Steve Farrell, president of The Farrell Co., Los Altos, Calif., pays his field crew a lower-than-average base salary, and they like it. That's because he then hands out yearly bonuses — big ones. Last year he distributed one that more than doubled one employee's salary.
The system provides an incentive for his crew to work hard, prevent mistakes, and stay at the company. “When things are hot and heavy, when everyone can bounce [to another company] for $1 more per hour, my people stay here,” he says. His crew makes $4 to $5 less per hour than their peers. Farrell pays himself with the same system. “That is incentive for me to keep projects efficient, effective, and profitable,” he says.
Farrell worked under this system in production housing. “They said, ‘Here's the project. You receive a certain amount to get it done. If you get it done faster, you will share in profits. If you race through and make mistakes, we have to subtract your mistakes,'” Farrell says.
He earmarks the total profit based on the previous year's results and then subtracts the cost of repairs, warranty work, and any mistakes made by the crews. Though some employees balk at this, he tells them the company is only as strong as its weakest part. He reviews the field crew annually using his own observations and feedback from his production managers. He decides what percentage of their wage they will receive based on this evaluation and on their longevity and position. Most bonuses range from 10% to 25% of the employee's annual wage.
There are several important considerations to keep in mind if this idea appeals to you. First, Farrell does not offer paid vacations or paid time off. His employees need to plan ahead and manage their money better than with an average salary. Second, because this is not an industry standard, you'll have to sell the system to potential hires. “We've lost people over the idea,” Farrell says. “Some buy in, some are curious, some are paycheck to paycheck so they go elsewhere.” Third, the owner must be able to accurately forecast finances and have steady profits. And last, if an owner wanted to try this system with an established company, their employees would have to take a temporary pay cut.