September 1, 2014

Profitable goals using a rewards-first approach, Part 2


Last month we looked at how to set goals for sales staff. Using their rewards as the foundation for their sales goals, the sales goal, and why we need it hit, is made crystal clear for both parties. You need your staff to hit a certain sales goal to be worth the wages you pay them. Good people want to work for a company that can afford them opportunities for success. With a clear sales goal, their success is your success, and vice versa.

But selling the work is the easy part. It’s getting these jobs done on time, on budget, with as little warranty, fixes and re-work as possible — that’s the hard part. Right now, 95 per cent of your peers and your competitors pay staff by the hour, and that’s the end of the story. The more hours staff work, the more they get paid. But most staff have little, if any, idea, what they’re actually worth, and how much work they should be completing. Even worse, neither do most owners.

Setting goals for production staff won’t take much more time or effort than it did for your sales staff. In fact, it might even be easier. It’s important to remember that different types of work have different goal levels. A maintenance foreman can’t drive the same annual revenue as a construction/install foreman. The install foreman installs materials worth $100,000 or more, while the maintenance foreman is limited, in most cases, to just labour hours. If your business performs different types of work, such as construction, maintenance or irrigation, each type of work should have its own benchmark for goals.

Step 1: Establish targets by division

If it’s your first time through this process, the easiest way to set realistic goals is by using last year’s numbers. Start with your sales, by division. It’s safe to leave snow revenue completely out of this process, as snow revenue is primarily dictated by weather.
Division Last year’s sales
Design-build 1,000,000
Maintenance $500,000
Now add one more piece of data. Add up the total wages paid to field staff; don’t count office or overhead staff here — include only the wages of staff who actually work on jobs. If you had some guys who bounced back and forth between divisions, do your best to guesstimate how much time they spent in each division, and divide their wage accordingly. Don’t let the fact that you don’t have these numbers separated to the penny stop you from  reaping the benefits of this process.

Once you have the total field staff wages for each division, divide the costs of labour by the sales to arrive at the ratio of wages to sales for each division.
Division Last year’s sales Last year’s field payroll Field wage ratio
Design-build $1,000,000 $240,000 24%
Maintenance $500,000 $175,000 32%
Your numbers may differ than the ones above, but those are typical numbers for both those divisions. (Note: maintenance ratios can differ significantly depending on how much enhancement work is included in maintenance revenue figures.)

Now, review your profitability last year. Were you happy with your profits? If so, those ratios from last year will likely serve your company well again. If you weren’t very profitable, you should either increase your sales goal, or reduce what you spend on wages to help improve your bottom line.

The owner of our sample company didn’t make much profit last year, and he’s got some changes in mind as well. He has the opportunity to hire a more skilled (and more expensive) foreman to replace a foreman who is not coming back. He would also like to give another construction foreman a raise. He doesn’t think he can sell any more maintenance work, so he reduces his payroll costs by $15k with the intention of getting the same work done more efficiently, with one less summer student.

His goals now appear below:
Division Forecast sales goal Forecast payroll Field wage ratio
Design-build $1,181,000 $260,000 22%
Maintenance $500,000 $160,000 32%

Step 2: Make company goals about the individual

With his labour ratios in place, our fictional owner calls that new, more expensive, construction foreman in for his hiring interview. He’s experienced, he’s worked for a few other good companies, but insists he needs to make $50k per year to take the job.

Is $50k too much? Is it too little? Can we afford it? All these questions can be answered easily using those ratios you calculated above.

First, we’ll do our best to estimate the total annual wages for the new foreman’s crew. The foreman will be running a three-man crew for most of the year, but will probably have a fourth guy for some occasional larger jobs. We estimate his crew’s annual wages below:
Position Estimated hours Hourly wage Expected annual pay
Foreman 2,000 $25 $50,000
Lead hand 2,000 $17 $34,000
Labourer 1,800 $15 $27,000
Student/casual labour 400 $14 $5,600
Estimated annual payroll for crew $116,600
Their production goal is now simple. Just divide their wages by your division’s target labour ratio. The foreman’s production goal is: $116,600 divided by .22 = $530,000.

To be worth $50k a year, this foreman and his crew needs to complete $530,000 worth of landscape construction projects this year. In just a few minutes, we’ve created a clear, measurable production goal for the foreman, that relates directly to what he wants to earn. If he fails to hit his goal, or come reasonably close to it, the company can’t afford to pay him the wages he’s looking for.

Step 3: Measure and track progress

Don’t make the mistake of setting this goal, then never mentioning it again until the end of the year. That’s not going to help him hit the goal, and if he doesn’t hit the goal, you won’t make your profit! You all need to stay on top of where you’re at and where you’re trending. You can track your progress with a simple spreadsheet.

All you need to do is assign each invoice (or split it up by line item, if it’s a big job) to the foreman that completed the job.
Invoice number Line Item Amount Foreman
1159 All $6,500 Greg
1160 Patio $4,100 Pedro
1160 Planting $6,200 Kate
1164 All $12,200 Kate
1168 All $8,100 Pedro
It really can’t get much easier than that. Take an hour at the end of each month to allocate each invoice (or line item) to your foremen, then you can total how much invoiced revenue (production) each foreman has completed. It works for construction or maintenance and now you can monitor progress, and results at the end of the year, using real numbers instead of emotions and feelings.

If your foremen want to make more money, all they need to do is help you make more money, and when you’re both making more money, you’re both happy.
Mark Bradley is president of TBG Landscape and the Landscape Management Network (LMN), based in Ontario.