Implementing Performance Pay

Departments - Travels with Jim

Jim Huston breaks down how to craft a performance pay structure the right way.

May 9, 2022

Travels with Jim follows Jim Huston around the country as he visits with landscapers and helps them understand their numbers to make smarter decisions.

Performance pay takes many forms. Regardless of the method, it ties one’s pay to one’s performance. No performance — no pay. On the other hand, the better one performs, the better one’s remuneration. A merit-based system rewards good character traits such as industriousness, hard work, risk-taking, creativity, the serving of others (customer service), frugality, perseverance and so forth. Performance pay has deep roots. It is capitalism implemented at the field level of your business. Like being a business owner, it’s not for everybody. Some get it. Some don’t. Some won’t. It incentivizes your field personnel to think like entrepreneurs where the goal is to gain the maximum amount of benefit (pay) while expending the minimum amount of cost (time/labor). Performance pay rewards people who constantly submit their efforts to a continual cost-benefit analysis.

How it works

John Garretson, president of ABC LawnWorks, implemented a performance pay system that is pretty simple. His lawn maintenance crews are paid 33.33% of the revenue that they generate. Re-work and call-backs are done as needed and by the crew that caused them. This automatically increases their time on the job without any additional pay. It doesn’t take a rocket scientist to figure out that doing work right the first time pays big dividends.

Here’s how John calculates the 33.33% figure used to pay his crews: (See the Diagram by visiting: bit.ly/2HlAnIV ).

The two-man crew is paid $23 and $19 an hour for an average wage of $21. There’s no overtime, so the total labor per crew-day is $336 ($21.00 x 16). Add to this a 24% labor burden (FICA, FUTA, SUTA, WCI, GLI, PTO, vacation pay, etc.) and you get a total of $417. The total cost of equipment (mowers, edgers, trimmers, blowers, etc.) is $71 per day. The F-150 with a trailer costs $96 per day. All of this calculates to a total direct cost (TDC) of $584 per day.

Next, we add general and administrative (G&A) overhead costs at $14 per man-hour multiplied by the 16 man-hours, which produces a break-even point (BEP) of $808. Finally, a 20% net profit margin (NPM) added to the BEP produces a daily revenue goal of $1,010. It looks like this:

Questions about Pay-for-Performance

Is performance pay legal?

In most states, it is. However, one’s pay must equal or exceed the minimum wage rate with overtime properly applied to it. Check with your state’s labor board, attorney, human resource professional, etc. to be sure.

Does it only work with residential maintenance work? Performance pay can be implemented (sometimes with minor adjustments) for various kinds of work (enhancements, irrigation service and installation, landscape installation, lawn care, and so forth) whether residential or commercial.

Conclusion

Implementing performance pay based on a percent of revenue requires that you know your costs for your labor, labor burden, trucks, equipment and G&A overhead. If you do, you can implement an accurate system. The primary benefit of such a system is that you’re rewarding your field staff to think like you do as an entrepreneur. Both of you should be constantly analyzing your work through the lens of a cost-benefit analysis. The objective is to achieve the greatest gain while incurring the least cost.

I should add that this must be done in a safe, legal and ethical manner while achieving the desired quality standard. In the process, you’re helping to create good character traits in good people who will be wealthier than they were before. It’s literally, “The more the merrier.” The more entrepreneurs we have, the merrier we all will be.

For a free copy of my MSX worksheet or more information on PP, click here.