MERRY CHRISTMAS AND a most emphatically happy New Year. Over the holidays I would hope you have some quiet time to think through your goals for next year. This is an extension of Contracting Management 101.
I continue to believe that you should operate to be almost obscenely profitable but honestly earned. It is not enough that you pay yourself a living wage or even an above-average wage or an outrageous wage. As a business, you must also generate a respectable profit on your investment.
If it happens you are the only stockholder, then the profits will flow to you as that single owner. It is hard to defend unusually high compensation, however, when involved in an IRS audit, if there are no profits to prove your management talents are worth your generous wage.
You, and each member of your family involved in the business, should be paid a competitive wage for the work product each delivers. If a member of the family (and this quite frequently is the spouse) keeps the books and answers the telephone, that person should be compensated individually for that work rather than have the compensation folded into one lump sum paid to the “Big Kahuna.” It is a mark of a successful business if you can afford to pay your family members for the work they do in the business rather than considering them as slaves, indentured servants or members of an unsuccessful commune.
I realize when you make profits you must report these profits as income and pay taxes. I feel sorry for those business people who think that their main mission in life is to conceal earnings and thus avoid paying taxes. Taxes are the price of admission that we all must pay for the privilege of participating in the economy of this wonderful nation.
You should pay taxes. The more money you make, the more taxes you will pay and the more money you get to keep. Every time you move up a tax bracket, you move up an income bracket.
If you observe people doing clever things to avoid paying taxes, and you can prove it, turn their sorry butts in and collect whatever bounty the IRS may be paying for this good deed. Last time I checked that amount could be up to 10% of the recovered funds. Every time somebody avoids paying taxes dishonestly they reach into the pockets of all who operate honorably and honestly.
To be highly profitable you need a small group of top-notch players on your team. You can’t do it alone. You must find people to help you to grow and to manage, and you must be willing to compensate them for their superior productivity.
It is no different in your business than dealing with the maitre d’ at fine restaurants. “Thanks” is a gentle statement of appreciation, but if you have money in your hand when you thank the maitre d’, you have indexed your level of appreciation in an effective and positive manner.
It matters little whether you are union or nonunion. What does matter is that you operate more efficiently than any of your competitors. Where ownership becomes preoccupied with upward striving (high society stuff in the community or in national associations) rather than leading the team effort to excel, unions do become an effective way to get management’s attention.
Whether union or nonunion it is important that you insist that your employees do the best work, do it faster and are compensated better than with any other contractor in the area. You must never let employee performance or employee compensation be based on the slowest mechanic.
The priorities for growth have not changed.
No. 1 - Develop the reputation that you are the best place to work in town. This includes higher pay, better fringes and benefits than any other shop in town. This reputation for rewarding employees is a powerful magnet that will attract prospective new employees to your door asking if you have any openings on your team.
Finding good people is always harder than having good people find you. Build your reputation for hiring exceptional people and rewarding them exceptionally and good people will come.
No. 2 - I strongly believe you should consider operating as a Subchapter S corporation. This is not a do-it-yourself project and certainly not one where you should look to me for your advice. Get a referral from your CPA or your banker and do it right the first time.
Several thoughts for your consideration: There must be a reasonable way for the corporation to buy back stock from employees who are no longer actively working. There must be an agreed method of valuation of the stock that is reasonable and fair and a well-defined buy/sell agreement if stockholders fall out of love or leave active employment.
There is no substitute for knowing the rules of the game before the first shuffle of the cards.
Next month I intend to continue this refresher with more thoughts on compensation and incentives. Your assignment is to identify all employees who you think are overpaid and to review what you can do about that.
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