It’s clear to me that A/E firms are all in a huge rut when it comes to how they pay their people. The typical firm reviews salaries once a year after doing some sort of cumbersome performance appraisal system. Then the employee gets a raise – sometimes within the constraints posed by an arbitrary salary range for someone in that specific position, say “Engineer 4″ – and sometimes not.
Bonuses are handled similarly. The principals/partners decide who gets how much with little or no information to work with beyond what the employee got paid last year in the way of bonus and maybe their utilization data. The money is paid out once a year, either right before Christmas or on the last day of the year.
If you think paying people this way motivates them and enables you to hire and attract the best talent, then I probably can’t help you. If you think there HAS to be a better way, keep reading.
Here’s what I suggest – and many of you will think this is too radical:
- Get rid of your annual evaluation process. No one likes to give or receive these reviews. They take a lot of time and are demotivational. And they also frequently provide the plaintiff with all they need to prove a wrongful termination case. The only feedback that really matters to most employee is the money anyway. Just get your managers used to the idea of providing instant feedback to their employees – both good and bad – as close to the incident as they can. It saves time and money and is much more effective.
- Dump your fixed salary ranges. You aren’t a government agency. Stop trying to put people in boxes. Who says these ranges make any sense anyway? Where did they come from? How often are they adjusted? Why do you need them? People are all different even if they work in the same job category.
- Change salaries for people as often as necessary. Once a year is not enough for really young people unless you want them to be recruited away by your competitors. Give individuals a raise when they need it based on your assessment of their value to your enterprise. You don’t really need any set schedule. That is self-imposed. You know who is worth more than someone else. Pay them accordingly with no delay.
- Implement an open book financial reporting system. Show everyone how much money the company is making or losing, where you stand on collections, working capital, proposals, backlog and more. Tie the bonus pool to the actual cash basis profitability. Set the percentage to go to the all-employee pool, the management/key person pool, and the owner pool each year as a part of your business planning process. Tell everyone what pools they participate in.
- Start paying bonuses out monthly or quarterly. Once a year is way too long to wait. If there’s a loss, make up the loss before paying out any bonus monies. Let everyone see where the money is coming from based on the open book report. Pay the individual bonuses based on the employee’s salary as a percentage of total salaries of people who make up that pool. For example, if the company makes $150K cash profit for the month, and 20 percent of that goes to the “all employee” pool, that is $30K in bonuses to be paid that month. If an individual employee has 3 percent of the total salaries of those in the pool, he or she would get $900.
You can disagree with me about how to pay people if you like, but I know what works over the long haul to attract, motivate, and reduce turnover. Doing these things makes life better. People will be happier. You’ll keep more folks as you’ll have some tools to keep them there. You’ll spend less time on it all. There will be more trust in management. People will better understand your business and feel the company is fair. And you’ll be encouraged to weed out the duds because they are getting bonus money they don’t deserve. All of this bodes well as it relates to improving the value of your enterprise – one of the primary objectives of an entrepreneurial venture.
Mark Zweig is Zweig Group’s founder and CEO. Contact him at email@example.com.
This article is from issue 1145 of The Zweig Letter. Interested in more management advice every week from Mark Zweig, the Zweig Group team, and a talented list of other guest writers? Click here for to get a free trial of The Zweig Letter.