E214 | How to Think Differently About Compensation with Verne Harnish
How do you think about compensation in your organisation? In this episode of The Melting Pot, Verne Harnish, a world-leading expert, speaker, author, and entrepreneur in the field of business growth, shares his recent research into how different organisations tackle compensation.
Having founded the Entrepreneurs’ Organisation in 1987, Verne’s also the Founder and CEO of Scaling Up, as well as author of Scaling Up, Mastering the Rockefeller Habits, and co-author of The Greatest Business Decisions of All Time, for which Jim Collins wrote the foreword.
But it’s his latest book, Scaling Up Compensation, a short read at just over 100 pages, that Verne is discussing here. In this book, he explores over 100 case studies to help you move top and bottom lines by hundreds of percent, just by tweaking your existing comp plan.
While the case studies aren’t there for you to copy, let them inspire and guide you in how you can take compensation and make it work for you, so you can attract and retain the best possible talent you can afford, so you can build the best team money can buy for your organisation.
This is a fabulous conversation, download and listen now.
On today’s podcast:
- Scaling up compensation
- How to afford the A-players
- Let compensation set you apart
- Sales commission – yes or no?
- Promotions and a pay rise
Making a Point of Differentiation Through Compensation with Verne Harnish
How do you think about compensation in your organisation? Verne Harnish, a world-leading expert, speaker, author, and entrepreneur in the field of business growth, has recently researched over 100 organisations to discover how they use compensation to attract and retain the best possible talent they can afford, so they can build the best team money can buy for their company.
Having founded the Entrepreneurs’ Organisation in 1987, Verne is also the Founder and CEO of Scaling Up, as well as author of Scaling Up, Mastering the Rockefeller Habits, and co-author of The Greatest Business Decisions of All Time, for which Jim Collins wrote the foreword.
In his latest book, Scaling Up Compensation, a short read at just over 100 pages, Verne shares over 100 case studies to help you move top and bottom lines by hundreds of percent, just by tweaking your existing comp plan.
Scaling up compensation
There is literally nothing more frustrating for a business owner, says Verne, than compensation creating messes inside the organisation.
“For most people, [compensation] is their single largest expense. [And] we don’t necessarily get the bang for the buck that we should be getting. It ends up being piecemeal together as we scale, and it becomes this hodgepodge mess that ends up creating more drama than it does good in the organisation.”
Which is why Verne set about finding a way to help business owners get compensation right and out of sight.
“We share over 100 case studies in the book. It’s a quick book, only 100 pages. You can move top and bottom lines by hundreds of percent, just by tweaking the existing comp plan you have today.”
How to afford the A-players
One of the first things that you’ve got to get out of your mind, says Verne, is that what you actually pay people doesn’t matter.
“What you’re trying to look at is do you have the best labour cost per gross margin dollar? Let me say that again: you want to have a lower labour cost per gross margin dollar than the competition.”
What does that mean?
Well, most A-players can produce 3X, sometimes 10X, in comparison to a B or C player. In fact, Bill Gates famously said the right programmer can replace 10,000 programmers.
What you need to do, says Verne, is have considerably less people, but pay more. E.g. pay your A-players twice as much. You might baulk at this idea, but when they’re producing 3-10X the output, your productivity and labour rates are suddenly hugely competitive in the marketplace.
Verne shares an example of a CEO building a commercial cleaning company in Malaysia. This guy realised that if he paid people, on average, 25% more than market rate – which was about 15% (33% for the supervisor), then he could attract much better talent and retain them. By getting pay right, he could put it out of mind.
And then he decided to focus on doubling their productivity to 50%. One year later, they only got to 40%. But, says Verne, if you can drive for productivity at 40%, but you’re only having to pay 25% more to achieve this, then you’re onto a winner. This guy ultimately ended up having the highest labour rates, but the lowest labour cost per square metre cleaned in Southeast Asia.
He paid less people more to lower total labour costs.
Let compensation set you apart
You have to bear in mind though, says Verne, when you read the book don’t just copy what’s been done. Instead, use the book as inspiration for you to find a way to use compensation to differentiate your organisation. This is because every organisation is different – their aims, goals, even their culture. So the worst thing you can do is copy someone else’s compensation plan.
“The thing that surprised me the most were the strangest comp plans, and how most people would throw up all over those ideas, but they fit perfectly with that company’s unique culture, and what it is that their customers and ultimately, the company wanted to achieve.”
Verne shares an example of a moving company in Australia. The big issue in the moving industry, says Verne, is you don’t want any breakage. So how do companies deal with that? Well, you can’t simply hire the smartest people, it’s not that sort of industry. But what every company does is take out insurance to make sure they’re covered should something happen to the customer’s furniture. And this insurance premium costs about 3% of revenue.
This particular CEO said, instead of paying money to an insurance company, why don’t we gamify every move? So they set aside 3% of the revenue for every move, and if there were any breakages it came out of the fund. And anything left over from the 3% was split among the moving team.
“And here’s what’s brilliant: all of a sudden, way before the customer is gonna get upset, way before [the CEO] has to get upset. The movers are policing each other. More importantly, they’re supporting each other, teaching each other, making sure that there isn’t any breakage.”
The result? One, the customers are ecstatic, and this word of mouth has allowed him to lower his marketing costs. Two, the extra bonus adds about AUD $4000 a year to the total comp plan, which makes this organisation the most competitive from a wage perspective, so this CEO is able to hire much better movers.
Just one small change to the comp plan and everyone wins – the customer, the employees, the culture and the company.
Sales commission – yes or no?
Egon Zehnder, the world’s largest private executive search firm is almost all commission based, says Verne, and that works for them. It’s almost 100% bonus based on the placements that you make by office, but with 63 offices, there’s not a penny of variable comp. Why does this work? Because it’s part of the culture they want to create:
- They don’t want anyone fighting over a candidate or hoarding a candidate, so their office or they can get the exclusive credit.
- They want their executive search person to stay there forever. In fact, the tenure of their executive search account managers is probably longer than any of the executives at the global 500 companies that they serve.
So, how do you get a bigger bonus at this company? By staying with the company longer. The higher your tenure, the bigger your slice of pie gets every year.
Promotions and a pay rise
Think about sports teams, says Verne, no one team pays its players the same amount of money – each player gets paid differently. And the same applies to organisations. People’s pay differs, and the thing is, not everyone aspires to climb the greasy pole – nor should they have to – just to make more money.
But, if you have your productivity KPIs sorted, says Verne, people should be able to make twice what they started at in the same position, so they don’t have to give up what they love doing. Saying that, none of this will apply if you don’t hire the best people to start with.
“We outline in Scaling Up that there are four criteria for which you ought to hire: the will to succeed, the will to persevere, the will to push through the pain, the will to continue to learn the skills. It is really hard to train that, and it’s really hard to compensate for that if it’s not innate in the people that you’re hiring.”
So how transparent should you be with your pay? Easy, says Verne, if you couldn’t live with your whole comp system being published on the cover of your industry magazine, that’s when it’s time for you to get more precise about your compensation scheme.
“If you have pay bands, and people’s pay rises are within them, that makes people much happier. Now, if you don’t want to go full transparency, having pay bands is as close as you’re going to get. And it takes so much of the heat out of the conversation.”
Dominic and Verne also talked about the the first CEO Bootcamp in Europe. From 28th-31st March, 2023 – and for the first time in Europe – we’re hosting the CEO Bootcamp with the author of Scaling Up, Verne Harnish.
During these three days of learning, sharing and fun in an intimate setting, you and your #2 will have the opportunity to access Verne’s extensive network and broad experience to help address the constraints in your business and make some critical decisions.
Watch the video below to hear from Verne how the Bootcamp has radically impacted the CEOs that have joined in the US.