Special Financial Report: Employee Compensation
What should you pay employees in this crazy job market? A look at the new rules of compensation
Dan Page
There hasn't been a labor market like this in years. Maybe ever. Entire industries -- financial services, real estate, auto -- are imploding. Unemployment is about 9 percent; in many parts of the country, it's well into double digits. Inflation, meanwhile, is nonexistent. It adds up to an unprecedented situation. It was only a few years ago that the top concern for many employers was finding qualified candidates to fill open positions. Now, those same companies not only have the pick of top applicants -- they don't have to overpay to land them. Clearly, the old rules do not apply. But operating in this kind of environment is far from easy. For one thing, businesses often find themselves in the position of simultaneously firing some workers while hiring new ones or cutting the pay of some while granting raises to others. What's more, employees who appear to be a bargain today seldom stay cheap -- especially if they prove to be good at their jobs. So what are the new rules of compensation in this most unusual market? Meet four entrepreneurs who made bold changes in the way they think about compensation. Their tactics vary, but the goal is the same: a work force lean and flexible enough so that when the economy does begin to rebound, the company will be in a position to pounce.
Controlling payroll may be easier than you think
Patrick Maher knew he needed to cut costs. The question was how. Maher is CEO of Eight Crossings, a medical and legal transcription company in Sacramento. When the economy began to stumble, Maher's clients -- most of them hospitals and doctors -- began pressuring him to reduce his fees. The request was hard to resist. But Eight Crossings, which brought in about $3 million in 2008, operates on tight margins, and nearly all its costs are related to labor. Cutting fees, in other words, meant cutting payroll.
The company employs 80 medical transcribers who work from their homes and earn from $20,000 to $70,000 a year. (Full timers get health benefits.) They are paid per line of text at a rate that depends on the complexity of the subject matter. From the outset, Maher had been paying his transcribers about 5 percent more than the industry average, in a bid to attract the best employees.
Maher was loath to alter that strategy and began considering his options. He could automate more of the transcription work by investing in voice-recognition software. He also could try outsourcing a portion to low-cost contractors in India. But he also knew that technology has its limits, and he didn't much care for the idea of sending jobs overseas.
So Maher began taking a closer look at the work itself. Most of the transcriptions, he knew, contain a certain amount of boilerplate text that is automatically generated and inserted into the document. Yet transcribers had always been paid according to the total number of lines in a document, including those boilerplate sections. To Maher's mind, that looked like a roughly 5 percent bonus on each assignment. In that light, a 5 percent pay cut no longer seemed so unreasonable.
Maher decided he didn't have a choice. He knew the cut would be hard on his transcribers. But he also knew that Eight Crossings had been inundated with unsolicited resumés from experienced transcribers seeking work. If some workers decided to quit, finding replacements probably wouldn't be that hard.
If making the decision was difficult, implementing it would be even harder. Eight Crossings's work force is spread over 22 states and communicates mostly by e-mail and instant message. "The truth is that I have not met most of my employees face to face," Maher says. The first thing Maher did was inform each of his eight supervisors, who are responsible for collecting and editing the transcribers' work. All of them expressed concern about losing employees, but they also said they understood why it needed to be done.
Maher then sent a companywide e-mail explaining why he was forced to make the change. He also stressed that such changes would be permanent. "I tried to make it very clear and open about why we needed to do this," says Maher. "I also let them know that I and their supervisors would be on standby for their feedback and questions." It took a lot of nerve to hit Send. Maher wondered how the news would be received.
As it happened, most of the feedback was supportive; many employees even thanked him for doing what he could to save jobs. Since Eight Crossings is now paying the going rate, there is no advantage to seeking work elsewhere. And what happens when the economy rebounds? Maher has no plans to reinstitute the old pay rates. "I made it very clear that the cuts were going to be permanent," he says.
Change the way you structure sales commissions. Then watch the bottom line grow
Paroon Chadha has a thing about discounts. He doesn't like them. Sure, a well-timed price break can spark a sale. But offer one too often, and customers come to expect it, which can wreak havoc with the bottom line.
So when the financial sector imploded last fall, Chadha immediately grew concerned. His company, Passageways, designs Web-based applications for banks and credit unions -- customers that Chadha knew would be tough sells in the months ahead. Indeed, clients soon began demanding big discounts before signing a contract. And the salespeople at the West Lafayette, Indiana—based company, who earned a base salary plus 3 percent to 6 percent commission, were agreeing to cuts of as much as 10 percent. "We were leaving a lot of money on the table by doing this," Chadha says.
Chadha was sympathetic to his sales staff members. He understood that they had to work harder than ever to close deals. But he wanted to find a way of rewarding them that ensured they could continue to make decent money without having to resort to discounts.
After all, say a salesman earning a commission of 5 percent offers a 10 percent discount on a $50,000 deal. He would be giving up merely $250 in commission -- earning $2,250 on the $45,000 sale, instead of $2,500 on a $50,000 deal. Passageways, on the other hand, would surrender $5,000 in gross revenue. That struck Chadha as way out of balance.
Complicating matters, Chadha had just signed up several reselling partners to help market and sell Passageways's software in Canada and other new markets. He knew he needed to get everyone selling at the same price or his sales teams could find themselves competing against one another. Discounting had to be thought of as a last resort.
Chadha found his answer by accident. His wife, who is attending business school, happened to be reading a book called The Strategy and Tactics of Pricing, by Thomas Nagle and Reed Holden. Chadha, who had read the book during his own days in business school, picked it up and came across the solution to his problem: a tiered commission structure.
In such a scheme, salespeople earn a bigger commission the less they discount the price. For example, when a deal closes at the list price, a salesperson might earn a commission of up to 8 percent; if the price was $50,000, he or she would take home $4,000. But if the deal is discounted 10 percent, to $45,000, the commission would drop to 3 percent, or just $1,350. The structure is meant to create incentives to discourage discounting and align the interests of the salespeople with those of the company.
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