Particularly in the current economy, how can a small company safely and effectively grow? Much has been said recently about the impact of higher taxes — should the company postpone hiring? Rely more heavily on on part time or contingency staff?
Our company, Fishbowl, is sitting at approximately 100 employees. However, while our employee base has stayed relatively stable for the past two years, our revenues have soared by more than 60 percent year over year since 2007.
How have we accomplished it? Having an excellent product and hiring the right talent is key. However, much of our success is due to our highly unusual compensation strategy that motivates everybody in the business to help the company grow.
We put every member of the company — and we do mean everyone — on commission. In our opinion, every employee contributes to sales, so we pay everyone based on company revenues, instead of using a more traditional bonus or profit-sharing plan. The commission ratios vary from development to marketing to finance, administration, sales and customer support, and in the various areas are based on the metrics the individuals are most able to directly control. In some respect, every person’s compensation is configured as a base plus commission. Consider the advantages of this compensation plan:more, the commission is paid every month.
• Every employee is inherently motivated to help the company focus on creating revenue.
• Job security and company stability increases, as the company’s greatest cost — payroll — rises and falls automatically along with revenue creation.
• In a company that can’t offer stock options, this is a structure that acts like a stock dividend, motivating teams to pull together and to pull harder as they think of the company’s good.
• It closes the inherent gaps and divisions between departments by ensuring everyone is focused on revenue, profit, and savings, versus individual department agendas.
The commission structure encourages transparency and team participation. Everyone knows what the monthly operational “nut” is. Each day the employees get a report on how how far we are toward that revenue goal. Beyond the break-even sum, two-thirds of additional revenue goes to the commission pools for each department to share among its members. One-third goes to the company.
Yes, we are entrusting employees with sensitive and confidential information. But in our model, the team is highly engaged as compensation decisions act as an invisible “belt” to hold our decisions in check. Every team decides as a unit how to distribute their portion of profits. Do we need another programmer to meet a critical goal? As the developers look at the discretionary fund they’ll divide, they help to decide if the time is right for an additional programmer who can help to drive new features for future profit, or if they are able to “crunch it up” a little to keep the funds for themselves and accomplish the work on their own.
Towards the end of every month, we see individuals from every department offering extra resources and help to other divisions. A developer or member of a support team may go to the sales department, for example, to say, “I have an extra half hour. Is there anything I can do to help you finish a sale?”
Are there any disadvantages to this structure? Only a few:
• The commission plan is different for every role and for every department. Ratios range from 10 percent salary and 90 percent commission for salespeople to 80 percent salary and 20 percent commission for programmers and engineers. This can make for a complicated structure at times. We’re perpetually improving our ability to adjust and adapt.
• Is payroll difficult? In theory, it could be — but in practice, as long as we ensure the commission numbers are accurate, each department can submit its list of amounts within the payroll software and the automated payroll system takes care of the rest.
• Are there legal technicalities? Yes. It does require support from HR to build a program to ensure that we are compliant at all times with overtime pay requirements under the FLSA (Fair Labor Standards Act). We continually receive counsel from compensation professionals to ensure our programs are sound and correct.
• The structure of commission is so foreign to many employees that we’ve actually missed some prospective hires. Because of the commission structure, our base salaries are typically lower than average (by perhaps 20%), and in a very lean month there will perhaps be no commission at all. However, in fruitful months, the commission can increase employees’ income by as much as even 40-50%. Even so, there are admittedly some individuals who are unable to adapt to the prospect of compensation that may vary by as much as 50% every month.
Here are some specific examples to illustrate our structure. For a junior programmer who might make a market-rate salary of $60,000, we’d offer perhaps $48,000 plus commission. Then we would show them our revenue history, pointing toward the strong possibility that, based on this record, that they will actually make $65-75,000 per year. For an administrative employee, perhaps we would pay $10 an hour coupled with a 30-40% commission. In many months, the individual would make $15 an hour and even as much as $20 an hour, with commission actually matching their salary. (While skeptics might wonder how and admin can drive sales, in fact these employees have significant power to assist directly and indirectly in helping us close our company’s sales; they are often the ones that touch our customers the most.)
Overall, we pay more than market compensation through our commission model, by 20-50 percent. Yet in a lean month, we have sufficient revenue to cover the core expense “nut” without depleting savings or relying on borrowed operational funds.
On the whole, our employees have applauded our structure. In hindsight, we realize the hires who wouldn’t join Fishbowl due to their perception our compensation system seems risky probably aren’t as entrepreneurial and highly motivated as those who have joined us.
After a short while on this program, we have found the majority of our employees to be highly resistant to going away from this plan.
Interestingly, our structure has made it easier for potential stars to determine and to control their rising wages. We seldom need to change a base salary. Individuals who are ready for an increase are ready to build, sell, train and support to a greater degree (in other words, to produce more revenue). This means that the rise in income is something our team members can largely influence and control on their own. As a point of reference, as incomes for the majority of incomes actually decreased in 2011 and 2012, our employees’ incomes increased by an average of 19% in 2012. We considered it a profound achievement for us as a company, and for them.
If we ever considered changing our base-plus-commission plan, we suspect we’d have a mutiny on our hands. We believe this structure could benefit every small company in 2013 that is looking for an effective way to stay safe in the current economic climate while also accelerating their ability to grow.
More blog posts by David K. Williams and Mary Michelle Scott
More on: Compensation
DAVID K. WILLIAMS AND MARY MICHELLE SCOTT
David K. Williams and Mary Michelle Scott are CEO and President, respectively, the paired leadership team of Fishbowl, provider of Fishbowl Inventory Software, and one of Utah’s and America’s fastest growing companies. Fishbowl is based in Orem, Utah.