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Pay for production

January 7, 2013 -  By

Case Study: An Incentive System that Empowers Employees to Think Like Owners
By Jeffrey Scott, Consultant

The Problem

John’s labor rates were too high. John, a member of one of the Leader’s Edge peer groups (for landscape business owners), had just bought a company in in the mid-west. His labor costs were hurting profits, and he needed increased cash flow to pay off the note. Necessity is a great motivator.

The System

He decided to use the Pay For Production incentive system: he pays his crews a percentage of the revenue they bill out every day. We calculated he needed to get labor expenses down to 25% of revenue for the majority of his services, so he offered to pay his 2-man maintenance crews a total of 25%. The more work they did the more they earned.  He tracked their hours and overtime and made sure he complied with the law. He implemented this PFP incentives system in other parts of his company.

The Improvement

His labor costs were initially reduced on average by 15 percentage points—for the fertilizer, mowing, holiday lights—though this percentage changed slightly as the season wore on. John experimented with this program in his other 2 divisions.  With this new system his employees are able to earn more, though the quality initially dropped and customer complaints increased. We reacted quickly and implemented an effective quality control plan to correct and maintain standards.

Keys to Success:

• Crews can calculate their pay daily; this is highly motivating, and creates a sense of ownership.

• Crew wages increased dramatically, initially by 25%.

• Quality control and managing the company culture are key.  This system still requires guiding your employees on your company values, and teaching them about the cost of doing business.

In John’s Words

I reviewed my plan with Jeffrey Scott and his Leader’s Edge peer group members, to get their candid feedback on the problems they foresaw with my PFP incentive; to find out what had worked and not worked for them. My ultimate success depended on the details of the implementation—they helped me work out the bugs and avoid many snafus.

Success Leaves Clues

The Leader’s Edge peer group members achieved 27% profit growth in their first year of membership. That is something to write home about!

Jeffrey Scott, MBA, author and consultant, grew his landscape company into a successful $10 million enterprise, and he’s devoted to helping others share the same success. He facilitates PEER GROUPS for landscape business owners who want to transform and profitably grow their business. For more information, go to www.JeffreyScott.biz, email Jeff@Jeffreyscott.biz, or call (203)220-8931.  

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1 Comment on "Pay for production"

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  1. David says:

    Great point. I’ve always been a fan of profit sharing.