Investments not Expenses

Daniel Yerger Financial Planning Leave a Comment

Often a growing business will look to add staff as quickly as possible. After all, a growing business is limited by the bandwidth of it’s human workforce, each of whom come with their own personal complications (i.e. work life balance). It is not uncommon for me to hear a business consultant or even an owner toss out something about trying to get the cheapest employees possible. “Hiring in Boulder county is so expensive.” Well damn right it is, it’s an expensive place to live. While I fall far from being an anti-capitalist, I disagree not jut ethically but practically on the premise that businesses should try to bring on employees at the lowest possible cost. In my view, this often only compounds the issue that unless the business is the exact career an employee wants or the company has a mission they have a passion for, there is forever and always a flight risk at work. Today, I’m trying to bridge the interests of the two parties (owners and employees); so if you’re an owner, you’ll learn how to evaluate and build a strong compensation package, and if you’re employee, you’ll learn how to evaluate what you have or what’s missing from yours. Fundamentally, the goal here is to remember that compensation is an investment not an expense. Every dollar of hard benefits and every bit of soft benefits goes to the happiness of your team and the longevity of their time with you.

Cash Compensation

This is the table stakes of the conversation. If you attempt to underpay for labor, you’re simply buying time. Fair compensation information can be found via a number of sources, including the bureau of labor statistics, salary.com, glassdoor.com, and others. Before hiring for a position, you need to make an offer of fair wages. However, it’s not so open-and-shut. Wages should be fair for the work, but you also run into several other issues here. Are you pricing each position individually? Does that open you up to discrimination unintentionally or to bias for or against certain roles? Rather than re-pricing each role, build out a compensation grid for your company, composed of both job levels (e.g. entry level, experienced, supervisor, manager, etc.) and experience (1 year, 2 years, and so on) in the relevant field. If you have such disparate qualification requirements such as “nurses assistant v. medical doctor”, then build out separate tables or adopt a default bonus structure to true up to fair compensation levels.

Above and beyond base cash compensation, there’s a question about whether it should be hourly, salaried, or more incentive-based compensation. The default answer here is “it depends” but that’s not terribly helpful; rather, look at the primary outcome you want from an employee. For someone like a security guard, you’re fundamentally paying them to protect something from time a to time b. This is where hourly is most appropriate, where the output of labor is less the focus, and use of their time is. In the case of professional staff (attorneys, accountants, IT, engineers, and so on) a salary is going to be most appropriate; and even more importantly here is what level of productivity you want from these people. The great mistake of salaried roles is then insisting on a 40 hour work week. There is little to no value in this default structure; rather, the work week should be predicated on the amount of productivity someone brings to the role. If an engineer solves “the problem” in 10 hours rather than 40, there’s no reason to make them sit around for another 30 hours until you come to them with a new problem. This gets into some of the soft benefits, which we’ll discuss shortly.

Incentive-Based Compensation

Traditionally the purview of “producers”, this type of compensation is typically aimed at business development and sales roles, in addition to some skilled professionals in the form of year-end bonuses (which are dangled as golden handcuffs to keep these professionals with the company; big red flag!) I’m of the professional opinion that incentive-based compensation should only take one of two forms: Either pure sales compensation or company-wide gainshare. In the case of sales compensation, this is for roles that are dedicated business development people. Their full time job is to make calls, knock on doors, network, meet with potential clients, and close business. If that’s their job, their only job, and they applied for the position knowing it would be their job, then commissions for a job well done make sense for all parties involved, since it directly incentivizes the behavior required of their core role. Otherwise, do away with individualized bonuses. The idea that any individual employee is moving the needle incredibly far for a company without help is almost laughable. While this certainly can apply to the sales people who might bring in a massive client or opportunity, everyone else is part of a large team providing the deliverable outcomes of the business. If there wasn’t an HR person taking care of their benefits, they would have to spend time on it themselves. Without a shipping department, there would be less production as people switched from production to shipping, and so on. In these cases, a company-wide gainshare is appropriate for every other employee.

Gainshare was coined by Jack Stack in his book “The Great Game of Business”; fundamentally, the idea is that if every employee can contribute to the bottom line, they should know how they do that, and should participate in the rewards. This isn’t a Marxist argument for workers “reclaiming their labor”; rather, it’s a practical exercise. If a company is well managed, profit should come out of the excess revenue over fixed and variable expenses. If that’s the case, then there is little reason not to share anywhere from 10%-30% of the outcome. This assists in aligning every employee’s interests with that of the company: rather than unnecessarily expensing things, keeping money in the company is in their best interest. Focusing on results that produce profit rather than things that might benefit them personally becomes the order of the day rather than an plea from management. Finally, by treating all staff as investments not expenses, businesses are in a better ethical position to share the health of the business and align the interests of the employees with the outcomes the business desires, while avoiding that most catastrophic of self-preservation techniques: Layoffs to reduce expenses.

Off-the-Shelf Benefits

Not to gloss over the importance of non-cash compensation, but in spite of the sometimes complex implementation of non-cash compensation, from a business planning and employee benefiting perspective it’s pretty straightforward. A basic rule of thumb for understanding what an employee will “actually cost the business” is a minimum of 125% of the employee’s base compensation, and if you’re being generous can grow from there. These are laid out in the order they should be implemented and with some notes on what to consider.

  • Health, Vision, and Dental Insurance: This is possibly the greatest return on investment for a business. Employees without health insurance are looking at having their take-home pay reduced by anywhere from a few hundred dollars to over a thousand dollars every month, simply because your business doesn’t want to foot the bill for the premiums. Understand that without health insurance, the wages you’re offering might easily come up significantly under market, and your team is a perpetual flight risk.
    • Ensure that you offer both low deductible and high deductible plans. Low deductibles are good for those employees with chronic conditions, while the high deductible plans keep costs low for healthier employees and can open up the option for a health savings account (HSA).
  • Retirement Plan: Whether it’s a SIMPLE IRA, SEP IRA, 401(k), or anything else, you should provide a retirement plan that saves a minimum of 3% for employees (whether provided by default or as a match), and target increasing it to the maximum safe harbor of 6%. While this might seem expensive, keep in mind that if your employees aren’t producing at least six cents on the dollar, you probably have bigger issues.
  • Short Term and Long Term Disability Insurance: Short Term Disability comes at a fairly nominal cost to a business so this isn’t a large line item, but ensuring that both your business and the employee don’t unduly suffer because of injury or illness goes a long way. Long Term Disability should actually be “free” to the business because it’s more beneficial if employees who use it pay for it due to taxation of the benefits (you pay the premiums, their benefit gets taxed, they pay the premiums, their benefit doesn’t get taxed).
  • Life Insurance: Life Insurance is offered by a lot of companies in almost the worst possible way, typically 1-3 years of salary tacked onto their benefits package without consideration for the needs of the employee. Instead of foisting insurance onto their compensation and sticking them with extra taxes, offer employees the safe-harbor $50,000 by default and then the option to purchase guaranteed issue life insurance through their benefits package. Those who are married or parents will likely take advantage, and your single and dependent-less employees have a choice as to whether to keep more of their paycheck.

Creative Benefits

Above and beyond the benefits that show up on an employee’s pay stub are the benefits that companies can provide at a no cost or as a baked in cost to their employee’s compensation.

  • Vacation: This is the “Free” benefit, particularly if your employees are salaried. The easiest implementation here is to offer an unlimited vacation policy subject to approvals. By doing so, employees don’t need to budget their time off throughout the year and you don’t have to pay out unused vacation when they retire or move onto another opportunity. Further, studies show that employees take more meaningful time off but less time off when given unlimited vacation. Rather than “using up their days for 3 day weekends” because you have a “use it or lose it” policy or never taking a vacation because they want the payout later on in life, employees take the time they need.
  • Sick Leave: Don’t have employees track and bank sick leave so they can occasionally take a day off when they’re feeling unwell. Sick employees “pushing through it” to come into the office can often spread their condition to other employees, and injured employees are at greater risk of re-injury if they’re coming into the office. If someone is unwell, let them work from home or simply take the day off. If their condition is likely to be prolonged, voila, you should have short term disability in place.
  • Paid Paternity and Maternity Leave: This is one of those conversations we run in circles on in the United States, so let me make this one very simple with two points. First, every developed country on earth offers some form of paid maternity/paternity leave. If you want to admit that Russia treats its workers better than you do, be my guest. Second, there is an excellent business case for Paternity and Maternity Leave. In his book “Work Rules”, Laszlo Bock (former head of people operations for google) shares the data the found as they expanded their leave policy. When employees were given the unpaid 12 weeks, retention was less than 50% after taking leave. When it was paid, it bumped up over 60%. 4 Months? 78%. 5 Months? 90%. 6 Months? 99%. If your employees were worth hiring, they’re worth supporting as they adjust to new life in their family, and you will save ample time, energy, and money by knowing they’re almost certain to come back, rather than flipping the coin about whether they’ll return, dealing with them under great stress, and then possibly incurring the cost of replacing them.

In Closing

It is essential that a business recognize that the lifeblood of its operations is its team. While buildings, plant and equipment, and intellectual property can make up the muscle, bone, and skin of the organism that is a business, none of it functions without its people. It is critical not only for employees but employers to have goals that are aligned with the long term interests of the business, and that starts by treating everyone within the organization as investments not expenses.

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