Verne Harnish | How to Craft a Compensation Scheme That Attracts and Motivates the Right People For Your Company

Verne Harnish | How to Craft a Compensation Scheme That Attracts and Motivates the Right People For Your Company

by | Podcast

Smart Business Revolution

Verne Harnish is the Founder of the world-renowned Entrepreneurs’ Organization (EO), which has over 16,000 members worldwide. He is also the Founder of Scaling Up, a global executive education and coaching company with over 200 partners on six continents. Verne is the author of multiple books, the latest being Scaling Up Compensation: 5 Design Principles for Turning Your Largest Expense into a Strategic Advantage. He also wrote the best-sellers Mastering the Rockefeller Habits, The Greatest Business Decisions of All Times, and Scaling Up (Rockefeller Habits 2.0). 

In this episode of the Smart Business Revolution Podcast, Verne Harnish, Founder of Scaling Up, gets interviewed by Co-hosts John Corcoran, Dr. Jeremy Weisz, Elise Holtzman, Adi Klevit, and Joshua Chin about structuring and scaling compensation plans. Verne shares his tips for creating compensation plans for managerial roles, creating plans for risk-taking businesses, and how to incorporate gamification in compensation plans. Stay tuned.

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Here’s a Glimpse of What You’ll Hear:

  • Verne Harnish’s reasons for focusing on employee compensation
  • The types of mistakes leaders when setting up compensation plans
  • Verne’s tips for creating compensation plans for managerial roles, professional service firms, and providing compensation perks
  • Lincoln Electric’s compensation plan, how to incorporate gamification in your plan, and how to structure compensation schemes for risk-taking businesses
  • Verne talks about Outback Steakhouse’s compensation plan, explains how traditional type businesses can effectively adopt new compensation plans, and talks about the role compensation plays in helping candidates decide where to work
  • How ‘sharing the last 10%’ promotes happiness — and how bonuses can backfire 
  • The best time to introduce a profit-sharing compensation model, Verne’s tips for compensating independent contractors, and how to create the right compensation game that ensures fairness and gratification
  • Verne’s book recommendations and his contact details

Resources Mentioned In This Episode

Sponsor: Rise25

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Cofounders Dr. Jeremy Weisz and John Corcoran credit podcasting as being the best thing they have ever done for their businesses. Podcasting connected them with the founders/CEOs of P90x, Atari, Einstein Bagels, Mattel, Rx Bars,  YPO, EO, Lending Tree, Freshdesk,  and many more.  

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Rise25 Cofounders, Dr. Jeremy Weisz and John Corcoran, have been podcasting and advising about podcasting since 2008.

Episode Transcript

Intro 0:01

Welcome to the revolution, the Smart Business Revolution Podcast, where we ask today’s most successful entrepreneurs to share the tools and strategies they use to build relationships and connections to grow their revenue. Now, your host for the revolution, John Corcoran.

John Corcoran 0:40

All right, welcome everyone. John Corcoran here. You know, we have a little different format here today. So I’m the moderator for this discussion, along with an all star group of co-hosts. We’ve got my co-founder, Dr. Jeremy Weisz here, who I’ll introduce in a moment. I’m also the co-founder with Jeremy of Rise25, where we help connect b2b business owners to their ideal referrals, partners, and prospects using done for you podcast and content marketing. But first, our guest today is Verne Harnish. Verne is the Founder of the world renowned Entrepreneurs’ Organization known as EO, which I belong to. It’s an amazing organization with over 16,000 members worldwide. He chaired for 15 years the iOS premiere CEO program held in MIT, a program which he still teaches today. He’s also the founder and CEO Scaling Up, a global executive education and coaching company, with over 200 partners in six continents. Verminous spent the past four decades helping companies to scale up. He’s also the author of multiple books, including the bestseller Mastering the Rockefeller Habits, The Greatest Business Decisions of All Times, and Scaling Up (Rockefeller Habits 2.0) , which has been my personal business Bible, and it’s never farther than an arm’s length away at all times. And his latest book, Scaling Up Compensation, rocketed to number one HR book on Amazon. And that’s what we’re gonna be focusing on today in this discussion. Now I’ll turn it over to my co-founder, Jeremy, who will introduce our co-hosts.

Jeremy Weisz 1:57

Verne, this is gonna be amazing. You know, I was listening to you for two hours last night with Joe Polish and some other ones. So I want to introduce the panel of co-hosts first in this episode. It is going to be published across all of our podcasts. I’m Dr. Jeremy Weisz, I run inspiredinsider.com. And we have Elise Holtzman, founder of Lawyers Edge which provides coaching consulting and training programs to law firms. She’s also the host of the Lawyers Edge Podcast. They hire a lease option. People know it takes Joshua Chin, CEO of Chronos Agency, which helps e-commerce brands increase revenue with email and SMS, and he’s the host of the eCommerce Profits Podcast. Josh, thanks for being with us. Adi Klevit is a process consultant and productivity expert, and is the host of the Systems Simplified Podcast. Adi, thanks for being now. John, you devoured Scaling Up Compensation. So I’m gonna let you start. I know you have an abundance of questions. So start us off.

John Corcoran 2:56

Yeah, I just thought we’d start with a really broad topic. So first of all, I mean, Verne, I joked about it being the business Bible, but there’s so many different topics that you’ve touched on. And what I wanted to know, for starters, is, you know, why zero in on this topic, why compensation? Why now?

Verne Harnish 3:13

Well, why now is the great resignation. And what’s interesting, you know, compensation, has John only spent four or five on the list, as long as you’ve got some of the other good stuff in your culture, but it has gone to number one. And I think people coming through the pandemic are like, you know, I want to have some resources. And I want to be rich like everybody else. And they’re seeing what’s happening with crypto and all of that. So people have said, Hey, in, by the way, it’s an interesting, original definition of compensation, which is compensation for injury that you’ve received at work. And I actually think that a lot of folks see it as, hey, you’re just having to bribe me to stay in this situation. And then a couple of things happened, you saw, Google made the decision that they were going to lower the pay of workers who chose to remain remote, instead of coming back to the office. So that really opened up the conversation. And then I thought it was even interesting, more interesting. Harley Davidson decided this year that they’re going to grant all 4500 of their workers equity in the company. And so it’s a new day relative to compensation. And workers want to get compensated for the work that they’re doing. 

Jeremy Weisz 4:31

Verne about that mistakes leaders make in setting up compensation plans and what to do about it. Because, you know, as you talk about in your books, you know, we start off and we’re kind of feeling our way through these things. So I love for you to talk about the mistakes leaders make with setting up the compensation plans.

Verne Harnish 4:46

Yes, well, first that they copy somebody else’s. What is your first print design principle? How do you turn this largest expanse into a strategic advantage, you know, the drives energy in the business instead of Being a downer. I mean, that’s what’s sad. There, your large expense often becomes a downer inside the organization. So the first thing is like your strategy has to be different. And it has to match both your cultures. And what is the second biggest mistake? Everybody thinks that this is a conversation between the employer and the company, what’s best for the employee, what’s best for the company. But there’s a third person in this relationship, and that is the customer. And so ultimately, you’ve got to make sure that the incentives are designed to align with what it is that you need to deliver for the customer. And there, we hope we brought some important conversation.

Joshua Chin 5:40

Verne, you write in the book about companies paying employees based on your actual contributions? But how do you monitor that, especially for roles that are hard to measure in terms of its output, especially managerial type roles?

Verne Harnish 5:55

Yeah, well, we actually are, you know, principle number three is actually to be very careful and easy on using individual carrots precisely for what you said, unless you can precisely measure that this individual and that individual alone is achieving something, you probably are better off having broader base pay, pay bands, and do more profit and gain sharing across teams, if not the whole company. So you’re absolutely right, we’re because it’s so difficult to measure an individual’s contribution. As you’ll see many examples, Egon Zehnder, which is one of the top executive search firms, they don’t even have any individual commissions, they don’t even compare their 68 offices, because ultimately, what the customer wants is for them to find the best candidate wherever they are in the world, and they don’t want some office or some individual hogging a candidate, because they’re going to get credit for their own score. And they want those people to stay forever. And so the only factor that figures into the piece of the profit pool that you receive is your longevity. But they love the fact that the executive search person assigned to that fortune 500 Board of Directors probably has a longer tenure than any of the board members or any of the executives at the companies that they serve. So that’s where aligning with what the customer wants, is a critical side note. Container Store did the same thing. And yesterday, in El Richmond, I actually had a former employee with the Container Store, she now runs her own company. And she said that’s exactly that. Every other retailer like Nordstrom, even though they’re known for great customer service, they’re gonna ask you, all right, who did to serve you. So they can then get them a commission, there’s not a penny of commission at The Container Store, because they don’t want anyone fighting over customers.

Elise Holtzman 7:51

And this is Elise, one of the things you talk about in the book are several things you talked about in the book include fairness, individual incentives, and also negative side effects of inappropriately applied incentive schemes. So you just mentioned this idea of what is best for the customer. In many professional services firms getting away from the product companies for a minute, such as law firms, partners are compensated largely based on the amount of client business they’re bringing in. And then you’ve got very good practitioners who are bringing in as much business and they’re earning significantly less. So what do you think of that model of compensation, particularly in light of what you just shared with us?

Verne Harnish 8:28

Well, again, that’s why I love the professional services example of Egon Zehnder. They’re their executive search placement firms. But again, I think we have to be very careful. You don’t want to copy anybody else’s, it really is unique to how you’re driving that organization. If it’s a law firm that has its kind of you eat what you kill, I get that. But let me give you an example of fairness that could apply. And we just did it with our client as well. A lot of these companies have 401 K’s. And it’s seen as sameness, we got to talk about fairness versus sameness. The sameness is, hey, we’re gonna match everybody equally. The problem is to your point, the law, the lawyers are making a lot of money so they can contribute a lot. The support staff not so much. And so one of the companies that we feature out of Sausalito, California said, All right, we don’t think that’s fair. And so they took their pile of money that they would use for a 401k matching. They took 50% of it. And they said we’re going to divide it equally among the 120 employees. The higher paid folks can still contribute more if they want to shelter their tax, but at least the frontline is going to get an equal portion because they’re all contributing to the success of the firm, kind of to your point. Then they took the other 50% and they raised their frontline workers hourly from $16 to $20. Because again, the law firm is going to be in trouble if it can’t retain a lot of that support staff in order to do their job. And so just taking the same pile of money and redistributing it, in essentially a more fair way, is driving much greater success for everybody in the organization. And I think that’s how we have to think about it moving forward.

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