Justifying Your Pay – An Imperative for the COO and Every Employee

Posted on Posted in COO, HR

If your manager was faced with a force reduction decision, would he or she be able quantify your contribution and justify your position? In other words, does a cost-benefit analysis of your job result in a net positive? Even if it does, have you made the data necessary to prove it readily available?

In a period of high unemployment, outsourcing, cost-cutting and general economic uncertainty every employee needs to be keenly aware of their value to their organization. They should also be able to easily point to solid data that proves their worth. The ability to do this well, could make the difference between you being someone who is indispensable or someone holding a pink slip. If you are not your own best advocate, you should be.

If you’re a sales professional or product manager, it’s usually easy to calculate the revenue and gross profits attributable to your efforts. However, a COO and personnel in other operational positions need to maintain their own metrics such as productivity gains, cost savings, upsell revenue, or effective hourly rate. I figured this out on my first job out of college and I’ve carried this skill with me to this day (see some examples at the end of this post).

The COO is responsible for all internal operations including HR. Therefore, he or she is in a unique position to make sure that all managers and employees have clearly defined objectives along with appropriate metrics to measure their success and contribution towards fulfilling the company’s vision. At least one of those metrics should reveal an employee’s return on investment or their effective hourly rate.

For example, it is not uncommon for software developers to put in very long hours during the coding phase of their projects. If a top developer is earning $120,000 per year, a traditional analysis based on a 261 day work year (including paid holiday and PTO days) would show them as earning $57.50/hour. However, if they are typically putting in 10 hour days and, when deep into a development phase, up to 16 or 18 hour days, their effective hourly rate might be more like $38/hour.

Would knowing this allow you to hire a more expensive developer than you had budgeted for? When faced with a cost cutting decision, would it be cost effective to let go of a senior developer with longevity, simply because her salary is higher than other senior developers? Are you measuring how much effort your knowledge workers are actually expending? If one of your key developers was threatening to leave because he felt he could earn more someplace else and came to you with a similar analysis, would you simply say that $120,000 is the best we can do?

If you’re a COO you should be aware of your contribution to the bottom line as well. If you save the company $150,000 on advertising fees, purchase used furniture at $100 per workstation vs. new furniture for $2,000 per workstation, hire a PEO organization at $150 per employee per month vs. an HR manager, payroll specialist and support personnel at $400,000 per year* how would that affect your company’s cash flow and operating income? If your efficiency expertise adds 3% to 10% to net income, you should be able to document that for the CEO and the Board of Directors. You should also impress upon your direct reports and their employees to track similar metrics, because those also roll up into your net contribution.

A lot of Boards, investors, CEO’s and financial analysts put the bulk of their emphasis on revenues and gross margin when looking for the main contributors to a company’s success. That explains why sales professionals are often the most highly paid people in an organization. But some of the most successful companies take a more holistic approach and value the contribution of each person and function to the whole of the organization. Companies like Southwest Airline, GE and 3M look for efficiencies and cost saving measures throughout their operations. They measure and reward the top contributors wherever they may be. Your company should, too.

As the COO you should be leading the awareness of placing a monetary value on everyone’s efforts. You should be touting your own contributions, as well. Doing so is leading by example, and what better way to lead is there?

Examples of Justifying Your Pay
Every company or client that I have worked for has made a huge return on investment for having worked with me. I make it a point to track my accomplishments and tally my results at the end of each year. Here are some examples of “Justifying My Salary” chronicling my career path from an engineer to a consultant to a COO:

Justifying Your Annual Salary by January 31 Every Year
Plant managers of large manufacturing firms are justifiably skeptical of corporate engineers and managers descending on their factories from the company’s headquarters. Plant managers have P&L responsibility for their facility and don’t like engineers mucking around with processes, or managers imposing system-wide policy changes.

As a young engineer fresh out of college more than one plant manager rolled his eyes at me when I first walked in the door. My specialty was industrial noise control and I knew that the PM didn’t want some green kid telling him to put a box around his equipment or slowing down production. But I had a job to do, so I needed to show the PM that I was not just a corporate hack but someone who was there to help him.

Fortunately, I knew something that most plant managers didn’t. Noise is a by-product, and getting rid of it can sometimes lead to huge savings. When I’d first meet the PM, I always asked for a plan diagram of his factory and for permission to let me take a quick survey of the entire plant before I focused in on any specific problems. Using a sound level meter, I’d produce a color coded noise contour map which easily showed the worst problems as red colored contours. In addition to large problems like punch presses, saws, and furnaces, my initial maps always had a dozen or so small red circles which I knew were an indication of sound levels in excess of 105 decibels around a leak in a high pressure air hose (all manufacturing facilities use compressed air for material movement, production or cleanup). Leaking hoses and fittings cause air compressors to run more frequently in order to maintain pressure, and the excess compressor time costs $5,000 per year, per leak in energy consumption not to mention excess wear on the compressor itself. Replacing a leaking hose or fitting costs less than $100 in time and material. So, typically within 24 hours, I could show a PM how to save $60,000 or more per year and eliminate some of the worst noise sources in his or her factory. This one action would more than justify my trip to the factory and gained me instant credibility as an ally, not an expense.

Carrying this further, by January 31 of each year, after two or three plant trips, I could show my manager at the home office that I’d already saved the company hundreds of thousands of dollars, more than justifying my salary for the entire year!

Helping a Client Maintain a Partnership
My IT consulting company was engaged by a multinational freight forwarding company to develop a fully integrated online move management system. The company was well established and had recently acquired one of its large competitors. The new system was going to take two or more years to develop and fully deploy world-wide. We’d be consolidating various manual and automated systems, replacing the newly acquired company’s entire infrastructure and deploying a modernized IT backbone world-wide. The CEO and COO of the company were young executives representing the next generation to run this family owned private company. Our project was seen as a bold strategic exercise by the prior generation with a high price tag that would take several years to achieve payback.

About two months into the project the CEO and COO asked to meet with me about an important matter. One of their lines of business was providing logistical support and storage yards for the shipment of vehicles around the world under contract from a large multinational shipping company. My client was the largest of four subcontractors providing this service to the shipping company, responsible for over 70% of the vehicles moved and 100% of the information management. The information management was running on a PC based flat-file database program developed by an employee of my client who had little computer or programming experience. It had been refined over many years and was, in fact, doing the job. However, at the prodding of the other three logistical partners, the shipping company decided to have its IT department develop a modern supply chain management system with a relational database and internet backbone. This decision was made without my client’s knowledge and represented a significant threat to their business. At best, it would mean total loss of the information management revenue part of the business and, at worse, loss of part or all of the move management work. My client estimated the total loss would amount to multiple eight figures annually. They were very worried, hurt by what they felt was a betrayal of their partnership, and concerned at how such a loss might be perceived by their elders who had recently turned over operations of the business to this generation.

My client asked if I would conduct an assessment of their technology and present a report to the CEO of the shipping company to impress upon him that it was sound and that an upgrade was unnecessary. They felt that the CEO of the shipping company, who had been a long time partner and friend of their parents, was simply being misled by his IT managers.

Upon review of my client’s technology, I found that it was indeed outdated and I could not honestly report that an upgrade was not warranted. I proposed taking a different tact. I told my client to accept that the “ship had left the dock” and that they could not stop the shipping company from developing a new system. However, perhaps we could convince the CEO that his IT department was making a mistake by failing to include my client in the process. I said if we could get the CEO to understand that my client’s intellectual property was the enabler of this partnership, we might be able extract a licensing fee and/or an agreement that would lock in my client’s participation as their preferred partner in perpetuity.

I asked my client’s developer to give me a count of all the functions he’d programmed into his system. I didn’t care how complex or simple a function was, I simply wanted a count. The number was nearly 5,000. Then, I asked my client to arrange a meeting with the CEO of the shipping company and his IT staff. I prepped my client for the meeting telling them not to let their emotions get the best of them. They could not get angry with the CEO, because he was not a technologist and was likely just following the recommendation of his CIO and the other partners, who were in fact, competitors.

The meeting took place the following week, with the CEO and five of his direct reports flying in from the east coast or Sweden. Within minutes, the meeting got out of control when my client’s COO lashed out at the shipping company’s CEO for betraying them. The shipping company’s CIO escalated the anger and tension when he sharply criticized my client’s system as being “Mickey Mouse”. I called for a time out and everybody stood up and huddled into their own corners.

I walked up to the shipping company’s CEO and asked if he’d step out on the balcony with me to chat for a few minutes. Once we were outside, overlooking the San Francisco bay on a sunny California day, I asked him to excuse my client’s behavior as they were simply hurt by the situation. Next, I asked him what sort of estimate his CIO had given him for creating the new supply chain system. He said they estimated six months.

Then I told him how I became involved with the matter and how I agreed with his technical team that my client’s system was antiquated. I told him that I had already convinced my client that it was in everyone’s best interest to move to a new system, and that the transition be smooth and successful. However, I asked to arrange this meeting because we felt that he needed to know that making the unilateral decision to replace the system, leaving my client out of the process, would be a financial and operational mistake. I reminded him that my client had developed the existing system at their own expense for the benefit of the partnership. It had evolved over more than a decade and codified 5,000 unique business processes necessary to fulfill his contract to his auto suppliers. To think that his CIO’s team would be able to learn all that operational knowledge and reprogram all 5,000 functions in six months without my client’s help would be highly risky and likely to disrupt his ability to service his clients. I said that my client would be willing to license their intellectual property to his company in exchange for an annual fee and a guarantee that they would be a perpetual partner in this operation.

He thanked me, walked back into the conference room and asked everyone to sit down. He asked his CIO if he was aware of how many functions were needed to facilitate the supply chain system. The CIO said he did not have a count, but they were starting to gather requirements. That was all he had to hear. He commanded his team to draw up a licensing agreement to transfer my client’s technology and assured my client that their partnership would stand for as long as his company had the contracts with their customers. The meeting was over within one hour.

I saved my client tens of millions of dollars annually, essentially giving them an immediate payback on the internal move management system that we had been contracted for, as well as for any fees that we would ever be charging on any other project. Over the next few years we completed the move management system, identified ways to save over $2 million per year on communications costs and provided other benefits in operational costs and head count reduction.

How 2% Can Pay For Your Entire Existence
My most recent role was as COO of an Internet based consumer services company. The company was started by two young brothers who were 19 and 23 years old at the time, the youngest being a sophomore at Harvard when he launched the initial website. I was the second person hired after a person who was answering customer emails.

The company was self-funded and generating money by selling information to consumers. To drive consumers to our web site we relied on various marketing techniques including search engine marketing or SEM (some call this PPC or pay per click). SEM was our largest expense at first and all of the search engine companies were making daily charges to one of the brother’s credit card. Because the brothers had no credit history, we were hitting the card’s limit every couple days, which was becoming a cash flow problem as our spending increased. It also required a lot of my time because I was checking our credit card balance several times during the day and night, seven days a week and paying down the balance several times a week so that our SEM campaigns wouldn’t be halted.

We explained our dilemma to our largest search engine provider and convinced them to switch from billing our credit card to sending us a monthly invoice. Since our credit card merchant provider was wiring our revenue payments to us semi-monthly, paying the SEM charges once per month provided immediate relief to our cash-flow situation.

Our company was profitable from the get-go, growing 15% to 25% month to month during the first couple years and, after a few months, was starting to build a cash reserve. After a while, we had been proving to the search engine company that we were able to make our monthly payments, so I asked our representative if they would offer us 2% 10/net 30 terms. They refused to do so.

I knew that as we grew, our SEM expenditures were going to exceed seven figures and finding a way to reduce that expense would directly affect our profitability. Fortunately, cash back credit cards were starting to emerge and since the search engine companies accept credit cards, I figured let’s find a cash-back card and switch back to paying for SEM with it. Most card issuers offered 0.5% to 2% cash back, but limited the total eligible spend. I needed to find an issuing bank that would offer 2% cash-back, not cap our eligible spend, give us a high enough monthly limit to accommodate our current spend, and be willing to review our financial statements each quarter to increase our limits as we grew.

It took over a month of concerted effort, production of lots of financial information, a personal guarantee from the founders and staking my more than twenty-year squeaky-clean business reputation for never missing a payment to convince one issuer that our company was an acceptable risk. The card was issued and we switched all of our SEM spend to the new credit card. In addition, we started paying virtually anything that we can with this card including insurance premiums (GL and E&O), vendor purchases, rent, utilities, software, co-location fees, etc.

Fast forward, three years later, and our annual savings are approaching $200,000 per year and growing. The credit card company is delighted to have us as a client and being able to consolidate the bulk of our expense processing into one source has greatly simplified our accounting.

This one action, by itself, more than justifies any salary that I’ve taken out of the company. And it is just one of many examples that I can point to.

* including benefits, annual training, facilities

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