Mark: Today on PowerTips Unscripted, we talked to Tom Miller, president of the Vision Link Advisory Group. For many, determining the compensation for an employee is nothing more than doing a quick Google search or, in our members case, maybe asking their peers what they pay a particular position. But Tom doesn’t really agree with that methodology. His company help small businesses apply best practice compensation strategies that help recruit great talent, encourage execution of the business plan, and grow the company.

Mark: Tom is going to share some of those strategies in just a minute.

Victoria: Do you understand the words that are coming out of my mind? Hi, this is Victoria Downing and welcome to PowerTips Unscripted where we talk about tips, tactics and techniques to help you build a strong, profitable remodeling company. And I’m here with my co-host, Mark Harari.

Mark: Hello.

Victoria: Hi there. How are you doing, Mark?

Mark: I’m pretty good. How are you?

Victoria: Hot topic today?

Mark: Yeah. How much?

Victoria: How much did you show me the money?

Mark: How do you. How do you compensate somebody?

Victoria: That’s right.

Mark: Don’t overpay them. Don’t underperform. You do attract them, right? To keep them. Yeah.

Victoria: It’s tricky. It’s, you know, just so many questions around this. So let’s dive in. We have plenty of time.

Mark: Jump.

Victoria: Tom Miller is the founder and president of the Vision Link Advisory Group, a compensation design firm that services private businesses across North America. Tom and his firm have served over 600 companies across all industries. Welcome to PowerTips Unscripted, Tom.

Tom: Thank you very much. Great to be with you.

Victoria: Yeah, it’s really exciting. I think it’s a great topic. So just to dive right in. What is the starting point for building a great compensation plan in a small business?

Tom: The starting point should always be what we call pay philosophy. Every owner of a business should evaluate or really ask themselves the question, why are we paying people? What are we trying to accomplish? What what do we hope to achieve? How do we intend to pay relative to our peers or the market, as everybody says? And deciding what’s important and prioritizing all of the different options that are available to pay employees.

Tom: We actually encourage clients to write down a draft, a pay philosophy statement that answers those questions, and it’s something that can be shared with employees. This is what we believe about pay. This is how we pay. This is how much we pay. This is why we pay. It can be kind of a fun exercise, but it’s also a very rewarding and meaningful exercise.

Tom: That’s always the best place to start. Most people don’t think to begin there.

Victoria: No kidding. I wouldn’t have either. So give me. Can you give me an example of what a pay philosophy for a company might be, or that you’ve seen?

Tom: Well, let’s think about the company’s business goals or business strategy. Are you a company that’s going to double or triple in size over the next five years? Is that your that’s your plan? Or are you a company that’s going to have more modest, steady growth over time? Or maybe you’re a stable cash flow company? So you would build compensation differently depending upon your business situation, if that makes sense.

Tom: And so you got to think about are we going to use long term growth compensation. Or are we going to pay high salaries and modest bonuses? All of that is answered after you consider your growth strategy.

Victoria: Okay. That’s pretty interesting. So what are some of the most common mistakes employers make relative to compensation?

Tom: Well, one of the first mistakes, most employer or many employers make is to rely upon market data alone. Somebody mentioned earlier kind of googling pay for this position or that position. And you will find information. The problem is if you go to two sources, you’ll find two different bits of information. If you go to three you’ll get three different bits of information.

Tom: So how do you aggregate to consolidate that? There’s this this mysticism around. You’ve got to know what the market’s paying. And I think that’s good information to have. It’s a starting point. As you begin to construct compensation levels for your team. But it should not be the end of it. So that’s the biggest mistake most people make.

Victoria: Well, so how do you determine the pay rates and so on if you’re not relying on Mark? I mean where does it come from?

Tom: So you start with getting a little feel for what the market may look like, but then you also use your own sense of understanding of your business. And you’re in a very specific industry where people kind of know for certain types of positions what’s being paid out there. But you also know from how recruits are responding to you and reacting to pay offers.

Tom: And you also kind of hear what people are supposedly being offered if they’re leaving the organization. Do you take all of that into the mix and then you establish your own internal? We call it internal equity positioning, where you lay out the compensation ranges for different positions. And that’s all just to start the ball rolling. There’s much more that follows, but that helps you set salary levels and then you get into the area of bonuses and incentives.

Victoria: Okay. So let me jump back for just a minute. So if you’re trying to determine that range, but you’re still looking at goals of the company and, and your philosophy of pay and what you expect the company to do with fast growth, slow growth, cash flow, like you mentioned before. Do the differences in total compensation really come from the structure of the bonuses and incentives?

Victoria: Then?

Tom: Yes. Let’s think of it and see if I can paint a picture here. A word picture picture of four quadrants. So a box with four with four elements in it. Okay. And the quadrants are divided between what’s fixed and guaranteed kind of column A what’s fixed and guaranteed. Column B is what’s at risk. What’s variable. Then as we move from left to right, the first row might be what’s paid short term meaning within the year, salary and bonuses and benefits, and then what’s paid long term.

Tom: The next most common mistake employers make is they don’t have enough variable pay or at risk pay. And it’s companion. I guess the third most common is their pay is too short term. Now here, I’m talking primarily about the leadership pay. The principle can apply throughout the organization. But if you think of your top 2 or 3 key managers, it’s important that they be, tied in to the long term goals of the organization as well as the short term goals, and that they be rewarded.

Tom: We say, to treat them like partners. Make sure your pay structure is recognizing that these critical managers in your organization are making important decisions that are affecting your profitability and your growth. So the pay arrangement, the allocation of pay, let’s use that term, is an important thing to consider.

Mark: So time on that on that grid that’s that’s interesting. So I’m kind of I’m visualizing it. Now I’m thinking that the quadrant the long term variable seems like something you want to focus on for. Is that is that where you want to kind of focus?

Tom: Yes. That’s an important ingredient, especially for your leadership team. If you look at public companies. So picture successful fortune 500 companies that have access to supposedly allegedly the best thinkers in all of these areas, right? The top consultants, attorneys, other advisors and a very experienced internal team and board members, 70% of executive pay in public companies is long term and at risk.

Victoria: Really? Really.

Tom: Yeah. So so now, of course, is mostly stock or stock options because it’s going to be harvested in the future, but you don’t know if you’re going to get any of it. Because if the company value doesn’t go up or the share price doesn’t go up. But the strategy behind that is to align the employees with the business owners.

Tom: But the shareholders. And if you want to do that, you don’t think the short term, you don’t want your employees making short term decisions at the expense of long term value creation. Right? So if you’re paying people only short term and it’s not at risk, then they’re not in the same boat. The owners are in tuh.

Victoria: That’s very interesting. Okay. What other mistakes do people make.

Tom: Well they’re often in the design of the incentive plans. Let’s think of a bonus. Well let’s use the term bonus. We say value sharing I like that term better. It connotes hey you created value. You deserve some of it. So we call it value sharing a common vernacular as a bonus plan or an incentive plan. An incentive plan.

Tom: Sounds like I’m dangling a carrot. See if you can catch it. Oh. Nice try. I’ll just move it back a little.

Victoria: Yeah.

Tom: A bonus plan. Sounds like, aren’t I generous? Look, I’m nice.

Victoria: I can use this bonus. That’s true.

Tom: Yeah. Value creation is intended to suggest that. Well, as I said earlier, you helped us create value. You. You deserve some of it. And our plan is merely the structured way that we do it. Let’s talk about bonus plans. So there are two common mistakes and they’re on the extreme edges of a spectrum. First mistake is not having a structured plan, meaning the employees don’t really know what their bonus is based on, or even if they’re going to get one.

Tom: But at the end of the year, all of a sudden they’re told, hey, you know, we did pretty good. You’re going to get a $2,000 bonus or a $20,000 bonus. And the employee says, okay, well, thank you. You just planted the seed for an entitlement mentality because next year, if they got a $2,000 bonus last year, I’m expecting at least that much and maybe more, in the current year.

Tom: And if I don’t get it or I get less, I’m just going to wonder why I’m not entitled to that. That’s part of my pay. If you have a structured plan, you eliminate entitlement mentality by defining in advance and communicating at the beginning of the year. This is what the plan looks like. These are the terms of what has to happen to earn the bonus or the award, and you even keep them up to date throughout the year.

Tom: So there’s no surprises and they know why they earned it. That eliminates entitlement mentality. But if you jump to the other end of the spectrum, you say, oh, this structure, this plan. And now the tendency is to over engineer the plan, put in too many pieces, make it too complex, make it so that every department has different hoops to jump through.

Tom: So most people get into engineering mode when they start structuring the plan and they make it too complex. Keep it simple.

Victoria: So if you were to describe something that you thought was a well structured bonus program, what would that look like for small businesses like ours? Do you think?

Tom: I think that small businesses in particular need to really keep it simple and identify the one, maybe two, crucial financial results that they’re striving for in a given year. Now, the most common one is profits. 90% of public company, executive bonus plans, use profits as the key or at least one of the key metrics, because profits, the lifeblood of any business.

Tom: And you have to decide which profit metric they’re using, operating income, or maybe EBITDA or net income. It doesn’t really matter. You pick a good off profit metric, then what we suggest is you identify what we call base. Base is the minimum threshold of profits necessary to be achieved in order to trigger any payments under the plan. Okay.

Tom: We with the target level, the target level is the expected result for the year or kind of the budgeted result. And then you can have a superior level to kind of, hey, you know, if we really all come together and we have a great year, we could hit this number. Now we’ve got a range based target in superior, and we expect 80% of the time 80% of the years, 4 to 5 years.

Tom: We’re going to land in that range now, you set, a bonus opportunity for each person. It’s easiest to express it as a percentage of salary, not a percentage of profit.

Victoria:

Tom: So, John knows that his opportunity is 10% of his salary, and Mary knows hers is 12.5% or whatever it might be. You add all that up as you do your budgeting and make sure it works for those profit thresholds. And then you build around that. You start a simple plan based on profits only. You may be just fine.

Tom: You don’t have to make it too much more complicated than that. Although sometimes there are some things you you want to look at.

Victoria: Now, one of the things I’ve heard about incentive bonus programs is to reward quickly. So for example, in our industry, the production department are cranking out producing building jobs, right? Building additions and ramps, doing all the remodeling and all that. A lot of our members and our listeners talk about incentive or bonus programs based on job by job, so that the Carpenters League Carpenters project managers were to get a bonus after each job if they hit certain parameters.

Victoria: What do you what are your thoughts around that versus company wide?

Tom: Yes. So there’s a fine balance to be struck there. I think that is appropriate in your industry. In any industry there, anyone who is in kind of construction industry or related, project base bonus structures, it’s still the same principle, though. You can measure the profitability of a given project, am I right? Assign some value to be shared upon achieving kind of a minimum profit level, a targeted and a superior profit level?

Tom: So the same principle can apply generally for leadership team members. We recommend in most cases, even in an industry like yours, that you still look at end of year overall organization profitability. But for those people who have accountability for onsite a project performance, I think that concept is extremely valid and appropriate.

Victoria: Hey folks, if you’ve been listening to this podcast for a while, you’ve likely heard me refer to our roundtables peer Group program. We have a bunch of our members on the podcast in the past, and I always try to give them a shout out. Now, if you’re not familiar with roundtables, it is the industry’s largest peer group program, and we’ve been hosting them and the peer groups for over 30 years.

Victoria: We bring together groups of 10 to 12 business owners from non competing markets to share strategies, to share experiences, to help one another build action plans to drive the results of each of these companies forward in a way that I’ve never seen before. We know that you can be successful on your own, but by working with roundtables and a group of your motivated peers, you can cut your progress time in half.

Victoria: There’s just nothing like it. Why be alone? Why figure this stuff out all by yourself when you can figure it out? With a group of people who know exactly how your business works, what your challenges are, and will share how they overcame each of these, we’d love to have you join us. If you want to learn more about this, visit our website at remodelers.

Victoria: Advantage.com or talk to Steve Wheeler at Steve at Remodelers advantage.com and he can give you more information about the program. Seats are limited because they have to be non competing market. So call today and get to be part of this incredible community of generous, smart, savvy, motivated remodeling company owners. So I want to jump back to something that I’m going to mix around on again a little bit.

Victoria: We talked about the fixed, the variable and the long term, and that the long term for public companies oftentimes is value, long term value. And in the form of stocks, we don’t have stock in any of our businesses. Right. So you know, they’re all usually owned by one person. What sort of long term program would you say if you were an owner of a remodeling company and you wanted your production manager who does an awesome job to be there in ten years?

Tom: Yeah. So we never advise private companies to use stock or stock option. You’re diluting equity. It can be complicated. Buying back the stock in the future is messy. Yeah. And it’s also good from the employee’s perspective. You know because they got to pay taxes on it when they get it. So yes let’s take stock off the table. There are concepts, however, that fall under the broad category of long term incentive plans tips we call them, and tips have a variety of options underneath them.

Tom: So rather than turning this into a lecture on all the different types of tips, let’s talk about one. Possibly the most common type, and we simply call that phantom stock. Many of your listeners have probably heard the term, it’s kind of a funky term. A lot of employers don’t like to use the term because Phantom sounds like, well, it really doesn’t exist, right.

Tom: So we start with that and often pick another term because you don’t have to call it phantom stock. But all you’re doing is you’re creating a stock value by finding a way to measure the value of the company a pretty simple way. You don’t have to have a formal valuation. You come up with that value. You create a number of units or shares.

Tom: Let’s say a company came up with a value. Make my math easy. $10 million and they create a million shares for the plan. Just for the purposes of the plan. Well, now you have a share price of $10, and you can begin to award those $10 units to employees. You can either give them the full value of the $10, or you can say $10 is the starting price.

Tom: You’re going to get the growth above $10. But because we have a simple formula to follow every year, now we can revalue the shares in our phantom plan. Now, what you do is you set dates or circumstances under which they can get cashed in. It might just be the sale of the company someday. Or you could have other events like retirement.

Tom: Or once they’ve accumulated for four years, they can be cashed in and perhaps you pay off if they die or get disabled. You deal with those details. But ultimately what you’re doing is you’re giving the employees something that’s treating them like gross partners in the business, where they have a financial stake in the long term success of the organization.

Victoria: Okay. All right. That makes a lot of sense. Now, what do you do if somebody comes up to you and says, I really want equity, I want stock in the company, and you’re sole owner?

Tom: Well, and my, my quick answer is, well, how big a check are you willing to write?

Victoria: Exactly, exactly.

Tom: So. And, depending on how big a lecture you want to give, you can say, were you here at the beginning and here all the times where I couldn’t sleep for three straight weeks, right. Be payroll and. Oh, good. You want to now be responsible for payroll and company debt.

Victoria: Right? That out. Yeah. Okay. Good.

Tom: And, yeah, that could be part of the conversation. The. I think once you do that, as you said, frankly, you probably don’t want stock. If I gave you stock today, you’d have to pay taxes on it. Number one. Number two, Ubu, inherit and begin to partake in all of the liability responsibility of shareholders. Let’s see.

Tom: Let’s talk about that list. What if I could give you the value of stock without all of that risk and hassle or taxes.

Victoria: You’d think they would jump at that, wouldn’t.

Tom: You? Yeah. Because that’s what you really want. You want the value of it. Now there’s the psychological value. Oh, I’m an owner. But you know, we say if you get phantom stock, go ahead, tell people you’re an owner. You have the mindset of an owner and the financial stake of an owner. While you may not have the formal ownership, you have the same responsibility to, customers and, and your employees.

Victoria: Okay, so, that got me thinking about what do you think about the concept of an every year cost of living increase in people’s compensation? Because at some point it starts to get out of control and you’re paying people a lot.

Tom: Yeah. It depends on hey, philosophy. So you pay philosophy statement would have a little line that says, here’s how we treat increases in salary. And you have three options. You can say, we do. We try to do a cost of living increase each year in order to help you maintain your standard of living with in accordance with inflation.

Tom: Or you can say salary increases are based on merit. And then there are techniques to build a merit pool and allocate that pool across your employee team so that yeah, there is some increase potential each year, but everybody’s not getting 2.5%. Somebody is getting 4%, somebody is getting zero. The third approach in the pay philosophy statement is to be silent on it and just say, we, we, we consider salary increases on a year by year basis.

Tom: And then you determine at the end of each year what you want to do. I think some degree of cost of living adjustment is appropriate in most cases. But you’re right. If you’re not careful it can compound in and run.

Victoria: Away from you. Yeah. So those are 15 years or something. It gets a little crazy you know, for for the position potentially.

Tom: Absolutely. Yes.

Victoria: Okay. Let’s can I go back for a second to how does one determine the current value of a company? If you wanted to get into the Phantom stock type of an arrangement, what’s your your formula for that.

Tom: So, the, the some people will tell you, well, all you really want to do it, right. You got to get an appraisal every year by a third party evaluation company. There are certain types of phantom stock plans where you actually have to have an appraisal. So allowed that caveat. But, we only wind up doing that for our clients.

Tom: One out of 30 times the other. 29 times you create what we call a formula value. A formula value simply means you study the company’s financials. You identify, and after a discussion with the owners, what are the key measurements of value to you? Is it profitability? Is it revenue? Some combination of the two. Do you use debt?

Tom: Do we have to account for debt or do you maintain a lot of cash. So there’s 4 or 5 markers of value. And then you create think of a simple algebraic formula. One of the simplest ones is you take operating income or pretax profit or, EBITDA and you multiply by 5 or 6 and you say that’s our benchmark for valuation.

Tom: It can be as simple as that because very fine. What are we trying to do. What the employees are we trying to give them something that literally represents our current share price, or are we trying to give them something to focus on? And I think it’s the latter. So if you used a, say, a pretax profit, multiple of 5 or 6, you get this value.

Tom: Then you say to your employees, when you give them their shares or units, how do you make these increase? We grow profitability, sell more, spend less. Right? Is the mantra of one of my partners is always say, yeah, well, we should sell more and spend less. That’s the bottom line. Yeah. If that’s what you want, your employees to focus on, right?

Tom: Treating customers well, repeat business, sustaining the business referrals, all those good things that go into, selling more and all the things that go into spending less. So you keep it simple. Employees relate to it and it works just fine.

Victoria: So do you like a lot of our members this year had best year they’ve ever had because so many people stay at home and remodeling and so on and so forth. If you have a year like that, that’s out of the ordinary. Significantly, how do you do that? You don’t want to use that number for a value if you’re never going to hit it again.

Victoria: You know?

Tom: Well, yeah. So we often, average profitability numbers into the formula and we can do weighting. So that was some years of a higher rate than others. But it’s not bad to have a year like that and to have employees benefit from it as long as they also realize. But we’ve also raised the bar on the number we have to hit to grow.

Tom: Two sometimes you adjust for unusual years as well. You want to avoid windfall years where you want to avoid, years where there’s a sudden drop and nothing good happens. There are ways to account for all those kinds of business cycles and events. But we suggest when you do phantom stock, don’t just give people one year worth of shares.

Tom: If you’re going to give me 10,000 shares, you’d probably be better off giving me a thousand a year over ten years, because then I have to keep pushing the bar forward. And I also have staggered redemption dates that could keep me in my place. So there’s a retention goal associated with as well as a performance thought.

Victoria: So as you gave them a thousand shares every year for ten years, it would be a different value every year based on that current year’s profit or whatever your measurement tool is.

Tom: Okay.

Victoria: That’s correct. That’s interesting. Okay. All right. Great. Thank you. Very very interesting.

Mark: It’s very cool. Tom, one of the things we do to value the quality of our guest is not only the good information they provide before the lightning round, but what they do with the lightning round. So are you ready for that?

Tom: I don’t know, it’s kind of scary put out. And now here’s a reminder that it’s lightning round. It’s a dry.

Mark: All right. We’re going to put 60s on the clock. Here we go. What’s your favorite business book and why.

Tom: Okay I didn’t prepare for that one. So I, enjoy Roger Martin. He’s the dean of the Rotman School of Management of Toronto, in Toronto. And I keep this book on my desk playing to win. How strategy really works. It’s a great book on strategy because it helps you define what’s your real win. And, what where do you play?

Tom: What world are you in? How do you win and what’s important to you? So it really gets to the why and how to operate and build a great business strategy.

Victoria: Very cool.

Mark: If you weren’t the president of Vision Link Advisory Group, what do you think you’d be doing so well?

Tom: I go back to where I left grad school. I was planning to be a, a college professor teaching Asian history that that’s what I would probably be doing today, teaching Asian history.

Victoria: It’s great.

Tom: Steer college somewhere.

Mark: What do you not very good at?

Tom: Administrative follow through. And so I have a team.

Mark: Your room your desk or your car. Which do you clean first?

Tom: Yeah, probably my desk.

Mark: What’s the weirdest thing I’d find in your refrigerator?

Tom: Probably ten, 12 panels.

Mark: If you can have a song play whenever you entered a room, what would the song be?

Tom: Oh, boy. Well, I don’t know. Maybe, James Taylor’s You’ve Got a friend.

Victoria: There you go. That’s nice. That’s great. Well, you’re certainly on our team, and we appreciate you being here. Thank you so much. This was a random opportunity for me to meet you. And I’m really glad that you agreed to be on our podcast. So thank you so much for that. Now, I want to ask you how people will learn more about you and services you provide.

Victoria: Where would they go to do that?

Tom: So our, we have several websites, but our main one is, vehicle as in Vision Link Advisors. So it’s vehicle advisors.com. A lot about different types of compensation strategies and tools there.

Victoria: All right. Great. Now before I let you go again, I want you to share with our listening audience your five words of wisdom and why they resonate with you.

Tom: Freed employees like growth partners. It actually fits with our mantra that, our ultimate mission is to transform employees into growth partners. Now, compensation doesn’t do that by itself, but it’s a crucial ingredient. But if you have a culture that says, we want our employees to feel like partners in our business and treat our customers like their owners in the business, well, you’re trying to transform them into growth partners, and compensation plays.

Tom: A big part of that has to align with what you’re saying, what you believe, your culture and how you treat your your, your customers.

Victoria: That’s awesome. Thank you so much time. We appreciate it greatly. And I know our listeners are going to love this.

Tom: My pleasure. Best wishes to everyone. Thanks for having me.

Victoria: Thanks, Tom. Well, that was really interesting. You know, it’s so true that compensation in the way it’s designed can have, you know, really significant impact. But I just didn’t think about it in the same way that he does, obviously. I mean, it’s it’s it was really interesting.

Mark: There’s so many different ways to what I really, really was kind of it was it was one of those forehead for head slap kind of things. But I liked the, the x axis, y axis, the four quadrant idea, you know, of, of long term, short term and fixed, fixed and variable compensation. And, you know, if you if you can visualize that, if you’re driving right now or sitting in your office, it makes total sense because there’s four quadrants.

Mark: You, you can really it’s just a visual way of how you’re going to reimburse and compensate people based on what you’re trying to achieve. And it makes total sense. But, you know, it just never occurs to you to kind of break it down in such a simple, straightforward, I love those two by two grids.

Victoria: Yeah.

Mark: They’re very good.

Victoria: The other thing that I thought was could be very useful from right from the get for everybody is writing down your pay for philosophy.

Mark: I yeah. You know that was cool. I wish you know and I know it’s a lot to ask on on the spot. You know on on a podcast. But I’d love to have heard like an example of one, like, you know, a pay philosophy is blah blah, blah.

Victoria: Yeah. Well, you know, but I think like one example might be something like we will pay fair market rate, but the rewards come from the net profit bonus, you know, something like that. Like we’re not going to be paying the top tier in your, in your, you know, weekly monthly salary. Well it might be pay a little bit below that in the medium range.

Victoria: But we’re going to bonus a big you know, that’s where you’re going to get the you know.

Mark: I have a feeling if we hired Tom, we’d come up with something a little more.

Victoria: Eloquently. Yes, I’m sure we would surely. But I’m sure we would.

Mark: But yeah, yeah. That’s good. You know, it’s it’s so true. I mean, the first when I first saw we were going to be talking to him and, and the kind of the topic and the, and the category of conversation was it was going to be first thing I thought, was how my intro went because I thought about, you know, that’s what you do.

Mark: You kind of either say, hey, what are you what are you paying, a designer, how you guys pay your. What do you guys pay your designer? You know, or just Google it? Yeah. Designer rates and.

Victoria: And then you talk to talk and fixed rate. Almost always. That’s a fixed piece of it.

Mark: Yeah. And you always kind of just get some random range, you know, between now I’ve done it marketing managers you know, between 42,000 and 89,000. Gee thanks.

Victoria: Yeah. That helped out really well. Anyway, I hope that people have found this interesting and I love their website. It’s got tons of good information on it, a lot of free resources and so on. So definitely worth a visit to VL advisors.com.

Mark: Yeah, absolutely. We want to thank Tom for taking the time to share some of his, industry secrets with us. And we want to thank you for listening week in and week out. I am, if you didn’t know already Mark Harari.

Victoria: And I’m Victoria Downing. See you next week.