How My Company Learned to Run Itself

Profile of a metal-fabricating business where, thanks to a bonus plan, employees solve their own problems.

Tweet

The anatomy of a bonus program

I'm a tinkerer by nature and a turn-around manager by experience. I buy troubled businesses, get them operating at a profit, and then sell them when the mundane details begin to outweigh the challenges. Over the past 16 years I've done that with three companies. But the company I currently own, Jamestown Advanced Products Inc., is different from the others. For one thing, there aren't many mundane details left for me to handle. My employees solve most of the problems by themselves.

Jamestown Advanced Products is a metal-fabricating business I started three years ago as the result of a telephone call from a friend. At the time, I was president and owner of another metal fabricator in Jamestown, N.Y., which I was about to sell. In fact, I had been looking forward to taking some time off, but the call forced me to reconsider my plans.

My friend had been doing subcontract work for a large building-products company that was importing industrial plumbing assemblies from Korea. Hoping to improve turnaround time and quality, it wanted to shift to a domestic supplier. The deal represented about $1 million of business a year, my friend said. We would be expected to produce fabrications in various sizes and models, and about 40% of the work would involve special orders to be turned around in less than two weeks. Custom work of that sort requires a manufacturing process significantly more flexible than the one my company had been using, so I would have to start a new company if I decided to accept the offer. But the business was mine, I was told, if I could commit to producing and delivering the specified quantity of metal products every week. And one other thing: I'd have to do it at the same price the Korean supplier was charging.

That was a challenge I could get interested in. To help me make my decision, the building-products company was willing to share all sorts of information, including the amount of product it intended to buy and the prices it would pay. From that, I was able to construct a projected income statement. The good news was that the numbers seemed to work, indicating a pretax profit margin of 12%. The bad news was that the numbers worked only as long as I could hold direct labor expenses to 11% of sales. And labor, I knew, would be difficult to control, particularly when so much product was being made to order.

Nevertheless, I went ahead and made a proposal to the company. I said I would start a business to fabricate the products it wanted, deliver them within the specified time frames, and charge the same price as the Koreans. But since the start-up required an investment of about $600,000 for machinery and working capital, I wanted a long-term contract. Otherwise, I might be forced to sell off the equipment at a loss if the relationship soured.

We settled on a three-year contract. The customer, for its part, made a commitment to buy a certain amount of goods each year and to provide regular projections of its delivery needs. We also came up with a formula for raising prices based on increases in the cost of raw materials. Finally, we agreed the customer could terminate the relationship only if I failed to meet its quality standards or deliver on time.

And so I had a new business.

In looking at my situation, I could see only one variable that could make or break the company, and that was labor. Not that my estimates of output per man-hour were unrealistic. But I knew they required a work force that wanted to meet and sustain a high level of productivity. And I do mean want. In my experience as both an employee and a manager, I've found that employee attitudes are a major factor in productivity. After all, every owner would like employees to strive for higher and higher levels of output, but they seldom do. The problem is that workers (even ours) are somewhat cynical about management. They quickly lose their motivation if they see their productivity increasing and they don't get the lion's share of the gain.

But with this company, I had an advantage. I could arrange things however I wanted. So I decided to set up a serious bonus program, one that would give employees as much incentive as I had to keep labor costs below 11% of sales.

The idea was simple: I would pay them decent base wages, totaling 11% of sales. If employees got the labor costs below 11%, I would pay them the difference in the form of a quarterly bonus. If labor costs went over 11%, of course, the difference would be coming out of the company coffers. I put all that in writing.

In addition, I agreed that at the end of every week, I would provide sales totals, gross payroll numbers, whatever employees thought they needed to check out the system. If they didn't trust me, they could (with a little effort) verify the numbers on their own. The feedback would be almost immediate, so they could study the results with an eye toward improvement. I thought it was feasible for them to produce at a labor rate of 9%, in which case they could be earning quarterly bonuses of up to $1,500 each.

We started gearing up in October 1987 with just four production people. All of them got $6 an hour, which was about the norm for similar jobs in our area, and I didn't promise to pay more until they earned more. Employees seemed to like the idea of being rewarded for efficiency. As far as I was concerned, that was most important. We could teach them how to operate equipment. It's much harder to persuade people to accept a completely different approach to compensation.

Employees spent the first few weeks getting used to the equipment and building prototypes. They knew what was expected of them in terms of output, and everybody thought it was doable. Then, in early December, we began building products according to our customer's production schedule. Immediately people saw how hard it was. For one thing, they were still learning their jobs. The engineer, for instance, would write programs with errors in them. The operators of our numeric-control turret presses would put clamps in the wrong position, then smash them. Or they would bend pieces of metal too far or not far enough, which would make it hard for welders to weld pieces efficiently. I knew it would take time to get production up to speed, and I had budgeted for it. But the employees were disappointed at our slow progress.

 1 | 2 | 3  NEXT 

Read more:

Sign-up for our Leadership and Managing Newsletter

Email Address: