Which dollars count?

Money matters. Although social networking, creating a purpose in life and many other factors contribute to why people work, the primary reason is usually to ensure they have an income. But what is a “fair” income?

Another term for work is “Job”, as Robert Kiyosaki suggests is an abbreviation for Just Over Broke. Many people tend to spend everything that they earn, which is one reason why personal insolvencies are historically relatively proportionate between most occupations. It came as a surprise to me to read that many high paid occupations such as barristers have people filing for bankruptcy in the same ratio as lower income occupations. There are a few reasons for this:

  • “keeping up with the Jones’s” and peer group pressure
  • Developing buying habits commensurate with your income, so when earning more you go from home brand to fashion labels.
  • Incurring debt to fund lifestyle (expensive cars, more expensive property than the income sustains, spending too much on “luxuries”) – which takes a hit when income declines or debt catches up when interest rates increase.

Studies also show that wealthier people are not necessarily happier than poorer people. But wealthier people are generally more comfortable.

Over the past six months, there has been a gradual rise in companies going bust in non-essential consumer spending (mainly restaurants/cafes). Interestingly, personal and business bankruptcies dropped to a very low level during Covid19, and has remained there, so my feeling is that this is the early signs of a well overdue adjustment in our economy. Cost of living has exploded in the last 18 months, with worse pain to flow through to most of the population.

The primary income source for most people is paid employment, so indisputably remuneration and disposable income is a significant matter for most people. A big issue for most businesses is how they structure pay arrangements throughout their company, as it can have big impacts on the motivation and satisfaction levels of employees and the ability to retain talented people.

There is always a balance not only between what different people are paid, but also structuring the pay to drive the desired behaviour and results the business wants to achieve. A good way to demonstrate this is a real life example from a business I took a management role in many years ago.

There was a really good salesperson with a package consisting of a reasonable base salary and a monthly commission structure that was a percentage of his dollar sales value, giving a larger percentage as higher thresholds were reached. Not an unusual arrangement, and one that on the face of it encourages a drive to grow more sales.

However, this arrangement had several flaws:

  • The salesperson became good at loading up one sales month and starving the other. Every second month had very low sales, and then because of the threshold kicker, he brought orders forward or held them over to then have a ripper the alternate months. He was very good at playing the game.
  • It rewarded on the sales value but had no consideration to the profitability of the contracts. So he concentrated only on big contracts and easy wins, and undersold to make sure he won them. The business was a service provider, so he maximised the “sale” by locking in these low rates for up to 5 years (rather than 1 to 3, also reducing the work he had to do), thereby further boosting the “sales commission” calculation, meanwhile the company profits would deteriorate even further over the ensuing years. Even if the calculation was on profit (rather than sale), it still distorts where the effort is put and prioritisation of what is sold (for instance the company might prefer to sell lower margin items but with an income tail, whereas the remuneration might prioritise the initial sale; or costs/priorities get shuffled between sales).
  • This remuneration structure does nothing to encourage Team work. Being one of two industry dominant providers, the company was “automatically” on the tender panel for large (especially Government) contracts. We basically had a 50/50 chance (or maybe 1/3rd) on every contract we submitted on. By cutting the price of course our success probability was elevated. They were however time consuming submissions, so our Gun sales person was often given an assistant who worked equally hard. On the first contract of this type I saw with this company, our Gun’s commission for this one sale was nearly the same as the annual salary of the assistant. When the assistant came and asked me why our Gun had given him a bottle of scotch when we won the contract (obviously the assistant didn’t know about the remuneration structure), I have to say I struggled with the answer. He was getting paid more than his managers too, without the pressures of responsibilities.

The problem with the above is that if a remuneration package is out of kilter, it is very difficult to bring it back. Commission or bonus structures are usually well thought through at commencement, but there may be circumstances that change over time. In this case, the unintended consequences created more issues than it solved. Pay rises on the upside (like annual pay reviews) are very soon forgotten, but people will always remember cutting someone’s pay.

Basically since the start of Covid, there has been a massive decline in “salesmanship”. Having looked to buy a car recently, and it is clear that the supply chain disruptions have left a major hangover. Salespeople have become order takers. Lead times are in many cases still considerably longer than they have ever been, so the art of negotiation is lost. This is the price, take it or leave it, as they can’t deliver anyway.

In our case, spending money on a new car was a grudge purchase to start with (and I love cars…) in that we didn’t really want one but needed to change. It was not a nice experience. The sales rep was an enthusiastic new high achiever with clearly a good work ethic. When we arrived at 3.00pm for our booked test drive at 3.15pm on a Saturday, the poor rep was the only one serving a customer. What turned out to be the sales manager came up to us and rather than help by starting the drivers license process and getting the trade in valuation under way, he told us to simply wait. He then walked up to our sales rep and told him off for booking a test drive so late in the day when they close at 4.00pm. At 3.15pm we hit the road, arriving back at the premises at 3.45pm to find the bollards blocking off the entrance except for the width of the car and the sales manager and another person walking out bags in hand to their cars for the day. Not only was the quoted price on the new vehicle subject to change prior to the arrival of the car, despite us asking a few times, it took our sales rep about a week to get the trade in value from his manager.

When the complacency is set at the top, what hope do people like our young sales rep have to learn the old tricks of the trade? Now that the slowdown is commencing, there is going to be a frightening wake up call to many. Orders for cars (and talking to managers within the new earth moving equipment sector also) are now getting cancelled. It won’t be long and dealers will be back to having stock in the yard burning a hole in the business bottom line again. Whilst it is true that the internet has changed how people buy even large capital purchases, the customer service experience will once again come to the fore front, especially when the balance of power reverts back from the seller to the buyer.

Remuneration for many people is going to change back to a more balanced reward for results model. The “rivers of gold” will dry up for many businesses too. Wonder how many will be able to adjust back to having to do the hard yards?

(What prompted me to write this article was being out on the water and seeing one lonely person on board this private yacht. The article is a bit of a segway from this prompt, but he wasn’t working any harder than the many people I saw that day. Maybe he was working smarter. Money makes money too. It highlighted that what a person earns in a lot of cases increasingly doesn’t have a correlation to what they do.)

Words from the wise

“The harder you work, the luckier you get.” – Plato

“Rich people acquire assets. The poor and middle class acquire liabilities that they think are assets”. “An asset puts money in my pocket. A liability takes money out of my pocket.” – Robert Kiyosaki.

As always, Onwards and Upwards!

Fred Carlsson

General Manager


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