Peter Lohmann's Podcast
00:38:52 · Peter Lohmann, Adam Willis
[00:38:52] S1: Tell me about some creative compensation structures that didn't work out or that you considered and decided against. [00:39:05] S0: Ones that have not worked out. Originally, I I read a book called Compensation by Vern Harnish. It's somewhere up here. One of the ones that we had done was... And I spoke about this, and I need to retract it. But it was, like, always bonusing over year over year growth. And for the most part, when the company is growing... Well, let me give you some context. If Nestwell Property Management does a $100,000 in net income in 2025, and then in 2026, we do a 150,000 in net income, I was taking that 50 k and dividing it amongst the entire company. And that worked well when the company is growing. What really sucks is in 2027, instead of 150 k in net income, we only did 75 in net income. And the bonus pool, the pool of money that's eligible is only on year over year growth. And so I'm always protecting the house. I always have working capital. In the example I gave you, I always have a 100,000 of working capital because that's protected. We're only paying on upside. What really sucks is you have a remote team member in, you know, Spain, and they work them. They're itself to, like, the bone, and they just grind. But then we don't have a really great year, and the bonuses are only based off of year over year growth. It's really disincentivizing saying, sorry. There's nothing for you. [00:40:34] S1: Mhmm. I go bonus amount was smaller than last year is what you're saying.
00:40:34 · Peter Lohmann, Adam Willis
[00:40:34] S1: Mhmm. I go bonus amount was smaller than last year is what you're saying. [00:40:38] S0: Yeah. Meaning, it's only based on year over year growth. So if you [00:40:41] S1: do Oh, it a no growth. [00:40:42] S0: Okay. No growth. There's nothing. There's no growth. I mean, we've always been on the fortunate scale of, you know, of a hockey stick. We haven't had any bad years, but there have been years where it was like... Or quarters that weren't, like, hyper... That weren't prolific. Yeah. And that that sucks because that person is, you know, wanting to pay for their kid's school or buy a car or whatever. The other the other one that when you're basing it just off of the company's net income... Let's see. When you're basing it just off of net income, a lot of the times, these people do not have the means to really impact it. Right? So it's like that entry level individual contributor doesn't have the ability to pull Sure. Really big levers. Or I go out and I say, hey. We're doing m and a. I just spent a $500,000. I vaporized any [00:41:31] S1: I mean, I could have told you this was a bad idea before any of this, so you should have called me because it's clearly not a good idea.
00:41:31 · Peter Lohmann, Adam Willis
[00:41:31] S1: I mean, I could have told you this was a bad idea before any of this, so you should have called me because it's clearly not a good idea. [00:41:37] S0: Well, We have pivoted. Right? Like, you know, sometimes I just gotta go through it. I gotta put my hand on the stove. I got it. Yep. But but it's worked out well. We have different bonus schedules based off of contribution margin. Some people are not impacted at all, so they're protected. Their bonuses, their incentives are totally protected from any decision that I make that could drain, you know, net income and whatnot. But those that do have the means do participate with me on on growth and and bonuses are... Their bonuses are structured on their ability to pull really big levers.
00:42:11 · Peter Lohmann
[00:42:11] S1: Yeah. There's there's always tension when you talk about creative compensation. There's tension between complexity and sort of susceptibility to gaming or outside factors and simplicity. So the ideal compensation structure would be dead simple to understand by anybody, impossible to game, and directly correlated with the individual's performance. Right? That's essentially impossible. So everything we're doing is is trade offs off of that, like, perfect compensation arrangement. Where I've landed on all this, and you can tell me if you agree, is, like, for for most team members, so non leadership, you you... It has to be unbelievably basic and simple. And the the simpler, the better. So, obviously, they're making hourly or or salary. And then what we do is year end, there's a bonus, and it's it's it's like a single digit percent... Percentage of their base salary that they earned that year. So if they came in halfway through the year, then it would be half of, you know, a full time person making the same amount. And then it... It's like... And then I tweak it up or down a little bit just depending on their performance or their, yeah, their performance for that year. So let's just pretend it's 2% of their salary. If I think they did a great job that year, really carried their department or showed a lot of growth and and jumped in and solved some stuff for us. Maybe I bump it to 3% or two and a half percent. Or, usually, I won't go below, like, whatever our base is. And that's pretty much it because I think if you were to try and, like, introduce all these complicated structures, now you're having all these arguments about, like, well, you know, I saw you got a new car. Was that coming out of the net income for the company? Like, well, you know, just like you... You're immediately into the the weeds. So then on the leadership side, though, I think there's more room to be creative. Probably in a case by case basis, probably some type of profit sharing. I'm in favor of that over any type of equity. I think with equity, people, a, don't really understand it, b, are suspicious of how it's calculated, c, they're not... They don't they don't properly value it. So, like, if you were to grant somebody 5% of... 5% equity in your business, right, for for you, Adam, would be, like, an unbelievable, like, giveaway. Mhmm.
00:44:25 · Peter Lohmann
They would essentially value it at zero. I can just tell you that right now. Like, anyone who's not a business owner, they they assign no value to that. So if you were to ask them to buy into that, they would be shocked and offended, you know. And so just it's kinda apples and oranges when it comes to employees and business owners with equity. I think the closest we've come to that is, like, our... My compensation for years was tied to... As CEO was tied to revenue growth percent and profitability as a percent. And it was like a spreadsheet that was kinda like, you know, obviously, the higher the growth and the higher the margin, the more my bonus was as CEO. That was something my business partner and I agreed to. That worked well for us and has for many, many years. And so, I don't know. I I I admire people who wanna grant equity and stuff and and try and be really creative. Like, you always get into it when you're, like, trying to compensate salespeople. Like, you wanna come up with these complicated formulas of, like, okay. Well, if there's multiple units, then we do... It's multiple... There's a multiplier, but they have to stay for ninety days. But then if one of the properties turns out, we have to back that percent out. And you... Soon you're, like, you're you're so chasing your tail, and then then they're coming back. They're arguing with you about, like, well, this actually wasn't a qualified lead because we found out later, you know, so we shouldn't count against me. And Yeah. You know, they they messed up the onboarding, so it wasn't my fault.
00:45:56 · Adam Willis, Peter Lohmann
[00:45:56] S0: A 100%. We're we're in the middle of that right now. Yeah. Two two things. One, waiting till the end of the year to pay bonuses. I get it. I mean, that's when your fiscal year closes. That's when you are feeling generous because of the, you know, December, and, you know, that's just a a season of celebrating the wins and and abundance. Right? We do ours quarterly and... Because, you know, second quarter is hard. And so, we wanna acknowledge and compensate our team around that. The other thing was, like, there's some subjectivity to yours, you know, Peter, a little [00:46:28] S1: bit where it's like, well, you know, they [00:46:30] S0: really showed up for me this quarter. I'm like, what does... What the hell does that mean, Peter? [00:46:33] S1: I know. It's true. [00:46:34] S0: You're right. But but ours is the same. So I'm I'm with you. Our our bonus structure is 50% based of KPI performance. So, right, we have all these metrics. Are you doing your job well? Blah blah blah. 50% of our bonus based off of that. The other 25% is, like, peer review. So how are you showing up for your team members and your your supervisor? And so that's where it gets a little bit subjective is I'm sure they're all like, hey. I'll give you an a if you give me an a. Right? Like, duh. [00:47:01] S1: Horse trading.