7 things every owner needs to know about payroll management

Payroll is probably your biggest expense.

Business owners need to find a balance between keeping payroll within budget and hiring talented people. If you’re too cheap, you can’t attract great people, and if you’re too generous, the business won’t survive.

Here’s everything I’ve learned over the last 15 years:

1. Set a target payroll percentage & build a sales plan to hit it

What should payroll be as a percentage of sales?

I define “payroll” as gross wages paid to the employees. I don’t include paid time off, health insurance, 401k, or other benefits that vary.

For example, our TARGET is 25%

The great thing about franchising is that you can benchmark against other owners. For example, if you’re at 30%, and neighboring franchisees are at 25%, you’ll know you’re leaving money on the table.

Here’s why it matters:

Let’s say payroll is $5k/week. At 25%, you need to do $20k/week in sales to be profitable. But if sales are only $15k, you spend 33% on payroll.

That extra 8% comes straight out of profits. In this case, you must cut $1,200 in payroll or increase sales by $5k/week to get back to 25%.

2. Project sales & base hiring on that

Before hiring, you need a clear sales forecast.

• Is your business seasonal?
• What’s our sales pipeline now?
• How much revenue can our current team handle?
• If we hit our targets, what will sales be in 30/60/90 days?

Build a staffing plan to match. But be conservative. Hire just enough to meet demand without sacrificing service. You can always add more later.

3. Replace low performers

High payroll costs often come from not having the right people.

Before eliminating positions, see if your existing people are performing well.

• Train them on your systems & hold them accountable
• Replace under-performers with A-players
• Shift workloads to balance over/understaffing
• Boost productivity with incentives (more on that next)

Often, this leads to your team and you making more money.

4. Tie comp to measurable performance

As a business owner, you want to tie labor costs to performance.

High performers should make more than low performers.

This also makes your payroll more variable (tied to sales), which is better for you as the owner. Some ways we do it:

• Hourly rate + commission
• Salary + % of gross profit
• Profit share

5. Find the balance between base & bonus for each role

70 base/30 bonus is a good rule of thumb for us.

For example, a manager making $100k may have a $70k salary and earn $30k through a bonus.

The lower the base, the bigger the upside. The higher the base, the lower the upside.

I have friends in the roofing business who pay sales reps 100% commission. Some employees make almost nothing. Others are making $200k, $300k, $400k+

Comp plan structure is a huge discussion point among franchisees.

6. Make sure you incentivize the right behaviors

“Show me the incentive and I’ll show you the outcome.” – Charlie Munger

Be careful what you bonus people on.

If you only reward people for speed, quality may slip. If you pay managers just on top-line revenue, they may skimp on gross profit.

We learned this the hard way and have made adjustments.

7. Get input from other owners

With all these numbers, benchmarking is your best friend.

Ask other franchisees:

• What’s your payroll as a % of sales?
• What’s your staffing model?
• What are your base & incentive rates?
• How much are you paying per role?

This will show you if you’re over/under market on certain positions.

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Cheers,

Brian Beers