Free Advice

 Risk & Reward

A wedding and a business lesson

We attended a wedding in Denmark. The bride, Marianne, was a Rotary exchange student of ours 14 years ago, the relationship was/is strong and we promised her we would come to her wedding. A traditional Danish wedding is quite an experience. The wedding was at 3 p.m. and the "party" (not the reception, the party) lasted until almost 3 a.m.

We stayed with Marianne's parents, who own a furniture manufacturing business. As I spoke to her dad, Freddy, about business and the Danish social structure a couple things came out. First, the taxes in Denmark, like a lot of European countries, are high. Very high. And they tax any and everything.

Second, these taxes provide an extensive social net. There are very few people in poverty and very few who are wealthy. The vast majority of the population is in the middle. They earn a good living, have a nice life style and will be taken care of in retirement.

A by-product of this high tax-high services system is there is very little incentive for people to take a risk. The rewards aren't there. Freddy told me it's tough to get good managers. The income tax rate is between 40% and 60%. Most people don't feel the extra responsibility and headaches are worth the 40-50% net take-home-pay increase.

Let's look at that risk-reward paradigm for three common functions in any business. How can you balance the risk and reward to grow your business?

Sales people

First, the sales department. Sales compensation plans are always a tough issue. The new salesperson wants and needs a base to survive while they build their customer base. They also want additional compensation for their increasing sales. This assumes a new sales person with a new territory. A new person with an established customer base is a different issue.

If the base is too high, there is no incentive to work harder. This produces the lazy (contented) salesperson. If they can't survive while they grow their book of business it's a lose-lose proposition. I can't discuss what makes the ideal sales compensation plan since all industries and firms are different. A good salesperson is one who wants the base to disappear, because there are generally higher rewards  in that situation. Rewards on the sales side are generally financial.

Management

This is the problem are in Denmark. Why have headaches for a low reward? First realize that some people just aren't cut out for management and responsibility. They may give 100%, be diligent, love their job and want to see the company be successful, but the thought of taking on more isn't worth almost any pay increase.

Business owners have a hard time understanding this. Yet it's very common. Reward in the management area, more than in sales, is a often more than financial incentives. There are advancement issues, the desire to learn and gain experience and satisfaction of reaching a goal (perhaps this is where ego comes in). A good manager, like a good salesperson, thrives in beating their challenges. Rewards in management are both financial and responsibility based.

Ownership

The ultimate "The buck stops here" position. When you own a business you're responsible for sales, management, HR, production and delivery, marketing and financial. In my business buying seminar I always ask the attendees why they want to own a business. The answers always include control, independence, not work for someone else (and make profits for them) as well as more income and an increasing net worth.

My friend Freddy is very successful in a system that does not encourage success of this nature (I'm not saying they discourage it, but the system is set-up to keep people from falling through vs. being set-up to have many make it to the top). Whether you're a one person firm or have dozens, or hundreds, of employees the rewards, financial and otherwise, are what keep you going. The rewards to owners are financial, responsibility and lifestyle based.

The key is knowing what risks are "appropriate" for the position and the reward that will keep you and your employees motivated. Important, not impossible, and not as easy as it sounds. If it was easy, everyone would be successful.

© Copyright John Martinka 2002. All rights reserved.