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

Adi Klevit 10:16

And this is to declare what my question is around perks, you know, we talk a lot about compensation. And I’ve seen a lot of examples, you know, there is the big you talk about Google. So Google is very known for the perks that they give, you know, the pool table, the beautiful restaurants, whatever it is, but also smaller companies, they tend to give perks out to employees in with the thought that that might offset some of the compensation or some of the compensate, or the bonus or whatnot. So what is your viewpoint on the perks?

Verne Harnish 10:48

Well, you know, we don’t dig into it, because we wanted to really stay focused on the financial aspects of compensation. And we’re the first to admit, there’s all kinds of other factors that come into play. And there’s been so much written about that. And there is so much focus on it, that we thought there wasn’t enough for companies around and by the way, there’s a lot of books on executive compensation. But there wasn’t much for the rest of the folks in the organization. But I’ll give you a couple examples. I think one of the important perks is flexibility and schedules. So one of our clients’ true love is in the hospitality space. And man, that’s a space, it’s really difficult to get talent, fast, casual Indian, they said we’re going to close at eight o’clock, instead of 10 o’clock at night. Look, because you shouldn’t be late anyway, it affects your sleep, it’s not good for your own health. And they really want their employees to be able to get home in time to put their own kids to bed. And they’re closed a little bit like Chick fil A not on Sundays, but they’re closed on all holidays, including the Indian holidays, so their employees can be home to celebrate those as well. A couple other examples that wipr is with on Tuesday, and our client as well. They are helping my client by helping every one of their frontline employees, if they stay five years, purchase their first not home. But rental property. You know, your home’s not an asset but a rental property is and they think that’s going to be a great perk and additional perk in order to attract and retain more of that frontline talent that’s needed because they manage other rental properties. And yesterday, I was with a client, where they’re actually helping their cleaners. They clean commercial buildings, but Simon Lim who was an EO member in Malaysia, said, Hey, we now have an initiative to help every one of our frontline cleaners own their own home. They’ve got the first six accomplished, and that’s their initiative over the next decade. So I think the perks are meaningful in the last comment, but it’s because of the perks, which is why I think Google made a smart decision to actually differentiate the pay. I think it’s because of all the other goodies. I don’t think folks are going to leave over just that one decision. 

John Corcoran 13:15

And this is John again. And going way way from Silicon Valley. You write about a 125 year old manufacturer of welding products, Lincoln Electric, and Cleveland, Ohio, which has so many great stories in this book that these different companies have really creative, inventive schemes for compensation. But tell us a little bit about that one, because that’s a fascinating one. Yeah, that’s the

Verne Harnish 13:35

one we actually chose to open the book with, because it has such a draconian compensation plan, which to emphasize why you wouldn’t want to copy anyone else’s, but that you need to be different. And their comp plan is very simple. By the way, they make welding equipment. What does the customer want? They want a great quality piece of welding equipment at a great price. And so their comp is all eat what you kill. It is piece rate based, which means if you have a sick day, you don’t get paid. If you decide to take vacation, you don’t get paid. But if you want to work two shifts, you can make twice as much. And by the way, if you make a mistake that comes out of your pay. Now, this is not a place for everybody. But that’s part of the point. You want to be different. And so it’s attracted a type of talent who says alright, game on, bring it on, because if you do perform, you become one of the highest paid people in the manufacturing industry. And that is enough incentive to attract enough talent that’s powered this company for 125 years. 

Jeremy Weisz 14:45

Jeremy Weisz here, and John and I talk a lot about learning about gamification, making things fun. And I would love for any talk about in the book to talk about some examples of incorporating gamification, your thoughts.

Verne Harnish 14:56

Yeah, you know, one of my no One of the keys is the gambling industry, let’s just be blunt about it. They understand human psychology probably better than any other industry. And that’s why comp is so difficult is because you’re dealing with people and people are not logical, they’re psychological. And what is it about gambling, is the fact that there’s the surprise, it’s not consistent, we have a chance to win big or not at all. And that really gets that dopamine flowing inside the body. So I’ll give you a practical example, one of my earliest clients, he’ll work out of the Boston area, and they have 60 employees, they make architectural steel, you know, stairway rails and that kind of stuff. And they had about 60,000 set aside as a bonus pool, and so average $1,000 per employee. And the reality was, they were getting no boost from that at all. We know from the research, the motivation of a bonus lasts about a day and a half. If that, then it becomes an entitlement. So he said, Why don’t you do something different with the 6000 60,000 5000 a month? So back to that original question, we were able to identify important KPIs for each of the individuals or teams. And so here’s the deal. If you hit your number for the month, you get a chance in this bingo wheel. If you exceed it, you get two chances in the bingo wheel. And so then once a month, gather all the employees together, announce the results of the month and then say all right, let’s start the drawing. And of the 5000 3000 went to prizes. So first dinners for two movie tickets, then bigger prizes, flat screen TVs, golf clubs. And then there was a $2,000 cash prize. And I remember one of the months I was there, the wheels going around, we’re now going for this cash prize. And it’s one of the guys in the warehouse. Now, not only is he happy, but the other three guys in the warehouse are cheering as well. And we’re like, what’s going on? Well, you know what happened, they made a pact that said, look, let’s support each other in not only hitting our numbers, but exceeding our numbers. So we get eight chances in the bingo wheel. And if any of us wins, we’re going to split it like you know, folks do lottery tickets. And I remember the EO turning to me and saying, you know, Verne, I could have sent those four through a week-long team building course. And it would not have done what the right incentive and gamification did in order to have some fun. So just an example, we’ve got plenty of them again, in the in the book. Amazing.

Joshua Chin 17:36

Thanks Verne. Josh is here. I’m interested in your thoughts around structuring compensation for risk taking or rather in lineman risk taking. You spoke a little bit about crypto at the start of our interview. And I think that’s been a huge shift in the way that people think about entrepreneurship. And it’s getting younger and younger. A lot of crypto entrepreneurs are 16-18, not even graduated from high school. And I see a lot of large companies struggling to keep up with the emerging changes in space. How do you incentivize, you know, innovation within an organization with compensation if that’s even possible?

Verne Harnish 18:16

Well, that’s why I love our friend Steve Rothchild, the EO member, seven employees with lightning access. And it’s his broad profit sharing plan, which we’re really in favor of gaining sharing or equity sharing. Because what that does is first Steve was clear, he has no delusions that this is going to be motivational are all nobody’s going to work harder. And if you’ve already hired right, you’ve got motivated folks just want to make sure the comp system doesn’t waterboard them to death, in turn, because it represents about 20% of their pay, which is at risk, a very entrepreneurial thing. They’re thinking as much like owners as Steve, and that’s where you’re able to share the rest. Let me give you an example. Before the profits share, the broad profit sharing, they would go to trade shows. And honestly the employee saw them as this kind of vacation boondoggles a chance on the company’s nickel to go to some cool place to wine and dine, and hang out with some customers. But after they put the profit sharing in place, they came to Steve and they said wait a second, Steve, there’s only two of these trade shows that we think are worth it. And when we’re there, I don’t think we need to do all this wining and dining. Now it’s their money, which is how an entrepreneur needs to think about it and you do in crypto as well. Hey, this is my money that I’m investing and putting at risk. So that’s one example of by the way, if Steve himself the owner had taken away those trade shows, it would have been a major downer he would have been the bad guy in this situation. Second with hiring. You know when it’s not your money, the employees were constantly asking Steve Hey, we just need more help around here. But whose employees now are careful if they bring in an additional person, that’s going to make the pot of money thinner for everybody. Now, they recently did hire somebody, because they rationalized, they’re going to deliver more to the bottom line than what their salary is. And so Steve, again, has got everybody thinking like an entrepreneur, not just himself, and it’s taken the pressure off of him having to be the only one making decisions, and everybody else just asking for stuff. And that’s what I think good about the marketplace, is you’re making decisions that affect your own immediate wealth or not. And that’s what the entrepreneurs do. So that’s where I think those gainsharing plans work for John.

John Corcoran 20:46

John Corcoran. Again, as a follow up to that, I want to ask you to talk about Outback Steakhouse, because you read about that in the book. And that’s a great example. And then we’ll go to a leaf after that.

Verne Harnish 20:55

Yeah, well, look at what I love about it’s not Facebook, it’s not Google, Microsoft, you know, it’s a chain of restaurants. And Chris Solomon, and his two co founders said, look, we’ve grown up in this industry. And what’s terrible about it, is the customer just wants consistent food, quality and service. But it’s very difficult to do when you scale. And so they peel back the layers of the bloomin onion. And they realize that the root of the issue was the fact that in a chain, it’s hard to keep a restaurant manager for more than six months, they’re constantly rotating around or they leave or whatever. So they ask the right question. That’s where you want to start with your comp system. If this is what the customer wants, what’s the number one thing we need to achieve? And that is, could we keep the same restaurant manager for five to 10 years, five to 10 years in the same location, we’re talking about 10 to 20x, more than the average in the industry. While they did it with one of the most innovative comp plans that you can read about in the book made 20 year olds millionaires. Part of it was that they had equity. And we’ve been encouraging even young companies like Ike, they went public at 3 million in revenue now worth, you know, market cap 125 million, that having that additional tool in your compensation kit is powerful. And Outback was able to use that, by the way to the point where they didn’t call a restaurant manager. Back to Joshua’s question, they call them a proprietor, they could actually paint their name above the door and gold leaf, because they knew they were leaving anytime soon. That’s a great lease.

Elise Holtzman 22:38

So preferring a lease again, some of the examples you’ve offered are innovative, right? They can feel a little risky, they’re exciting. And obviously they can have a tremendous impact. So I kind of have a little bit of a mishmash question. When you have people who are in a profession or in an industry where it’s kind of traditional, right? And you may be populated by a certain kind of personality, that’s not so much interest taking you know, that they say the legal profession is overpopulated with people who are, you know, detail oriented and like to execute, but they’re not necessarily big picture thinkers and risk takers. What advice would you give to organizational leaders who are in those kinds of more traditional industries or professions? who sees the benefits, but because of the culture of their industry? And because they’ve often said, Well, we have to do what our peer institutions are doing? What advice would you give them in terms of being able to shift in this way?

Verne Harnish 23:34

Yeah, well, first, I’d encourage him to read everything, Michael Porter, the strategy guru of Harvard’s ever written, which is the thing he emphasizes, you don’t really have a strategy if you’re the same as everybody else. So that’s one but I also understand and the question came in yesterday, which is why your question is right on target. If you’ve had a certain comp system, and you want to change, and change is difficult for people, particularly because you’re messing with their livelihood here. This isn’t just, you know, fun and games, whether we’re gonna have a pool table or not. And you can try these things. This is their livelihood. And so we addressed that in the book. And we suggest that you run your new comp plan in parallel, as if it were in place. And you calculate what people would then earn in, different from what they would in the old system. And clearly, you want to tweak that new system to show that, hey, you’re going to get paid more, given the results that we’re looking for, and what the customer is achieving. So you want to shoot bullets. Then cannonballs, as Jim Collins would say, you want to test it out. I think that’s what Google’s doing with their decision. They’re going to know very quickly whether it was good or not, they can back off. But if it’s going to be a big change, run it in parallel as a phantom comp. plan, and then show people at the end of three or six months, what it’s going to do to their pay. And if it’s making the better performers more money, they’re going to be in favor of it. And the lower performers, if they’re not happy with it, you know what? It may be good that they leave, and you’ve got a chance then to attract the kind of talent you need to scale.

Adi Klevit 25:23

Learn. Thank you for that answer. It’s Adi, again, my question is a little bit broader. So from your experience, how much compensation actually plays a role in deciding for an employee, whether they’re going to vote for a candidate, whether they’re going to go work for a certain company or not?

Verne Harnish 25:40

Yeah, well, well, you’re right on. And in chapter three, we talked about the three things that are called the effects of financial incentives. By the way, the least important is what’s called the motivational effect. That is, you’re going to try harder. But that’s what everybody thinks incentive is for. Ah, the second one is what’s called an information effect, which is it needs to point people to doing the right thing, which is what Steve Rothschilds system is doing, hey, let’s only go to the trade shows that matter. Let’s not bring people in unless it really is going to be additive to the company. And the number one is exactly as you suggest, it’s called the selection effect, which is it ought to convince people to pay, I ought to come work for you instead of the competition. And that’s why Chewelah made the decision to shut down earlier, not work weekends, and I didn’t share their copies. But we think it’s a very conscious capitalism idea. Used to be a day’s work deserve the day’s pay. Now, if you’re paying workers every two weeks, particularly frontline, you’re really scaling on the back of their cash flow. And so in Chula you have an option through a lot of these new services that have popped up, they use what’s called active pay, where you can get paid daily. And that way, you’re not really leaving your frontline, particularly employees at the behaviors of payday loan sharks out there in the marketplace. Now, because of their hours, several other perks and the fact you can be paid daily, provides a great selection effect for Chula so they’re able to attract the talent to their restaurant versus the competitor. So you’re absolutely right now, what’s the percentage? It really varies across the industry. So I don’t know what that number is. But it is significant now that people are changing jobs a lot.

John Corcoran 27:38

Verne, John Corcoran here again. All right, you have a great story in the book about sharing the last 10% a company had this happiness guarantee. Can you talk a little bit about that one? I have to have to have you share that?

Verne Harnish 27:50

No, I don’t remember that.

John Corcoran 27:53

Okay, refresh your recollection. So it was designed sort of story designed to serve any movers, wasn’t it? No, it was right around that though. It was Dan Coffield design services agreements, it was a sales coach, they would sell 600,000 to a million dollar projects, and they’d hold back the last 10% With this happiness guarantee.

Verne Harnish 28:12

Yes, yes. Yes, yeah. So there I don’t remember it is we’re not allowed to say the name of the company, we barely were allowed to put that example in the book. So I’ve almost blanked it out of my mind about it. So we don’t get any kind of trouble. But yeah, we thought it was one of the more innovative ideas that said, Look, ultimately, we want to make sure that the customer is happy. With there’s big audio AV installations, which can be very complex down to if anyone has an AV system, just getting the remotes to all work can be frustrating. And so they make sure that they hold back 10% of the final payment. And only when the customer is completely satisfied, do they have to pay that and then all that 10% is then split among the employees. So now it’s not the customer pushing the issue as much as the boss as it is the teammates. And one of the things that’s important to realize, and it’s a foundational idea of comp around compensation is that look, peers care more for their peers than they do the boss, let’s just be clear about it. They learn more from each other than the boss and they will work harder for each other than the boss. And so the systems that we share in there really take advantage of the team esprit de corps that you’re trying to create in the organization. So again, you don’t have to be the bad guy or the bad gal in that situation.

Jeremy Weisz 29:44

And Jeremy Weisz, you know, makes me think of how you talk about aligning incentives with the customer, because that’s ultimately what you want to make happy as well. It makes me think of bonuses. So I love for you to talk about bonuses and when they can backfire.

Verne Harnish 29:58

Yeah, they generally backfire, which is our message in that chapter. Obviously, you know, it’s a well worn example. But we saw what happened to Wells Fargo, with you’re going to provide incentives for opening up new accounts. Hey, why don’t we just open up a whole bunch of accounts, even if there aren’t humans, or customers behind it, or we’re going to open it up on behalf of customers that they’re not even aware of. So you got to be careful, you get what you reward, and it does need to align. So those are those situations. But in reverse, I’ve, that’s why I love the mini movers. And it’s kind of a gamification in that situation. You know, if you’re moving furniture, someone’s furniture, what’s the number one thing the customer wants? I don’t want a mark on the furniture, by the way, Number Two’s on time, but I’ll take it a little bit late. If you didn’t put a bone break at the high end, well, not a mark, I don’t even break. I don’t even want to work on it. Now, how does the industry handle it? Well, they have insurance. It’s roughly 3% of revenue. And so many movers down in Brisbane, Australia, Michael Hagen, he said, Look, why don’t I instead, provide that money to the team that did that specific move 3% of the revenue of that move, we’re gonna make available split among the four or five folks that would be available that did the move. And by the way, it represents about 1000 Ozzie dollars a quarter and additional compensation back to the selection effect, an extra 4000 a year to work for many movers versus the competitor is well worth it. And again, the team is more likely to hold each other accountable that way before the customer gets upset, or the boss. And so that’s where the team incentive is often much more effective. Because we all affect each other’s results, then the individual incentive, which can cause people to compete against each other, which looks, you got enough competition externally. I don’t know why you needed insight. Now I want to give one exception, and that is in sales we cover that is a whole separate, you know topic in the book, and a client I was with on Tuesday, a salesperson can make anywhere from 60,000 to 600,000. At his printing company, it’s a paid band of 10x, depending on your performance. Oh, that’s incredible.

Joshua Chin 32:27

I’m Josh Chin here. I have a question. When do you introduce profit sharing? compensation model, especially with your key employees? When you were you’d be thinking about options plans and Phantom shares and all that stuff? Do you? What’s this sequence of events? Do you identify ownership mentality first, then reward with profit sharing or profit sharing that results in ownership mentality?

Verne Harnish 32:57

Well, first, let’s make sure you’re trending towards profitability. You know, if you’re, yeah, if you’re Amazon, you know, and you’re going to go decades without making a profit, it’s going to be very demoralizing to have any kind of a profit sharing plan in there, because the employees don’t feel like they have any any say over the investments that the leaders are making in order to grow the company. And so we’re really careful to outline in the book the environments where it is effective and where it’s not. But if you come back to the second part of your question, we really do think of the incentive, like it didn’t Steve Rothschild’s company, they didn’t really have an odor mentality. Until now it was going to affect their pocketbook. And it was amazing overnight, all of a sudden they got it. So I think there is a chicken and egg here. And if you’re going to create an environment where you’re going to benefit from acting and thinking like an owner, first, you’re going to attract those types of people. And then they’re going to really contribute because they’ve got a stake in the outcome as Jack sac would say. And this is a waste again,

Elise Holtzman 34:10

There are a lot of different businesses that have a lot of different models, obviously about whether they have employees or they’re using independent contractors, right? We talk about the gig economy, and there’s been a lot of controversy over how and when and how much people are being paid. Do you have different suggestions for compensation? Do you have a different approach to compensation when people are using independent contractors versus what we would consider to be legal employees?

Verne Harnish 34:37

Yeah, you know, it’s, uh, at least it is a great question. I actually am using a company virtual hub. They’re actually a client of ours and I’ve got a virtual assistant from the Philippines. And I think they’re, it’s more of a conscious capitalism decision. Like I went with virtual hub because of their compensation, their full time plan for their assistance that paid holidays off, they’re getting their retirement and they’re getting a lot of the perks that otherwise some organizations aren’t providing to those independent contractors that you would have. So I think really, it’s a core value decision that the company needs to make, and are we going to treat the independent contractors as if they were employees with all the perks and benefits or not. And with as competitive as becoming in the marketplace, I think it’s driving many companies to try to, you know, share the wealth with a much broader group of people. Now, that being said, one of the advantages of these unicorns is they’re able to scale really on the backs of people that aren’t on their payroll at all. So I was with some leadership at Microsoft a couple nights ago, naturally, the magic of their model, one, they went public early, so they’ve able to make more millionaires than a company we compare and contrast and with SAS in the firm, but they also have 20,000, Microsoft solution providers, for which they’re out there in the market selling Microsoft products. And not one of those people is on Microsoft’s payroll, which makes them very anti-fragile. So there’s the good decision around independence from a business model perspective, then how you look at compensating them, or how they’re being compensated by the organization’s you’re interacting with is a second more of a core values conscious capitalism decision.

John Corcoran 36:37

We’re gonna get one more question from a de and then we’ll wrap things up, Adi, go ahead.

Adi Klevit 36:42

Alright. So, Verne, my question is more about the games, right, the gamification, so how do you? What are your suggestions in terms of creating the right game? Because, you know, the biggest fear, I think, is to create a game and then nobody’s behind it, right? So then it’s not really incentivizing. And also the tension between instant gratification of playing the game for this week, as opposed to playing a game for a longer period of time, that might be better for the organization, because maybe you’re making money this week, but then you’re not making the next week. So maybe it has to be for the long term. But as an employee, you’re playing the game, but you’re not getting the gratification right there. So there can be tension there as well. So what’s your advice on creating the right game?

Verne Harnish 37:29

Yeah, and you’re right, it backfires. with United Airlines, United Airlines said, Hey, we’re going to give away a Cadillac. And it turned into a big key motivator for their broad workers. So here’s the key. You’re just taking a look. People want to be paid fairly. And we know a lot of these fancy bonus schemes and that kind of stuff. Really don’t drive any people to, you know, work harder. That was Dan Pink’s book called Drive where you really exposed all of that. My own team came to me and said, Verne, you know, we’re not going to work hard or less hard. We just want to be paid well and fair. So the game of vacation piece is really meant to have fun. Um, you know, I don’t think you’re gonna change anybody’s life. You know, if they want the flat screen TV or not this week, in turn, I love what Sara Blakely did when she sold her company to Blackrock last week. And she gave all of our employees $10,000 into first class tickets to any place they wanted to go in the world. Kind of this one time spot, everybody was clear. It’s not something we’re going to get again, as a way to just say, hey, here’s our appreciation. So keep it small, keep it fun. And, and if you’ve hired right, you’ve already got self motivated, folks. Now you’re just trying to be fair and fun. With your compensation. Get it right, and out of sight. Verne, this

John Corcoran 38:59

has been such a pleasure having you here Sara Blakely, longtime EO, I have to point out there as well. But that was so cool. I saw the video online. It’s so cool to see it. Live it before we wrap things up. You’re so well read everyone here loves reading books and you cite you give credit to so many other authors. In your books. Jim Collins, you mentioned Dan Craig Pink, Greg Crabtree Topgrading by Brad Smart. There’s so many books, what else? What other books should we be reading? Are you reading these days? What do you recommend?

Verne Harnish 39:27

Well, the book that I’m likely going to call number one for 2021. And one of the finest business books I’ve read in a decade is Hubert Joly, the guy who turned around Best Buy and took his stock from $11 to $110 in a very tough industry, and it’s called The Heart of Business. And I just think it’s an absolute number one must read for all business leaders in 2021. And then I think number two, Michael Dell’s book that just came out a few weeks ago. Also spectacular so you got a couple of really great business biographies.

John Corcoran 39:57

And Michael Dell, I think was one of your early Maybe the first one and my right, my

Verne Harnish 40:03

gosh, he was there at the beginning when it was just the association of collegiate entrepreneurs. And we were just getting started, hey, let me mention one, a third book. I just interviewed him last week, Jim McKelvey, co-founder of Square, the multi billionaire, his book called The Innovation Stack. And how they took on Amazon, Amazon was gonna come in and crush them. And they beat Amazon. Nobody does that. And so how he was able to break 17 laws in launching Square, how he’s able to get an entire financial industry to pivot, and to beat Amazon. The lessons in that book are spectacular as well. So the Innovation Stack.

John Corcoran 40:43

Verne, Scaling Up Compensation is the book. Where can people go to get it and also to learn more about you and connect with you?

Verne Harnish 40:51, my email is [email protected], you can get it on Kindle. It’s only an eBook, Kindle or iTunes. And by the way, we’re sort of making a statement they’re printing books is really not good for the environment. They’re heavy, the amount of trance, you know, transportation needed to move them around. When I’ve got a digital I can even listen to them easily. I can not take it. I can search for them You bet. So I hope folks don’t push back and we don’t have paper copies. Plus, there’s a massive shortage of paper right now.

John Corcoran 41:25

But get it on Audible, because we’re big audible people. So we’d like to hear that there. So hopefully, it’ll be an audible sound.

Verne Harnish 41:31

Well, but there’s apps that will actually read it to you without having to buy the separate audible. That’s true. Oh, don’t don’t wait, don’t wait. This gives you such a strategic advantage over the competition. I wouldn’t wait. Alright, very. Thanks so much. You got it. Thanks, John.

Outro 41:47

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