Kill the hourly wage

In a previous post, I discussed why CEO compensation should be in the millions. However, the article did not address the disparity between executive and worker pay. Well, here's how to bridge and narrow the gap: kill the hourly wage.

Hourly wages worked well for a manufacturing economy. They allowed organizations to break productivity into easily measurable units. To measure productivity in a manufacturing economy, organizations simple divide input into output to get a quantitative figure. When wages can be broken into hours, hourly input dollars could be divided into hourly output product values to get hourly productivity per worker.

The measure of success in a mentisfacturing economy distorts this formula. You see, when service-centered economies and organizations take a look at input, the speed of the flow of ideas doesn't require hours to bring about multi-million dollar results. Some of the most cost saving measures an organization can take can be conceived in minutes.

For example, a client was in the process of shuttering its business thanks to the 2007 mortgage defaults. During a conversation about how best to fold the company, I asked the leadership to stop the process. They had invested millions in developing technology, systems, processes, and people to deliver their organization's services. They did not have to close their doors, no matter what analysts said. With a bit of creative thinking, I suggested, they could re-purpose those investments and assets to launch new services and recover their losses.

That two-minute bit of advice combined with a four-hour strategy session led to a business plan revamp and relaunch -- and more than $50 million in investment.

What would advice like that be worth to your organization?

Charging by the hour for ideas that are backed by years of experience, personal knowledge, problem solving skills, and collaboration is ridiculous in a mentisfacturing economy. When more organizations are making things with their minds instead of their hands, the time to put together products and services is exponentially reduced. Service industries continue to grow while contributions of goods-based industries to our national GDP are falling. So how do you compensate an employee, vendor, or consultant who takes 3 minutes to explain an idea that brings your organization $50 million in investment and $100 million in revenue over the next two years?

I recommend killing the hourly fee/wage and replacing it with a base salary or flat fee for services. For internal compensation, handsomely reward your employees with a variable value-based compensation model that shares a percentage of the savings or revenue based on the contributions they make to the organization. For example, if your receptionist answers the phone from 9am to 5pm, provide him with a base salary to cover the basic skills and time needed to greet customers and direct calls to the appropriate extension. But if that receptionist happens to handle a customer complaint and prevents a $400,000 per year customer from taking their business elsewhere, provide that person with a 5% customer value bonus ($20,000).

I know it might sound outrageous  at first glance -- receptionists don't receive $20,000 bonuses! But the only way to fill the wage gap is to shift compensation models from time-based to value-based. That process will take time for some organizations. For others, their enterprises are small enough to make compensation changes more quickly. The mentisfacturing economy requires that we reward people for the value they bring to organizations, not the time they put in at their desks.

For another example, one small business could not figure out why its bookkeeper wasn't producing results. The bookkeeper was on site for eight hours, two days a week. When the owner asked to see financial reports, the reports were little changed, if any, from week to week. After some discreet observation, the owner discovered that the bookkeeper often ran into difficult bookkeeping questions. Instead of actively pursuing answers, the bookkeeper sat quietly or sent text messages friends and family until time was up, filled out her timesheet, then left. Legally, the owner was obligated to pay the $55 hourly rate for the time spent on site though no results were produced. The hourly wage model rewarded an incompetent hire and sapped valuable financial resources from other areas of the organization. If the fee for service were value-based, the bookkeeper would have been compelled to produce results or would not have been compensated for the time wasted by both the company and the consultant.

You, too, can shift your compensation model from manufacturing to mentisfacturing. However, our public policies and labor laws need a lesson in intellectual value in the mentisfacturing economy. But your organization can make incremental changes that comply with current labor laws. Implement meaningful performance reward programs that provide compensation for goals reached, savings realized, and revenue generated. These rewards can be based on individuals, teams, departments -- or all of the above.

Base rewards on instant bottom line results for each employee's personal concerns. Cash bonuses mean more money for Junior's college fund and to pay outstanding bills. Additional vacation time means more time with the family and to spend time pursuing personal interests. Do not use "vapor pay" like stock options, futures, and programs that require being vested or could go away if they lose their jobs or the economy tanks. Long-term compensation models defeat the purpose of rewarding every day performance results.

In a mentisfacturing economy, the people, their ideas, and the results they bring override the importance of butts in seats. Just like executives.