, don't start and stop with hourly wages and annual salaries. For some people, health benefits make or break an offer. For others, flexible hours may be a deciding factor. Offering monetary rewards based on performance rather than increasing the hourly rate may provide greater motivation.

The fact is, with good people hard to come by, business owners need to be creative when choosing the quantitative and qualitative elements that go into employees' total compensation package. Bill Brinkman and Jeff Russell share the full-service perspective, while Pete Fitzpatrick and Rick Stover offer replacement contractor insights.

Tom: Talk to me about who is paid hourly at your company and who is paid salary.

Bill Brinkman,
Co-Owner
Brinkman Russell Inc.

Bill: The people that work out of the office are paid salary and the people in the field are paid hourly. Right now we pay salespeople a base salary and then 1.5 percent of the gross sale amount in a commission. They get half when the job starts and then half when it's completed.

If we're profitable, there's a discretionary bonus so we share part of the profits with everybody.

Tom: Is the discretionary bonus paid quarterly or yearly?

Bill: It varies. At least yearly, and if there's cash and we're being profitable at the time, it can be as much as quarterly.

Tom: Do you use any consistent formula to come up with your discretionary amount?

Jeff Russell, Co-Owner
Brinkman Russell Inc.

Jeff: We don't have a consistent formula right now. We meet with the employees once a quarter and they get information on whether things are tracking profitably. We do job costing on every project and track it throughout so that they know how they're doing on individual projects as well. The reason we let it spread out is sometimes you'll have a bad quarter and then you'll have a good quarter.

Tom: When you pay 1.5 percent of the price, is that guaranteed or does the job have to come in at a specific gross margin?

Bill: Right now it's guaranteed. We've only had salespeople other than myself for about 2½ years or so. We're considering having it tied to the gross margin but we haven't done that yet.

Tom: Rick and Pete, who gets paid by the hour, salary and commission at your place?

Rick Stover, General Manager
P.J. Fitzpatrick Inc.

Rick: Our office folks are paid a salary. They have some monthly incentives that are tied to companywide revenue targets we set each month. Our carpenters and our warehouse staff — specifically our window and door installers — are paid hourly. They also have a monthly incentive. We set a revenue target, and if they hit it then they get a certain percentage of their pay in bonus.

Tom: How often do they hit their monthly revenue target?

Rick: We're probably running at about 50 percent. We'd like it to be closer to 75 or 80 percent. Our siding and roofing folks get paid by the job. There is no incentive plan for them.

Tom: Are they subs?

Rick: Yeah. They work pretty much per square, and we add some things in for difficulty. Their incentive is to get it done efficiently and to get paid at the end of the job so that they can move on to the next one.

Tom: Are you salary and do you have an incentive?

Rick: I'm the general manager and I'm in a similar bonus plan to the CFO and production manager. We set up quarterly net income goals for the management team. Let's say the goal is $100,000. If we hit $100,000, we all get a full bonus. If we do $120,000, then we all get 150 percent of our bonus. If we come in just a little bit below the target, then we get 50 percent of our bonus.

Pete Fitzpatrick, Owner
P.J. Fitzpatrick Inc.

Tom: Pete, is this a partnership or a C corporation?

Pete: No. It's a dictatorship.

Tom: I know those; I love them. So as the owner, you sit down with Rick and other managers and set the net profit goal every quarter or set it up for the year?

Pete: We set it up every quarter, and we adjust it periodically throughout the year. The key to these goals is that they are achievable. If people don't think they have a chance at hitting these goals, then it's a disincentive.

Rick: If you do it annually you lose focus. Quarterly also allows us to adjust them based on the cyclical nature of the business. Being quarterly you can have a bad month and still recover by having two good months. Also, we know the first quarter we're going to make less money than in the fourth quarter.

Tom: Bill and Jeff, do you have a qualified profit-sharing plan?

Jeff: We actually use a professional employment organization, a PEO, to do our payroll and a lot of administrative things related to HR and payroll. It has allowed us to have a lot of benefits that aren't always available to small companies. We have a 401(k) plan that our employees can take part in, and we have a discretionary match. We can match 100 percent up to 5 percent of their income. They can put up to 15 percent in. It is based on our profitability at the end of the year. We're hoping to drive participation. Only a third to 50 percent of our employees participate right now.

Tom: Pete and Rick, do you do a set profit sharing and 401(k)?

Rick: We have a 401(k) that matches 50 cents on the dollar up to 6 percent of contributions. It's not discretionary at all, it's set. We don't view the qualified plan as a reward for a good year. We really see it as purely a tool for them to build for their retirement. I'd say more than 85 percent are participating.

Tom: Is there additional profit sharing at the end of the year or end of the quarter, other than the quarterly bonus you have?

Rick: No, although we do have what I'd call a pseudo profit-sharing plan for our salesmen. Our salesmen are paid straight commission; they have no salary. We also have some incentives for them built around volume. If in a certain month they sell over a certain volume, they get a couple extra percent. But we do job costing, and if their jobs exceed a certain profitability level, then we let them share in some of that.

Tom: There's also a downside. We sometimes get finger pointing when the salesman can show that it should make a certain gross margin and it doesn't. Then they say production botched it.

Pete: You're going to run into issues like that, but we still feel that it's a healthy way to run the program and keep the urgency on production. You need to have some accountability.

Tom: I want to know what non-monetary benefits you have used.

Bill: We give vacation pay for our field guys. The longer you're here, the more days you get. Six holidays a year, 401(k) plan, healthcare. We pay half of either single or family healthcare. That's always fun when it goes up 12 to 15 percent a year. We usually have to adjust the plan every year to keep costs in line. We pay long-term disability, and they have the ability to buy short-term disability. We have education reimbursement. We do a lot of safety training.

We do have flexible hours. If a guy has to take his kids to school every day, he has to come in at a certain time, it can't change every day. But if one guy gets there at 7:30 every day and one at 8:30, we work with that. We have flex spending plans for health issues and daycare, a life insurance plan, cell phones for all our guys. We'll pay for half of the cost of tools with a $200 limit, but we're flexible depending on circumstances. We pay our field guys $14 a day for mileage reimbursement.

Tom: No matter if they drive 10 miles or 200 miles?

Bill: We're fairly localized in what we do. We've done a study of how many miles they drive and used that as an average. They obviously don't get it on holidays and vacations.

Jeff: They own their own vehicles.

Tom: What about uniforms?

Bill: I've got a variety of different shirts. We've had jackets, caps.

Tom: Rick and Pete, do you agree with these, don't agree with them or are there some other ones that you have tried?

Rick: Most of what we do is similar — cell phones, company vehicles for all the sales guys and our in-house installers. So we pay for the car, we pay for the insurance, and we pay for their gas. We've got about 45 trucks.

Pete: We probably buy between five and 10 trucks a year. Our sales guys have the option of a company vehicle or an allowance, and it's about 50/50. All of our installers wear uniforms and they're all drug tested and background checked.

Tom: I think a safe environment is a big non-monetary advantage. We implemented random drug checks about a year ago. At our Christmas gathering, several wives thanked us because they thought that their husbands were working in a safer environment.

Bill: We'll do background checks but we don't do drug tests.

Pete: We did drug tests about eight or 10 years ago, and it really cleaned up our shop. All of a sudden we didn't get this unexplained absenteeism — no call, no show.

Tom: Are pay increases related to inflation, performance review, acquiring new skills or responsibility or anything else?

Pete: We review our people twice a year. One time is non-monetary and one is monetary. If they've done well and they've kept up their end of the bargain and were better, then they're going to get a raise. If they haven't, they've got things to work on.

Rick: We try to base their raises on increasing their incentives or bonuses.

Pete: We feel that the higher the salary or hourly rate, the less incentivized they are. If they just show up and they're going to make $20 an hour, there's not a lot of incentive to produce. We'd rather pay them $15 an hour and have them really motivated to produce.

Jeff: We have set up some pay ranges based on position. There's a lot of flexibility within that for a supervisor and/or Bill and I to set the wage, and we do have incentives. When they complete NARI or NAHB training there is some incentive to their pay tied to that, usually in the form of an hourly wage raise.

Tom: What incentive programs have you had that didn't work, and why?

Pete: When we first changed our sales program, we worked out a profit-sharing program. Say a job was priced at $10,000 and they sold it for $12,000, then they would share in that extra $2,000. We did that for about six months and found that a lot of the jobs should have made money but didn't. So the company lost, and the salesman made out like a bandit. To keep the company from being thrown under a bus, we decided that the profit sharing part would be worked out from the job cost. If the job really did make an extra $1,000 or $2,000, we share that with them. They also share if the job loses $1,000 or $2,000. If you have three jobs that make $1,000 and one job that loses $1,000, $2,000 is in the pool.

Tom: If the job doesn't make money, do they make any money?

Pete: If they priced it right, they'll get their commission. If it lost money, they need some good jobs to bring it up before they share in the profit.

Rick: You've got to make incentives easy to measure. If they're tough to measure or people don't fully understand them, then they're just not effective. Then you say, "Why am I paying this money if it's upsetting them rather than motivating them?"

Tom: Jeff, is there anything that you tried and you found out really wasn't the best way to do it?

Jeff: One of our incentive plans we termed a gift, and that way they didn't see it tied directly. I think they felt like they couldn't measure it real well and so there was some frustration over whether it was fair or not.

Tom: As you grow, you better have the processes in place because if you don't, a little problem at a little volume all of a sudden becomes a big problem at a bigger volume.

Pete: Absolutely. You're trying to make people more productive and at the same time have them make more money. If it's not working, we've got to change it. So we monitor things and change when we need to.

Bill: We've learned that when we have a year with real good profits, we may hire somebody at a higher rate than we would have in a year when we weren't making as much money. Try to be disciplined and know that the year is going to have ups and downs. Set that benefit package so that it's not going to hurt you when you're a little bit slower. Make sure it's the right number for the person and for the situation, the area.

Tom: Are field people commanding higher rates as we're in a tougher labor force environment?

Bill: A lot of our labor is guys that are coming out of other industries. They've had to take a cut in their pay but they've been willing to do it because they think our industry is more stable. With the other benefits we offer, the rates we're paying have gone up over the years.

Pete: We have to match top pay around this area. We want the best people. We may not start them out at top dollar; we make them prove themselves. We're not going to upset our current labor force. If they're not as good as our top guys, they're not going to get paid what our top guys do.

Bill: When Jeff does reviews, he gives them a breakdown of their hourly wages or salary and what the other benefits are worth, so there's a bottom line number that is bigger than their hourly rate. If they're out looking in the papers to see what other companies are paying, it helps them remember that the benefits of being with Brinkman Russell are above and beyond what they're getting per hour.

Tom: What do you want remodelers to take away when it comes to incentives?

Bill: It's one thing to get the person into your company, but we use the incentives more to keep people once they're with us. It's part of our culture.

Jeff: I know the PEO is not an option in every state, but there are payroll services that can help you provide benefits that are more like a large company. EDP has it in some states. It's like employee leasing. We co-employ. Our employment organization is on the hook for the payroll taxes, for the workers' comp. They provide all those things in one package to us with our payroll service, including healthcare.

Here in the Twin Cities, NARI does a wage and benefit survey every year. We take part in that and then track how we're doing compared to other companies in the market. If you can get your hands on something like that it helps you to judge how you're rating against your competitors and how your benefits stack up.

Then when you have an employee who says, "I'm not making quite enough," you can say, "We're paying the top of the scale." You can feel good and have a strong position, not just guess that you're paying the best.

Tom: Pete and Rick, your advice to the guy out there who's scratching his head and saying, "I just don't get it."

Pete: A mistake hiring somebody can cost you a lot of money, so it's very important to keep people on the bench. Don't interview and hire only when you need somebody. That's when you make wrong decisions.

Rick: If you don't have incentive plans, get them. Some of the major changes that we've made over the last couple years are putting in bonus plans that incent people for the behavior that we want and the results that we want. You can attribute our success to that as much as anything else. I think there's no better way to change the mindset of people, drive your business around being goal-oriented, and have everybody shooting for the same goals, than an incentive plan.

Pete: It's important when you're rolling a plan out to let people know the spirit of the plan so that they know the end result that we're looking for. The spirit of the plan is more important than the plan.

Rick: We stress to our people that we try to design these plans so that we win together. In other words, when the company wins, you win too. You can't have a situation where the employees all win, but the company loses.

 

Pete Fitzpatrick, Owner, and Rick Stover, General Manager
P.J. Fitzpatrick Inc.

This specialty firm, owned by Pete Fitzpatrick, will install about $17 million in roofing, siding, windows and doors this year. With locations in New Castle, Del., and Wilmington, Del., P.J. Fitzpatrick has about 65 full-time employees, including carpenters and window and door installers. About the same amount of people are regular subcontractors who install roofing and siding.


Bill Brinkman and Jeff Russell, Owners
Brinkman Russell Inc.

Founded in 1989 by Bill Brinkman as a home improvement company, Brinkman Russell now specializes in three areas: full-service remodeling, basement finishing and remediation of water damage. Jeff Russell has been a co-owner since 1990. Located in Oakdale, Minn., the firm employs 23 full-time people and 5 part-time people and will do about $4 million worth of work in 2005.

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