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How Production-Based Pay Works

We are all familiar with a "pay-per-hour" pay structure (like how we pay Base Wages here), and, unfortunately for most employees, it has become the singular standard by which they measure their value to a business. But is that True?


IF it were true, then you could lay it out in a Formula like this:


Time = Value

But if you think about it from the Customer's perspective (the perspective that matters), it cannot be true. Why? Well, put yourself in the Customer's shoes.

  1. You want your concrete floor done.

  2. You want to know (and NEED to know) how much it will cost BEFORE you agree to have it done, right? You wouldn't just drop off your car at a random mechanic shop and say "hey guys, fix it and I don't care how much it costs" would you? (Side note: if you would, we want to get your number).

  3. You EXPECT to get, at the very least, a reasonable estimate, and preferably, a Quote which guarantees that this is all you will be expected to pay (which is what we give our customers here).

Imagine that you got a quote for $320 from the Auto Repair shop. The next day, they call and say "Ok, we are ready for you to come pick it up and pay the bill." When you arrive, they hand you the bill for $320, but your car is still in pieces. Would you pay it? Of course not.

You would probably look at them as if they had lost their minds and say "but you're not done! My car isn't put back together!" If their response was "yeah, we spent more time on the repair than we estimated, so we ran out of hours before we got it put back together." Would you pay the bill? Nope. You'd probably say something like "well, how is that MY problem?"


What you have just done is defined THE formula upon which your agreement with the Repair shop was based. The correct one. It was NOT an agreement in which Hours = Value. The variable (unknown) of Time is a Risk that Customers are not willing to take. Nor should they. Therefore, the correct formula looks like this:


Production (Thing Produced) = Value

So, once you look at it from the Customer's viewpoint, then you can begin to place yourself in the right slot in that equation.

IF Production is where the Value is (because that is the ONLY thing the customer is going to measure before handing over the money), then you can begin to evaluate How you get paid for whatever portion of that Production was derived from YOUR effort.

Its not that Time (our personal hours involved in the Production) is not a factor in the equation. It most certainly IS a factor. But only on OUR side of the equation, because we Quoted the Customer based on a Thing Produced. Not Time to produce it. We effectively removed the Risk of Time from the Customer's side of the equation (just like you expect when you go to the repair shop). And, by default, we then assume the Risk of Time.

OUR time matters, therefore, because IT IS A VARIABLE. If we spend 80 hours of our Time in Production to get the Value the customer has agreed to pay, then Thing-Produced divided by 80 will allow us to "measure" our Time against the Value from the Customer. And, obviously, if we only spend 40 hours of our Time in Production, then the Value of our Time just doubled in that equation, without changing the fixed Value on the Customer side.

Now we are modifying one side of the equation. And it looks like this:


Production / Time = Value


Production-based pay might not appear so straightforward at first. But once you understand the reality that ALL pay is Production-based (whether you "realize" it our not), and you understand the starting point of the formula from the Customer's perspective, then it can start to make sense for you.


In this article we will cover what production-based pay is, what are the numbers behind it and some examples of the pay you can expect here at Bel Covo. But first, its important to understand why we chose a production based pay system over the typical hourly-pay-only format.



The Drawbacks of Hourly Pay


Raises don't reflect actual contribution

Suppose you start a new job at $10/hr, and after 3 months, you get a dollar raise. That one dollar is 10% of the original $10 hourly rate, but did you only get 10% better at your job? Its more likely that your production and efficiency doubled or tripled what it was when you first started, and in all but the simplest of jobs, it should continue to increase for the first year or two.


Doesn't happen frequently enough

Typical raises are given based on performance reviews that happen at regular, scheduled intervals. While the bulk of your increase in performance could happen one month, it could be months before it is considered in a performance review. By then details can get fuzzy, and during that time, you have to continue to improve only in good faith that the the true weight of your continued performance will be seen and fairly rewarded.


Cannot go backwards or be redirected when needed

For this one, lets assume you are not the only worker but instead frequently interact with other coworkers, one of which started working one year ago just like you. During that time, both of you were equal in reliability and ability to learn, and have received sizeable raises. However, your coworker's reliability and performance has changed, be it from a changed personal life or simply from an attitude change towards the company. You are frequently the only one who can be trusted to show up on time and to perform the work properly, free of distractions that affect your focus, which means in one way or another, you are picking up some or all of the slack left by your coworker. Typically, this is solved by the company mediating, disciplining and eventually firing your co-worker once they realize what is going on during a quarterly performance review, and you are in no way monetarily rewarded for doing your job better than your co-worker did. With performance-based pay, More leeway can be given for an experienced worker to temporarily work at the level of an unexperienced worker because he gets paid the bulk of his pay according to his production.

Additionally, when pay is tied to production, any slack that you pick up from him during the process is more pay into your pocket, at the cost of little to no additional hours from you.


Distracts from the production that actually makes money

Perhaps the greatest drawback of hourly pay is the mental perception it creates that hourly attendance is all it takes to earn a paycheck. In reality, regardless of how its paid, the money a company pays in wages first comes from a customer that paid for something to be produced. Without that production, the company cannot expect the customer to pay, and without that money, there is no business. This happens more than you would think, and with the proper focus placed on production being the key to steady and greater pay, there are less times when money leftover for bonuses instead goes to the guys who know how to 'milk the clock' the best.


There is a second issue that comes from associating an employee's deserved money only to an hourly pay. From the manager's or supervisor's position, doing so might encourage them to see their role as managing your time and paying themselves for all of the resulting extra money from extra production, leaving your earnings down simply to per hour pay and a raise when appropriate. The reality here is that we are all in charge of, and paid for, our own production, directly or not. Keeping a focus on production as the source of money helps keep it clear that the person who produced the money gets the money.


Production Based Pay


Terminology

Don't be daunted. These terms are kept short and sweet, but you need to know them here and now because they are mentioned often below.

Base Wages

Per hour pay that is attributed to a job but still paid out every pay cycle. Includes regular time and overtime.

Ex: 40hrs @ $10/hr = $400

Labor Budget

Budget Leftover


How the Money Flows



Every job/project has a FIXED labor cost associated with it. This is the Labor Budget, and all labor-related costs are deducted from it. This includes Base Wages, mileage reimbursements, and payroll tax. This amount, after the listed deductions, is what is called the Budget Leftover.


After a job is complete, the Budget leftover is split in half, 50% to the installer and 50% to the supervisors. The supervisors split their pool amongst each other based off of a fixed percent. The installers spilt their pool based on the proportional amount of hours they worked on the job. Finally, a self-sufficiency percentage value is applied to any installer that is still in training. A 75% self-sufficient installer will see 25% of their bonus get split by all of the 100% self-sufficient installers on the job. This is to reflect the new installer temporarily requiring the partial time and focus of other installers on the job until he can do his job productively and without the frequent attention of his peers (who all have a vested interest in him being just as fast and effective as the rest of them). The final bonus shows up on the next paycheck as a gross amount that is subject to the employee's income tax rate.


Why Production-Based Pay is Better

  • Those who produce the most get paid the most.

  • Those who produce the least get paid the least.

  • Money created from exceptional performance is not sucked up to the top ownership.

  • Management is encouraged to find the balance between heavy and light supervision.

  • More jobs and positions can be afforded at once.

  • Unproductive training periods cost less.

  • Trainees make more money according to their speed, not at a predetermined average speed.

  • Top-performing employees are much less affected monetarily by lower-performing employees.

  • Promotions are more common and come at a lower risk and expense.

  • Teamwork and communication comes naturally in order to make Budget Leftover as big as possible.

  • Greater transparency is given on where the money goes within the company.

  • All costs are extensively tracked and those who reduce costs reap the reward.

  • Entrepreneurial mindsets can be achieved without most of the entrepreneurial liabilities.



Woah, that was a lot of info! Feel free to comment with questions below.



To those of you who got all excited after reading this, we'd like to hear from you too!




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