How to lower your fixed payroll cost by at least 40%

September 28, 2011

Recently, there has been a lot of press about football player’s compensation. Specifically, many of the new contracts written for superstar quarter backs have had press showing over $100 million to several hundred million dollar packages. What the press doesn’t tell you is the compensation is made up of a relatively smaller fixed salary with a huge variable incentive plan. Our industry could learn a thing or two regarding this sports model of compensation.

Each of us are struggling to maintain the absolute best and brightest people at a time where we have had years of financial challenges. Most have seen a tremendous percentage of employees laid off in order to survive this economic recession. We are asking our white collar employees to do almost twice the work for in some cases one half the total compensation they received prior to 2006.Why couldn’t the above sports model work in our industry?

 It’s a long standing Human Resource philosophy that if you pay an incentive, you must make it large enough to actually get the person to consciously alter their behavior because of the opportunity to earn additional income of consequence. Pay to little of an incentive, and you can expect insignificant change and performance improvement.

Most professional sports franchises pay $1.50 in incentive for every $1.00 in salary. So a player negotiating a $250 million dollar contract is actually receiving $100 million in salary and the balance is paid only if the performance of the team meets the expectation of the owner. Makes sense right?

So why can’t we transcribe this sports compensation model to home building? I believe that given good metrics and a healthy frequency of incentive payout when earned, that most of our management personnel would gladly embrace an upside compensation incentive for a lower fixed salary. The key is setting goals that are realistic and obtainable and involving the affected employees in the formulation of the new strategy.

A head of construction making $125,000 a year under this scenario, would receive a base pay of $75,000 and have a variable incentive opportunity of $107,500, totaling a annual compensation potential of $182,500.If the metrics are defined and measured well enough, it should give you as the employer an opportunity to pay incentive dollars on a more frequent basis and thus alleviate cash flow concerns for the employee.

I know that many of you are thinking I am smoking something and that realistically this change could never happen in your organization without a mass exodus, but I suggest that to avoid mediocre performance we need to look at every “break from the pack strategy” there is out there. We all are scared to shake it up and make changes. Were concerned that we will affect our ability to sell that next home.

My suggestion is we can’t afford not to evaluate alternatives to ultimately strengthen our balance sheets.

In this model, we pay more cash but only when the individual and the company has created more wealth for us. Think about it. Don’t automatically discount the idea. I am certainly interested in talking to you about the implementation of such a plan, Feel free to call me.


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PB-Best Practices