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Cost Per Unit of Productivity

Tuesday, June 21st, 2016
Posted in Advice by Joel Gross

When I worked as an employee at Visible Technologies, I thought to myself that if I ever owned a company that I would like to pay people based on actual work output rather than just for having their butt in a chair.

Now that I do run my own company, I have found this to be nearly impossible to do. Even my salespeople have a base salary. Everyone who works here is paid for the time they have their butt in a chair.

I would still like to change butt in chair time to paying for people’s actual productivity, but this is much harder than it initially looks.

Most employees themselves want the security of a regular fixed paycheck; I have found that any money paid that is not fixed each period is discounted significantly in people’s minds.  We do a generous monthly profit share, but people don’t factor this into their compensation when they think about it since it is variable.

From the perspective of the company itself, actually measuring true productivity that helps the bottom line is very difficult. Even our salespeople, who theoretically could just be paid on what they sell,  quite often do work outside of just closing deals that helps the company (occasionally managing a client, or helping improve our systems and processes). For people like our accountant it can be very hard to assess how they impact the bottom line.

After much thought, I have found a system I call Cost Per Unit of Productivity or CPUPs to be reasonably effective. It’s not perfect since it requires subjective judgments of managers, but it formalizes that process a little bit.

How does Cost Per Unit of Productivity measurement work?

  1. List all employees and their accompanying rates of pay
  2. Find the most productive employee you have and rate them as a 100 so you have a benchmark to use.
  3. Talk to managers, other employees, and review any objective measures available and arrive at a comparison to the most productive person. If the most productive person is 10 times as productive as the least productive person, rate the least productive person a 10. Establish ratings for each person in your spreadsheet so that now you have 3 columns. Name, Pay, Productivity.
  4. Create a fourth column called CPUPs. Divide Productivity by Pay. This will result in a number that gives you how much you pay for each unit of productivity.
  5. Create a fifth column called special skills / circumstances and if a person has a unique skill that cannot be found elsewhere or if there is some special circumstance make note of it here.
  6. Sort the columns by CPUPs. Those with the lowest cost per productivity are those most deserving of raises. Look at them closely for increases. Those with the highest cost per unit of productivity should be considered for termination unless they have special skills – they are likely the worst employees you have.
  7. Talk to the leaders in your company before taking any action on the information you found above and consider it for at least a few days then make your moves.

I have used this informally through the last few years of running my company, and formally once about a year ago. When I used it formally, I was a bit surprised by the results, but I talked with my advisers and managers and they recommended to move forward with the raises for the people at the lowest cost per unit of productivity and terminations for the highest cost per unit of productivity and I did so. The result was that the next six months were the most profitable and successful months the company has ever had.

I have been mostly focused on growth and improving our systems over the last few months and not on cost per unit of productivity. As a result, our profit margins have narrowed. I am about to use this methodology again to make adjustments to our team, so we will see if the methodology continues to work as well as it did the first time around.