When Max Borges started hiring at his namesake public relations agency in Miami in one of his biggest challenges was figuring out how to incentivize employees to take on more responsibility.
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His solution: a pay structure in which employees could double and even triple their salaries based on how motivated they are to service clients.
"I came up with the idea to pay my employees a percentage of client billings they were responsible for," said Borges, founder of the Max Borges Agency.
The pay structure incentivizes employees and holds them accountable for their performance. "At my agency, if you lose a client, you get a cut on the next paycheck. It causes people on the front line to be accountable for how to save the business. They are looking for ways to be more efficient, handle as many clients as possible and do good work so they don't lose clients," said Borges.
Most of Borges’ employees are paid under a percentage of client billings structure. These employees are paid a low base salary and are given the opportunity to increase their pay once their percentage of billings exceeds their salary.
For example, an employee with a starting salary of $30,000 is assigned an account which brings in $120,000 a year for the company: If that employee gets 25% of the billings, that means she has generated $30,000. However, because this amount does not exceed her salary, she is not given additional compensation for this client. The additional compensation kicks in on the next account. If the second account is also worth $120,000, then the employee’s salary jumps from $30,000 to $60,000. If she were to lose one of the two clients, her pay would go back down to $30,000.
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Mark Olson, an MBA grad, started working at Max Borges four years ago, and has progressed through company ranks from account executive to account manager and currently serves as account director. His salary increased from $40,000 to more than $100,000 during this time.
“The overwhelming benefit is there is no cap on your success. It is completely driven by your work ethic,” said Olson, “Everything in our company is based around efficiency.”
Despite having lost clients, Olson said that his pay rarely went down for more than one pay period. “When I lost a client I usually gained a higher retainer client,” recalled Olson.
Borges maintains that his company's success and employee job satisfaction is linked to the pay structure. For the last two years Max Borges Agency has been a part of INC5000's fastest growing companies.
While it's tempting for other small business owners to want to replicate Borges’ success, there are precautions a business owner should undertake before revamping pay structures.
Dave Klasing, founder of The Tax Law Office of David W. Klasing, warned that entrepreneurs may find themselves in a nasty situation if they don't familiarize themselves with industry regulations for pay structures.
"Write up a version of the plan and submit it for approval to the Division of Labor Standards Board or hire an employment law specialist," recommended Klasing.
Small business owners need to structure the plan in a way that is easy to monitor, advised Tae Macias, founder of Padgett Business Services in Los Angeles.
"Make sure that you have a reporting system capable of tracking the billing and staff capable of administering and getting the payroll out.” She also said owners need to determine whether the pay plan will be based on a simple percentage or have a base salary with an added percentage.
"To keep the plan fair, it needs to be complex, but the more complex it is the harder it is to track and administer."
Business owners should also make sure employees understand the nuances of the pay structure. "Entrepreneurs need to clearly explain to employees how this will be structured in a way that illustrates the upside," Macias recommended. "They should put the plan in writing to avoid litigation down the line and they should make sure employees understand the lag time between when sales are billed and when they end up in a pay check."
For employees, this pay structure can also result in surprises come tax season. "With a fluctuating paycheck employees will have to make sure their taxes are not over or under withheld," said Macias.
Klasing warned that one of the downfalls of percentage of billings is how much access employees will have to the company’s balance sheet.
"This structure forces you to open your books to your employees," said Klasing. "Every employee will want to check and verify and you will have to show them."