What Type of Employee Compensation Works for Your Company?

There’s no one-size-fits-all plan when it comes to compensating employees – and keeping productivity high
What Type of Employee Compensation Works for Your Company?

Years ago, 40-year septic industry veteran Tom McLaughlin, owner of Metro-Rooter Plumbing Service in Jacksonville, Florida, paid his employees by the hour.

After witnessing productivity slide a bit, however, he later changed the compensation program from hourly to commission-based.

“When I did that, we doubled production,” he says. “If you’re paying a guy ($X by the) hour or (instead) you pay him $15 to pump out a septic tank, you’d be amazed at how productive they can be.” 

That decision worked for him, but it may not work for every operator in the industry. Whether your company pays workers hourly, commission or salary, many owners and human resources experts agree what’s most important is productivity and great customer service.

According to David J. Baker, managing director/CEO of Human Capital Advisors in Pittsburgh, “Generally, in task-oriented roles, incentive and hourly pay actually is higher from a productivity standpoint than those who are salaried.” According to Baker, most salaried individuals are 20 percent less productive than hourly employees.

And, he says, incentives are especially important. “The organizations would be well served to develop incentive systems to finish things in a time-oriented model,” he says, citing the NASDAQ-listed Ohio company Lincoln Electric and its widely known and respected compensation plan.

Baker calls it an “exceptional model. … They have a unique incentive pay system. Their employees are paid a fairly decent wage. But their incentive system allows employees to double their income. Employees are empowered to earn more by doing more.

“A lot of companies don’t have a compensation strategy … they pay a wage.”

Baker advocates that companies consider a compensation strategy that is tied to productivity. They may compare competitive wages, but they should look more at best practices, he notes. “Those organization who take that approach, outperform … many of their competitors.”

At A Royal Flush in Philadelphia, all drivers are paid hourly while most of management is salaried. And while spring and summer are the busiest times of year, co-owner Alexandra Townsend feels the company has balanced out the wages issue.

“We assume that in the summer there is a lot of overtime; the routes are much bigger,” she says, noting that routes are condensed in winter to stabilize the year’s costs.

This requires a lot of management and monitoring on the back end, Townsend admits.

Every truck has GPS capabilities, and if a driver is stationary for more than 15 minutes, an alert goes off. “Obviously there are people who try to cheat the clock,” she says. However, dispatchers and the management team meet weekly to review detailed reports, routing and hours to ensure efficiencies are there.

Townsend doesn’t believe a “per unit pumped” commission system is best for them. “Then people are racing to get them done,” she says. “It’s not giving good customer service.

“When you pay them hourly, they’re not rushing, which means the accident rate is down too.”

Is employee productivity growing?
On a national scale, labor productivity appears to be growing slowly. According to the U.S. Bureau of Labor Statistics, nonfarm business sector labor productivity increased at a 3.3 percent annual rate during the second quarter of 2015. Output increased 4.7 percent and hours worked increased 1.4 percent.

Labor productivity, or output per hour, is calculated by dividing an index of real output by an index of hours worked of all persons, including employees, proprietors and unpaid family workers.

The bureau calculates unit labor costs as the ratio of hourly compensation to labor productivity. Increases in hourly compensation tend to increase unit labor costs, and increases in output per hour tend to reduce them.


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