There are three principles about money that most of us entrepreneurs should be able to agree upon. First, it’s better to have it than not have it. Second, it’s better to have more of it than less of it. Third, it’s better to have it sooner than later. Many people in our country agree with my three principles regarding money and operate financially out of self-interest. They see the obtaining and accumulation of money as a good thing — an empowering endeavor.
How it works in the field (real life)
A client in Virginia decided to pay his two-man residential lawn maintenance crew one week of pay to perform one week of maintenance work with the stipulation that the quality of the work had to be acceptable. Any re-work had to be done on the crew’s time. How’d it go? The crew consistently completed five days of work in four days while meeting the quality standard. This was a 20% productivity improvement. Seen another way, it was a 20% pay raise for the crew. Any re-work done on their own time would lower the increase in pay (hourly rate).
An irrigation technician for a New Jersey irrigation company was billing only four to five hours per day. The owner decided to pay the technician $40 per hour for billed hours and $15 per hour for non-billed hours. Overnight, the technician’s billable hours doubled and his pay increased.
John Garretson worked mostly in the pet care retail industry for 20 years. During this time, he saw how pay-for-performance could be implemented. In 2009, he started ABC LawnWorks as a side hustle. Four years ago, he devoted full time to his residential lawn company.
John knew that he personally could service two houses per man-hour. He thought his two-man crew could satisfactorily service 2.5 to 3 houses per crew-hour (2 man-hours). John’s field labor cost ran roughly 33% of revenue so he paid his crew one-third of what he billed for the crew’s work. However, the crew leader thought he was getting the short end of the bargain. He also thought that he was rushing through jobs.
John agreed to put the crew back on hourly pay. The crew leader agreed to this but told John that he was going to slow down a bit to ensure that the quality standard was met. John had no problem with this. After a few weeks of paying the crews hourly, John sat down with the crew leader and showed him that he would have earned a significantly larger paycheck had he worked on a pay-for performance basis. Today, John pays all of his field staff on a pay-for-performance basis.
The benefits of pay-for-performance
John implemented pay-for-performance three years ago. Here are some of the benefits that he’s seen:
• Productivity: Amazingly, John has seen a 20% improvement in productivity. (Other contractors that I know who have implemented pay-for-performance have seen a similar improvement).
• Turnover: PFP attracts individuals who embrace being paid based on their efficiency. If they improve productivity by 20%, they see a 20% increase in their pay. These individuals generally tend to be long-term employees.
• Motivation: PFP rewards employees who think about the quantity of work performed. The more they do, the more they make. They’re motivated to get out of the yard and produce. They realize that unnecessary time at the gas station or donut shop cuts into their earnings.
• Quality: PFP not only rewards employees who are concerned about quantity, but they also think about quality. Call-backs decrease and customer satisfaction increases.
• Truck and equipment (T&E) expenses decrease: If field labor efficiency improves 20%, T&E efficiency also improves 20%, and T&E costs go down. T&E expenses usually run 12% of revenue. This translates into a 1-2% savings.
Performance-based pay isn’t for everybody. Some people either can’t or don’t want to connect their pay to their performance. When employees do connect these two dots, they’re thinking the same way that a business owner thinks. “How do I make the most amount of money (pay) utilizing the least amount of resources (time)?”
But is pay-for-performance legal and does it work for anything other than residential lawn maintenance companies? What about work performed on a time and materials (T&M) basis? How do you implement PFP? We’ll cover these and other questions next time.