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Creating an Equitable Pay Structure

2009 | Nov 12 in Business Development , Home Page News , Money , Management , Leadership

By E-Myth Business Coach,

Deciding how to compensate your employees and, if you have partners, how to structure pay between them equitably is a topic of interest for our business owner clients. In this article I’ll touch on some of the important criteria from the E-Myth perspective, helping you understand this critical component of your company.

Important Fundamentals

Naturally, this is about striking the right balance. When you pay too little, you can have difficulty hiring and run the risk of losing employees. Paying too much can waste valuable resources. Smart compensation starts with budgeting. You need to determine what you can afford to pay and what you need to pay in order to remain competitive in the marketplace.

Next, think position contracts or agreements.  If you haven’t adequately defined the position, how can you even consider compensation? At E-Myth we strongly believe in creating a contract for the position, not the person who will be occupying it. In the same vein, the compensation should be for the position and not for the particular person who is presently filling it.

Now let’s consider compensation for partners. The E-Myth perspective on this is clear: owners should occupy positions in the organizational structure and be compensated for that position with the same pay you would provide an employee. In this way, if the time arrives for you to replace yourself or one of the partners in that particular position, the salary is in the budget and makes sense to the overall business organism. Partners are fairly compensated for the work they do in the organization, and whatever profits remain can either be re-invested in the business or split among the partners according to the appropriate percentages.

Right Pay

So how do we arrive at the right pay rate for each position? There are two basic methods: either internally ranking the positions in your organization in relation to each other or structuring pay according to the market pay data. With certain high-demand positions such as software developers or specialized marketing managers, the use of market data is critical to competitiveness and attracting quality candidates.

These days, many companies use a combination of both methods to arrive at the right pay structure. Through what is called “strategic work valuation” they look at both the market pay rate for the position and the value of the position’s contribution to the organization. In this way, pay can be linked to the relative competitive nature of the marketplace as well as to the specific organizational objectives that are important to your company. There are many web resources such as Salary.com that provide external salary information. You can also do informal surveys of other business owners. Internally, rank the value of each position and place them in relationship to each other based on how they contribute to the overall achievement of your strategic objective.

Fairness Is Critical

Most importantly, your intention should be to develop a pay structure that is fair both internally and externally. Internally you want fairness between employees and externally you want to be aligned with other businesses. Failing to consider these can lead to a drop in employee morale resulting in lowered performance, absenteeism or leaving the business. And if you become known for a poorly paying environment, your recruiting process becomes much more difficult.

The E-Myth model of clear expectations through position contracts, systems, and articulating the “rules of the game” suggests that we can often hire someone with less tenure and skills because we have processes to train and mentor such employees to the level of expertise other businesses often demand. Once the employee is up to the higher skill level, however, it is important to remember that external equity becomes increasingly important to retain that employee.

Total Compensation

Once you’ve arrived at base pay figures, next consider what you want your compensation package to reflect about you and your business. In addition to pay, here we’re talking about benefits, not just health, but child care, longevity bonuses, 401K, flexibility, job security, opportunity for growth, praise and recognition, task enjoyment and other perks of your particular company culture. All these extras both compensate and demonstrate how we value our employees. In a competitive job market, indirect compensation becomes increasingly important. If you can’t compete with the top wages, you may find that you can offer individualized alternatives that meet the needs of your candidates and employees. Often, small businesses can find ways to creatively compete with larger companies through such indirect compensation alternatives.

Performance Incentives

In some fashion, and recent studies back this up, you most likely want to tie some part of pay to performance. But this can’t be arbitrary; to be successful, you must find tangible reflections of what an employee can influence and base performance objectives on these indicators. Bonuses for production and sales, tenure, maintaining equipment, customer service quotas, or even bonuses for arriving at work on time are all valid, but each one should reflect your company culture and be equally distributed throughout your organization. The more you quantify and measure, the easier it is to create such incentive targets. Failure to pay based on performance is one of the biggest reasons companies fail to make a profit. Extraordinary performances should be paid well, while those in the middle should be mentored and receive incremental incentives to reach their peak performance level. Employees who can’t keep up will often leave such an environment, while good workers prefer pay for performance since it rewards them to excel. Remember: what you reward gets done.

Structure Pay Through A System

Like so many strategies and activities in your business, look at structuring pay as a system. First strategically decide the primary purpose of your compensation package. Is it to recruit new employees, motivate and retain current ones, reward good performance, or to build employee loyalty? Or do have your own original idea about the way you do it in your own company? Next, determine your internal wage structure through your chosen method of looking at both internal and external equity. Talk to your employees about their indirect compensation needs, and structure your performance-based reward system.

Implement your new system through clear communication of both its philosophy and structure as employees always feel more secure and fairly treated when they understand your compensation policies. Finally review your system periodically, maintaining flexibility to innovate, and continue balancing the key parts of internal and external equity along with performance incentives.

Share Your Story

What’s has been your experience with creating a pay structure? What would you do differently after reading this article?

Comments

  1. .Alan L. says:

    For me, this is the most important and relevant E-Myth article I have read so far. As a solo business owner (I guess that makes me Technician, Manager and Entrepreneur, right?!) I have struggled for more than 4 years to expand. But I feel I cannot do so until I have created an appropriate remuneration system. And I struggle to do that, given that I feel that a just economy can really only be built on the principle: "From each according to Ability to each according to Contribution."

    To me at least, the latter suggests that the bulk of remuneration in any corporate activity should go to the Technicians who actually produce the goods and services which can be exchanged for money and not to the Entrepreneurs and Managers who respectively create and supervise the environment and the systems within which the Technicians operate.

    Why? Because it's what the Technicians do which is the Contribution which matters the most. Everything else sets the Stage... but without the Players (in this case, Technicians), there is no Performance.

    Of course we live in an economy where the bulk of remuneration goes instead to the Managers and the Entrepreneurs. Or - worse yet! - to the Owners and Investors who provide start-up funds but otherwise do no Technical work at all!

    The problem with all of this is: it's a positive feedback loop. If the lowest financial reward goes to those who do the Technical Work (that's the bit that really takes time because it tends to be the least scalable) then those who actually provide the goods and services which enable the economy to exist are, by definition, persistently disadvantaged by the non-scalable nature of their work. While those whose wealth enables them to do scalable work become ever wealthier by virtue of that scalability.

    For me, the rational conclusion would be to create positions in such a way that the Contribution of each position (ie. the income each position brings in to the company and the cost to the company of maintaining that position) becomes very transparent.

    As a simple example let's take a sandwich stall on the beach, where the sandwich stall owner employs one employee (the sandwich-maker) to stand at the sandwich stall all day (let's say 8 hours), make sandwiches all day and sell sandwiches all day for $3 each while the sandwich stall owner himself goes and lies on the beach all day and does no work at all.

    The idea of 'paying market rates' says that if other sandwich-makers on other beaches are regularly paid $5 an hour, then the sandwich stall owner should pay his assistant $5 an hour, (or perhaps even $5.25 an hour if he wants a superior sandwich maker). He then pays the beach supervisor $10 each day for the licence to run a sandwich stall on the beach, pays $25 each day for bread and sandwich ingredients and... he keeps the rest.

    What?! He KEEPS the rest?!?! He lies on the beach all day! Yes, I know: he came up with the business idea and he manages the operation... but it seems grossly unfair (to me at least) that once 25 sandwiches have been sold, every single sandwich after the 25th is $3 (before tax) in the stall-owners pocket!

    Why not, instead, say that for every $3 sandwich, which is sold, $1.50 goes to the sandwich-maker who actually has to stand there making and selling sandwiches all day, $0.40 goes towards the beach licence and $1 goes towards the ingredients for that day. That leaves $0.10 for the owner per sandwich. Not very much you say? Yes, but he's lying on the beach not doing any work, so on that basis, $0.10 per sandwich is pretty good, I think. Furthermore, this time once 25 sandwiches have been sold, all the overheads have been covered! So now, the sandwich-maker can be paid $2 per sandwich and the stall-owner can be paid $1 per sandwich past the 25th.

    Still there are those who will ask: But why should the person making the sandwiches make more money than the stall-owner? I think the simplest answer is: Because the stall-owner is lying on the beach all day and on that basis $0.10 per sandwich for the first 25 sandwiches and then $1 per sandwich is pretty good remuneration. (Remember: there's nothing to ever prevent the stall-owner from giving up his all-day sunbathing sessions and becoming a second sandwich maker and then being remunerated the same as the first sandwich-maker).

    So... what (if anything) am I missing?

    Submitted Nov 12, 2009 9:45 AM

  2. .Matthew F. says:

    It's an e-Myth that entrepreneurs and managers do no work, and that technicians can do everything they do, only better.  Managing or owning the store is much harder than slicing the bread and putting the cash in the drawer.  It involves making difficult business decisions, marketing, financing, purchasing, legal considerations, and taking a lot of risk.  It's high level thought.  It's not lying on the beach as you describe.  If it were, everyone would be doing it.

    Compensation (price) is based on supply and demand of the availability of the skills in the marketplace, which are necessary to fill a given position.  The number of people available who are capable of ringing up sales is far greater the number of people who can be managers and owners of the store.  Large supply means lower cost.  Clerks take no risk, invest no capital, and are not responsible for making decisions.

    The bottom line is that your beach store won't be in business very long with the owner and manager lying on the beach.

    Submitted Nov 12, 2009 10:57 AM

  3. .Kim C. says:

    Alan L. I agree with you in theory, BUT....

    I don't think the article was saying the owner should get everything. There should be a fair wage paid for the job done. Business owners take all of the risk and liability for a company, so there should be a greater compensation for them, they risk everything. An employee just moves on to another job if things don't work out.

    I am sure there are some business owners who get to a point where they can lay on the beach all day, but unless they are very lucky they most likely went for a long time (in my case about 4 years) with almost no compensation at all. The employees get paid first and then hopefully there is enough leftover to pay the owners basic personal bills. The point of growing your business and becoming successful is so that the early years of struggle become worth it. You are in essence getting your first three years of income four years later.

    Having said that, I do have an issue with many of the large corporations where the executives at the top make 500%+ more than the average worker, not even the lowest paid worker. THAT is not an equitable situation especially since most of the worker-bees are probably barely scraping by. If everyone in the company is paid at an equitable rate and there is still a lot left over, it should (if not being invested directly back into the company operations) be divided in some way between employees, with those at the top taking a somewhat (not obscene) larger amount.

    Submitted Nov 12, 2009 11:06 AM

  4. .Margaret W. says:

    Hi Alan:

    Respectfully, I think what you're missing is that it's not realistic to think that the sandwich stall owner is lying on the beach at all.  He's more likely performing management activities such as negotiating contracts with ingredient vendors, marketing his sandwich stall so that people know that it's there and why they should buy from him rather than one of the other sandwich stalls, dealing with vendor's licenses/insurance/stall maintenance; and, if he's a good sandwich stall owner, he's also working as an entrepreneur - dreaming up new and fabulous sandwich combinations or services like a beach umbrella rental with every sandwich purchased, etc.

    If your sandwich stand owner is like most small business owners, he's actually putting in 12 hours for every 8 that his sandwich maker is putting in, not to mention the thousands of unpaid hours he put in to make the business a reality, or the financial risk that the sandwich maker doesn't share in. 

    Beyond that, although the sandwich maker's services are indispensible to the sandwich stall's success, so are the owner's.  If he doesn't keep up with licenses and insurance and marketing and entrepreneurship, that business will close and the sandwich maker will be out of work.

    I'm not suggesting that the owner's contribution is more important than the sandwich maker's.  I'm just saying that it is equally important and should not be considered business "fluff."  The owner deserves to be fairly compensated for the time, effort, expertise, and financial risk that he contributes.

    I think that's really the heart of the E-Myth philosophy - too many small business owners feel that the Technician's work is the only work that's really important to their business; when, in fact, it's vital to balance that with Manager's work and Entrepreneur's work to have a truly successful business.

    Submitted Nov 12, 2009 11:12 AM

  5. .Rod F. says:

    This is a great blog of information....... What I gather from the E-Myth is that each position has a value. That value has an associated compensation or worth to it. As a business owner, why would I want to pay more for a position than I have to. That is why I really like the concept of portion paying for the partners. Partners should be treated in the same manner. Their excess money should be given because of their additional risk or ownership. Therefore, each person's contribution should be rewarded by salary based upon position only, not just because he works hard. 

    If I could replace one of my partners for a lower salary, then it is in the best interest of the company to do this. On the contrary, if I have a very good employee whether they are a manager, technician or partner it doesn't matter, I want to treated them fairly, I pay them above where they can go somewhere else, but for the job or position they hold. I don't think it matters what they contribute to the bottom line, rather it matters can they do the same job somewhere else and get paid more money or can I hire someone else for less money. Obviously, in an E-Myth business, people are replaceable and have to be if the systems are operated properly. You take away the requirement for having "superior" people who can't be duplicated if they leave. No business should be so dependent upon such an individual. Anything could happen to change your business and your system would be effected drastically.

    The concept of E-Myth preaches the company and the larger vision rather than the smaller pieces. If you pay too much attention and get to bogged down by how much the leaders of the company are making you are forgetting the key concepts of E-Myth and that is that every part is important.

    Submitted Nov 12, 2009 2:39 PM

  6. .Dave T. says:

    Alan L. just re-invented communism, which doesn't work very well. In part, this is because there is no incentive for quality or good management, and with no one making a profit there is limited desire to do a good job.

    Submitted Nov 12, 2009 7:37 PM

  7. .Marcella H. says:

    Alan,

    I think the ideas you present are very interesting and I use to struggle with some of the same concepts but after struggling to grow for many years (and I would suggest you may be struggling for more than 4 years to come if you don't look at this a bit differently...)  At any rate, my perspective over the last 15 years has shifted significantly.  (Admittedly, struggle seems to be there always, just the causes change)

    First, I think of our law practice almost as an organism as a whole.  We are all in it together.  In accounting, (a former life of mine) I learned that a company can be more profitable with a division that is a money loser if having that division causes another division to make so much more money that it more than makes up for the losses of the other division and these profits would not exist if the losing division did not exist...not sure I explained that well but basically, it is a loss leader.  Now...the people who are not technicians may not directly produce the sandwiches but who is going to buy the sandwiches if no one lets the world know how great they are?  You have to get someone in the doors even to begin with before there can even be word of mouth!  Who will still buy the sandwiches if noone writes the paycheck for the sandwich maker or the power and water company, etc.  How long will a sandwich maker have his job at that shop if the entreprenuer does not keep the company on the leading edge so that the shop down the street does not so outshine their shop that noone wants your sandwiches any more.  So, I would respectfully suggest that it is all about teamwork. 

    We strive to find the right people for the right positions and honor the contributions they make through financial and emotional contributions.  We live most of our lives at work.  We should like the people we work with and be inspired by the work we do, regardless of our title.  Also, pay is not just money but it is respect and acknowledgement of our strengths and weaknesses and that both of those qualities when properly placed in the business causes the business to be stronger and the people in it to grow personally.  The entreprenuer's job is to envision a bigger picture and to help us all to contribute to making it happen AND to build a team in which everyone becomes a co-creator. 

    Regarding why the sandwich maker may not be paid as much...they can always go make sandwiches for someone else.  This is not always the case for the Entreprenuer.  A lot of blood, sweat, financial and emotional capital not to mention risk went into the birth of that shop and it seems to me to be fair that this is remunerated over time.  It takes alot more to create something from scratch than it does to fill out an application for employment.  But once our sandwich makers apply and are found to be a good fit, we do everything we know how to do to find ways to have them become co-creators and remunerate them to reflect their contributions without forgetting that some of us have been here for the long haul and took the risks up front.  Just a thought!

    Submitted Nov 13, 2009 1:35 AM

  8. .Alan L. says:

    Good debate!

    @Kim C - "I don't think the article was saying the owner should get everything."

    No, I don't think so either. I think the core of the article was: "So how do we arrive at the right pay rate for each position? There are two basic methods: either internally ranking the positions in your organization in relation to each other or structuring pay according to the market pay data."

    The points I wanted to make in my example was that a) 'market pay data' can be a red herring (businesses which appear similar on the outside may be subject to markedly different internal and external environments - rationally it needs to be your business which dictates what you can pay, not the market) and b) internally ranking the positions is fraught with danger if carried out using the wrong criteria as a starting point.

    Compensating according to position, might accidentally lead to compensation on the basis of 'status' rather than 'contribution' - and for me (at least) it makes sense that it is Contribution (ie. the Technical Work) which counts.

    @Dave T. - "Alan L. just re-invented communism, which doesn't work very well."

    Hehe. That made me smile over my morning coffee. I think you might find that under communism, everyone on the beach would own the stall collectively and would have long forgotten what money was.

    There would be a long queue of people excited at the prospect of being the next sandwich-maker so they could make sandwiches to the very highest standards of quality for as long as they could keep going, a second queue of sandwich ingredient providers delighted to deliver the current sandwich-maker the finest quality ingredients to keep making sandwiches with and a third queue of people licking their lips before picking up well-made, fantastic-tasting sandwiches for free. That's not going to happen much before the 25th century, so let's not worry about it - it's certainly not what I was talking about.

    @Marcella H. - "I learned that a company can be more profitable with a division that is a money loser if having that division causes another division to make so much more money that it more than makes up for the losses of the other division and these profits would not exist if the losing division did not exist..."

    Wow! Thank you for that, Marcella. That's food for thought. I like it.

    @Margaret W - "The owner deserves to be fairly compensated for the time, effort, expertise, and financial risk that he contributes."

    @Marcella H. - "some of us have been here for the long haul and took the risks up front"

    Okay. I come from a background in teaching and journalism (not business) and this whole question of the business owner being compensated for financial risk is a new concept for me. Really.

    I first encountered it only about 3 months ago (after six and a half years of running my own business!) To be honest I don't buy it. Nobody holds a gun to the sandwich stall owner's head and demands they start a business. That's their choice.

    If they choose to do so, that's fine, but I can't see how that legitimates short-changing the assistant sandwich-maker for their contribution when the sandwich-stall venture is successful.

    Being compensated for providing an employment environment is one thing - but being compensated for taking a financial risk which no-one forced anyone to take and - and this is the key point - to extract that (self-assessed!) compensation at the expense of the Technician actually doing the work on a full-time daily basis seems quite obscene. Taking a risk is one thing but the reward for that risk is that the venture is successful! Why should there be any extra reward on top of that?

    What I'd really like to do is arrive at the right pay rate for each position based on an assessment of that position's Contribution per unit? (Obviously this first requires working out what constitutes 'a unit' of work). Has anyone developed such a model? I must confess I have been fruitlessly searching for such for most of this year and I am, as yet, empty-handed. If I can't find a way to remunerate on the basis of contribution I am afraid that I may never take on any staff. And I think I have the potential to make a bigger social contribution than that.

    E-Myth states: "First strategically decide the primary purpose of your compensation package. Is it to recruit new employees, motivate and retain current ones, reward good performance, or to build employee loyalty? Or do have your own original idea about the way you do it in your own company?"

    My idea is that

    Contribution = Quantity x Quality = Pay

    such that everyone is rewarded exactly in proportion to their contribution towards creating a product or service which the company can sell.

    I am interested to know if anyone here has an alternative idea about what the primary purpose of a compensation package should be.

    Submitted Nov 13, 2009 7:30 AM

  9. .Christopher F. says:

    Alan L., why would anyone want to start/own a sandwich business in your scenario?  Here is what you are missing:

    A) RISK & REWARD - Those who take the most risk get the most reward.  How many employees will kick in their life savings or take out a second mortgage on their house or forego a paycheck the first few years to keep the business going?  It took me 6 years as the owner to see my first paycheck yet I paid my employees faithfully.

    B) SUPPLY & DEMAND - If there are 10 billion people available to make sandwiches they will work for $1 per hour.  If there are only 10 available, you will need to pay $1000 per hour (and you'll need to raise the price of your sandwiches.)

    You don't have to feel guilty that you are making more than your workers.  It's a free country and they are free to start up their own businesses.  Most of them don't want the headaches that you have.  They want to punch out and go home without thinking about work any longer.

    Submitted Nov 13, 2009 11:53 AM

  10. .Alan L. says:

    @Christopher F. - With respect, I think you are coming at this from a very different perspective.

    "[...] why would anyone want to start/own a sandwich business in your  scenario?"

    For the best motives possible: to improve the lives of others. And at no personal cost. Why wouldn't anyone want to do this?

    "Those who take the most risk get the most reward."

    I agree 100%. Collecting social security is not risky and not very rewarding. Working in paid employment is riskier but more rewarding. Setting up a business is riskier still but even more rewarding. (Arguably, playing poker for a living is even riskier and even more rewarding). But I don't think the reward for setting up a business successfully is that you can unilaterally dictate a non-equitable pay structure (see my comments to Margaret and Marcella above), but instead that you have a viable company. And that's quite a big reward. Look at how many small businesses fail.

    "How many employees will kick in their life savings or take out a second mortgage on their house or forego a paycheck the first few years to keep the business going?"

    I don't understand how any of this is relevant.

    "It took me 6 years as the owner to see my first paycheck"

    (A little off-topic: Okay, this I really don't understand. If you didn't receive any money from your company... how were you able to survive? I don't see how this works. I started receiving money from my company the first month I set it up - if I hadn't, I think I might have gone very hungry.)

    "B) SUPPLY & DEMAND"

    Christopher, I don't really buy into this either. I comprehend supply and demand in relation to provision of goods and services. But I'm not sure I would classify the 'human labour power' from which the labour is derived as a good or a service. It's not that it couldn't theoretically be regarded as such - but it seems to me it is our choice to regard it as such or not. And, as a human myself, who lives off the back of my labour power and having many relatives and friends who also live off the back of their labour power, I don't think seeing 'human labour power' as a commodity subject to market forces advantages any of us. Better to remunerate human labour power on the basis of the value it produces. (And, yes, that value, IS subject to market forces).

    "You don't have to feel guilty that you are making more than your workers."

    I certainly wouldn't - if I had contributed more to producing my business' goods and services in a given time-frame, then collecting more remuneration for that time-frame would be entirely appropriate. I am only saying I feel it makes sense for every worker to be paid the same profit percentage for delivering the same contribution. That seems to me like an equitable pay structure.

    "It's a free country and they are free to start up their own businesses."

    Right. And everyone is free to become an NHL star player or a top celebrity on MTV as well. You know that not everyone can set up a successful business. Some can do it, others can't.

    "Most of them don't want the headaches that you have."

    I don't have any headaches (I don't regard having taken four years so far to work out an equitable pay structure as 'a headache'), but I wouldn't want any either - any more than any future employees might.

    "They want to punch out and go home without thinking about work any longer."

    So do I. What do you want to do?

    Submitted Nov 14, 2009 6:33 PM

  11. .Timothy L. says:

    Hi, Alan, great answers and experience sharing. I like your ideas. It seems to me that your idea is modern management and out of love for your people.

    You don't treat Labour power as goods and services, wow. You seems benefit alot from your teaching experience. You treat labour as human. Wow.. That's what people call leadership.

    You amazed me with your perspective that no one forces you to start a business and take risks. Yes, I totally agree with you on this.

    If business is birth out of passion plus meaningful purpose ( to improve people's live.), I am sure that business will be very successful.

    Wow. Your writing is great. Have you consider publishing a book?

    I read many books and realised that decision on this earth only can  either based on two factor, fear or love.

    Obviously, your point of view is from love. Good luck and stay firmed for what you believe !

    Haha, lastly, I also doing teaching and education business for 6 years. Also recently got my first paycheck on my business plus I execute rumuneration plan like what you mention. It works! We also have to be careful and control our cash / cost and adjust accordingly. Pay well and make sure it's a long-lasting one, not pay well once then company closed down.  

    Great! Create more jobs and good luck in your business!

    Submitted Nov 15, 2009 11:27 AM

  12. .E-Myth Business Coach says:

    It is wonderful to see the kind of exchange of ideas and opionions that this article seems to have inspired. I really appreciate everyone's thoughts, and hats off to Alan L. for nicely stirring things up!

    Going back to Alan L.'s initial posting:

    "As a solo business owner (I guess that makes me a Technician, Manager, and Entrepreneur, right?!) I have struggled for more than 4 years to expand."

    I would suggest, Alan, that as a solo business owner the accountability of being the Technician, Manager and Entrepreneur for your business rests with you, however, that does not mean that you actually have or do wear each of those hats appropriately. It takes great skill and practice to master each personality within ourselves, and most of us tend toward one or the other and need to seek greater balance.

    For example, most businesses are started by Technicians who have an Entrepreneurial Seizure and then spend very little of their time after that actually being the Entrepreneur. As a consequence, their businesses struggle to grow and thrive and eventually fail entirely, or even worse, they somehow survive by the sheer will and stubborness of the owner even though the business takes away more life than it provides.

    If you've been "struggling" for so long to expand, then perhaps you've been approaching the idea of expanding and "creating an appropriate remuneration system" from too much of a Technician's perspective and not enough from an Entrepreneurial perspective? A Technician would want to look around and find the answer from someone else(somebody tell me what to do and how to do it!). An Entrepreneur would want to look around to gather information to inform the answer that (s)he envisions for themselves (here is what I envision, now let me find out everything I can about how that is possible and what the alternatives are).

    Thinking and dreaming about the way you want your pay structure to work represents a very entrepreneurial activity, and an opportunity for you to practice your visionary skills and enhance your entrepreneurial mindset. As long as you adhere to applicable laws and regulations that apply to your industry there really are no limits to how you establish a pay structure other than what you want to create and what your particular business will accomodate.

    In any case, you'll have to find a pay structure that you can justify and come to terms with. You may not find it "out there" in any kind of a standard format or process. You may have to take whatever information is available to you, use your imagination, and create a method that is right for you-but just think about how much more rewarding that will be than if somebody else were to tell you how to do it!

    I'm hopeful you'll find something that is right for you and your business, and you should keep the external and internal dialogue going until you have found it!

    Submitted Nov 16, 2009 4:59 PM

  13. .Christopher F. says:

    Alan L., I respect your opinion that pay should be based on contribution to the company.  We seem to disagree on the level of contribution between the employee and the owner.

    What you are discounting is both the past & present contributions of the owner.

    Like I said, I was not compensated for the first 6 years of my business.  The last thing I wanted to do is starve the biz of the little cash it had.  I racked up over $100K in credit card debt during this time to provide for my family.  My wife and I cashed in our 401K's to buy a mini-van to hold our 4 children.  I worked very long hours and we made many personal sacrifices for the business.
     
    Is this not accumulated contribution?  Do my blood, sweat and tears count for nothing?

    I've since been able to pay off the credit card debt but I still have business loans that will take a couple of decades more to pay off.  I still have the sole liability should something go wrong.  I still make personal sacrifices for the business.  Is this not contribution?

    Your sandwich example does not reflect reality because you simply took a snapshot in time of the business.  What did the owner contribute in the past to get there?  What about his present contributions?

    Who's on the hook for the business loans when a tsunami strikes?  What if a customer gets sick from a sandwich?  Who pays the price of reimbursement or bad publicity or attorney's fees?  Who pays the sandwich maker on a rainy day when 0 sandwiches are sold?  All contributions by the owner.

    My point is...  typically the owner receives more remuneration than the employees because of his/her greater contribution to the company.  I guess we agree after all!

    Regards,
    Chris

    P.S. No, I don't want to punch out and forget about work like my employees because I am passionate about my business.  If you don't enjoy working for yourself - why are you doing it?

    Submitted Nov 18, 2009 2:41 PM

  14. .Jonathan M. says:

    Great Advices,

    Thank you!

    Submitted Nov 19, 2009 5:18 PM

  15. .Jerry B. says:

    Alan L. says

    "I have struggled for more than 4 years to expand. But I feel I cannot do so until I have created an appropriate remuneration system. And I struggle to do that, given that I feel that a just economy can really only be built on the principle: "From each according to Ability to each according to Contribution.""

    Justice is not the same as fairness. Justice demands and eye for an eye, fairness allows for consideration of context in making the best of any situation. Doesn't the Taliban, in there own eyes, only want justice for the percived wrongs we've done to them? You should be seeking a fair system, one that is organic and grows with the ever changing situation. With that said, you will never arrive at a perect system, so go with the best one that you currently have.

    Then Alan comments:

    "Of course we live in an economy where the bulk of remuneration goes instead to the Managers and the Entrepreneurs. Or - worse yet! - to the Owners and Investors who provide start-up funds but otherwise do no Technical work at all"

    Socialism seems good, but didn't work in the USSR, Cuba or commuist China. ARe CEO's over paid? Yes, quite often. If I didn't invest in someone's firm, how would the the person fund it? Is it unfair to ask me to invest 100K in 15 different firms, knowing that 12 will fail and lose my money, so that I need to recoup my funds from the 3 firms that are left? If you funded your start-up from savings, doesn't that mean that you earned more than you needed from past employers? Is that fair to people who are unemployed? By your standards, you are not being 'just' yourself.

    Jerry B., BA, DGS, IDP, MBA

    Submitted Nov 20, 2009 6:06 PM

  16. .Arthur B. says:

    As a business owner for over 30 years I would like to add my 2 cents worth to Allen.

    First of all it sounds like you are comparing yourself and others on this board to CEO's of huge corporations with a board of directors who enrich themselves with no concern for their employees and the common stockholders of their companies.

    Large Corporate Ceo's are not small business entrepreneurs like the people on this board. No one here will ever be be responsible for some of the economic and social damage that has been done by unregulated corporate crooks.

    Neither you or anyone else reading this is likely to be laying on a beach for more than an week or two(if they are lucky)

    Secondly, Small businesses must make aa possible, not only to enrich the risk taker who started the business and worked for free when the business started but to compensate the entrepreneur for the tremendous amount of work and capital needed to start a business.

    I and many of my entrepreneurial friends have started businesses  working 80 hours or more a week without any compensation and used our own savings to pay the people working for us.

         If the business is sucessful and makes a profit then employees are rewarded with a long term job and benefits. If the business is not succesful there are jobs for no one and the Entrepreneur suffers the economic losses as well the opportunity loss of not going to work for elsewhere and getting a guaranteed paycheck. Employees of a non-profitable company go get another job somewhere else.

    In my many years of business ownership I have taken a third of the vacation time my peers who work as employees have taken. I deserve to lie on a beach somewhere now, for a time, but, unfortunately in a recession, I can not. I have had to work harder in order keep my business -- and employees jobs -- together. 

    In addition I have to use the profits I made in better years to keep the business afloat.

    Alan, if you do not make a profit you will not create jobs for anyone and with all your high-minded social ideas you will be doing much less

    good in the world than someone who makes enough profits to allow their workers to keep their jobs during good and bad times. 

    Submitted Nov 21, 2009 9:09 AM

  17. .Anna M. says:

    Wow, what a blog!  I've just power read it and the debate is quite a robust and healthy exploration of the universal concept of the 'right' to make money.

    Everything the business owners have written is fairly standard universal stuff. Having been there myself you fall into a trap of justification of taking money earned because you starved for so long establishing the business. Then you begin the universal debate of entitlement vs greed vs success etc etc. And yet, you are entitled to profit, it is a fundamental positive consequence of business.

    I've learned that success shared is an open door for unlimited abundance. It's not rocket science. For example 25% of profit is a whole lot better than 100% of debt. And 25% of a million dollars is much better than 100% of $100,000. I think this is the premise of Allan's original post.

    For me, completing the Mastery Programme was about truly embracing why I went into business and what I want for me. Once I got the balance right the riches literally poured in, along with time, health and happiness. When I got the whole point of sharing the success I watched a great number of people around me share and succeed and a domino multiplier effect took place.

    My point is, I actually like (concept - wise)what Allan said and I agree with him. It's not communism (that limits success via limiting desire theoretically extinguishing greed).

    Some people would argue that they as business owners, would rather have full control and full profit. Yep, I've been one of those and for a while I was swimming in the ocean of money. Yet the more I read about successful business people the more I understand the concept of partnership. It is, in fact incredibly liberating and exponentially far more profitable.

    I would recommend a reread of Richard Branson's autobiography. Whilst it does not directly address this issue it is a fantastic example of the profit share concept in action. 

    Good luck everyone.

    Submitted Nov 25, 2009 2:59 PM

  18. .Kathy H. says:

    While I agree with most of the business owners on this thread, I think that I understand what Alan L. was driving at. Where I believe is his downfall is his determination to compensate his employees at a unrealistic percentage level. A smart entrepreneur must keep a good portion of our "profits" or gross revenue in a savings account or in a place with easy access, because we are vulnerable to the ups and downs of the economy or to any other unforseen circumstances that surely will arise. Who else will bail us out?? 

    Alan L. should consider various types of bonuses at regular intervals to reward extra effort or loyalty. However, I do believe that the rewards or bonuses should not be unrealistic for their position or effort. A business owner really has a lot to consider and define on a continuous basis, which is much more than then worker bees have to worry about.

    Great ideas!

    Submitted Dec 30, 2009 11:25 AM

  19. .Travis M. says:

    At the risk of affending the entire forum, I think we are missing the point. The article teaches determining employee compensation not pay based on two criteria, "both the market pay rate for the position and the value of the position’s contribution to the organization".

    First lets focus on the value of the positions contribution to the organization. The article says we are to determine compensation based on the position not the individual and it is the positions contribution to the organization not the level of contribution to the product or service directly. Just because the guy who actually makes the sandwich is the one direclty handling the product does not mean that his efforts contribute the most to bringing the product to market. This is Emyths whole point. We need to see our business as a whole and not view it as just the part that handles the product. Vission, Planning, marketing, accounting and managment went into bringing that product to market. Our job is to determine how much did each of those parts play in bringing our product to market and based on that we can determine the value of that position to the organization as awhole not to the product directly. The value of that position determines the quality of person we need to handle those responsabilities and that in turn determines the rate of compensation necessary to attract and keep that quality of individual. What is being said is not that this is how much we value the individual but rather this the value that the responsabilities of the position conribute to reaching the goals of the organization.

    Again we are talking about the value of a position and not the value of the individual, and the value the position contributes to the success of the organization as a whole not to the product directly. the responsabilities of the sandwich maker contributes in part to the succes of each sandwich he or she makes, in part to the success of that one sandwch cart, and in part to the brand of the company and its product as a whole. I say in part because the sandwich maker did not design the sandwich, find the quality vendors that sell the food parts that make up the sandwich, do the market research that went in to determining the location of the cart, the price for the sandwich the design of the cart and the uniforms, find the company who sells the uniform at a cmpetative price. In reality the position of puting the sandwich togwhter contributes very little to what goes into bringing the sandwich to market. This is Emyths whole premise we need to grasp. In reality the role that contribute the most value to the organization as awhole is the antreprenor or the vissionary because they are the only ones in the company whos responsabilities directly impact every aspect of the organization. The higher the percentage of your companies investment that goes to thet positions that add the most value towards the goal of your organization the greater the return on your investment and the easier it will be to reach your goals.

    In other words why putting new tires on your car will not make it perform betterif the engine is not running. We're not saying tires are not important but old tires will work just fine if the engine is running. The engine running is more important than having new tires when your goal is having transportation. So why are we spending our time making sandwiches when we can hire someone to do it for $8.00 per hour while we figure out how to design market and sell those sandwiches along with 20 other locations.

    Why is it an insult to pay someone 8.00 per hour to make sandwiches when we have just realized it is the least contributing position to the success of the organization. Why shouldn't the CEO make a million dollars a year if his expertise in vission and planning yeilds the company an extra 8 billion in profits. Did the sandwich maker bring in an extra 8 billion because he stacked the sandwich right? Would the company still have made the extra 8 billion if he stacked it wrong? Maybe not but I bet it still would have made a gain of 7 billion because the master vissionary compensated for the average percentage of wrongly stacked sandwiches in His business plan and he was a little off in his predictions but I still think the value of his contribution to the company as a whole is worth 1 million and that has no baring on the value of the sandwich makers salary.

    The sandwich makers share in the profits is the oportunity to move up in the company and occupy a position that is ads more value to the companyand therefor that get a raise. Why should they be jelous of you? None is stopping them from starting their own sandwich company. "Well they may not have the skills to do that". Thats a pretty insulting thing to say about our sandwich maker you obviously think less of them than I do. I think they have the potential to contribute more and even if they don't the rest of us hvae to give up our success? If I become insane and can't contribute value to society please don't forget about me but please don't limit yourself because of me because limiting yourself is not bennifiting me unless I have the bitter desire to see you suffer along with me.

    Submitted Aug 27, 2010 10:08 PM

  20. .Andy M. says:

    Just stumbled on this article and I must say that the comments are great.  Alan really started something didn't he?  All this theory is fine on paper but the only way to prove it, Alan, would be to go ahead and start up your sandwich shop (or other business).  But I have one request:  Can you tell me what and where you business will be?  I'd love to be your competitor!

    Submitted Nov 9, 2010 7:56 AM


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