Pay-for-performance plans certainly aren’t new. But this company has taken the idea to a whole new level.
David Williams and Mary Michelle Scott, CEO and president, respectively, of the inventory software developer Fishbowl, have come up with a compensation strategy that seems perfect for today’s uncertain economy: They put all employees on a commission plan.
Williams and Scott described their unique pay structure in a recent Harvard Business Review blog post. A summary of what they had to say:
Since they’re convinced every employee in the Orem, UT-based company contributes to sales in some way, everybody gets a base salary plus a commission based on overall revenues.
And when they say everybody, they mean everybody — from salespeople to finance, administration and customer support personnel. And the commission’s paid every month.
The advantages of the system:
- Everybody’s motivated to help the company generate revenue
- Job security’s enhanced, since payroll rises and falls based on how much money’s coming in
- The commission acts like a stock dividend, further encouraging workers to think about the company’s overall success, and
- It minimizes conflicting departmental agendas, since all facets of the operation are intertwined.
Here’s how Williams and Scott describe the mechanics of the system:
Everyone knows what the monthly operational “nut” is. Each day the employees get a report on how how far we are toward that revenue goal.
Beyond the break-even sum, two-thirds of additional revenue goes to the commission pools for each department to share among its members. One-third goes to the company.
A lot of CEOs would be wary of sharing such sensitive information with the rank-and-file. But Scott and Williams see the practice as “an invisible ‘belt’ to hold our decisions in check.”
They point out that key personnel calls are made at the departmental level: If, for instance, a team is facing a critical goal, members can decide to add temp staff (with its accompanying cost) or suck it up and work extra hard to achieve the goal with the people on hand — and boost their commission check at the end of the month.
There are a few disadvantages to the system, Scott and Williams admit:
- The commission plan is different for every role and for every department, so payroll can get pretty complicated at times. Ratios range from 10% salary and 90% commission for salespeople to 80% salary and 20% commission for programmers and engineers.
- Legal technicalities: “It does require support from HR to build a program to ensure that we are compliant at all times with overtime pay requirements under the FLSA,” Williams and Scott wrote. The company also consults with compensation professionals to ensure the program’s compliant.
- The pay structure’s so unusual some prospective hires are scared away. Base salaries are typically lower than average (by perhaps 20%), and in a very lean month there may be no commission at all, Scott and Williams said. But in the good months, the commission can increase employees’ income by as much as 40-50%. However, a pay plan that could vary so widely month-to-month isn’t everybody’s cup of tea.
But it all works out in the end, Williams and Scott say: Total compensation packages beat the market by 20% to 50%. And cash flow works out better, too: “In a lean month, we have sufficient revenue to cover the core expense ‘nut’ without depleting savings or relying on borrowed operational funds.”
Sounds like a winner to us. Could such a compensation strategy work for your organization?