December, 2006

Measure First, Advance Later

If you’re not setting performance-based conditions of employment, you’ll soon be unable to compete.

By Bill Lee

Anyone living on this planet knows that the Japanese system—if not broken—is in serious need of repair.  The nenkojoretsu system (the literal translation is “years-merit-order”) channels millions of workers in an orderly, predictable way through the corporate system.

Examples of the nenkojoretsu system:

• Longevity determines a worker’s rank in the organization.

• Competence is equated with age.

• Experience counts more than expertise.

• Each spring, and with no explanation, workers receive slips of paper advising them of nearly identical raises.

• During the first 15 years with their respective company, workers receive promotions regardless of ability.

• The best indication of high performance:  Working long hours.

• Workers are never told where they stand; their performance is not measured.  Workers must sense how they are doing by how they are treated in after-work drinking

• sessions with coworkers.

Result: Japanese payrolls are bloated with 2 million to 5 million under-utilized workers. Companies’ operating expenses are so high that they can no longer compete in a fast-changing world market that demands flexibility.  The time for change has come for Japanese businesses.

Compensate for Results

In a lot of lumberyards, many of the business practices are identical to those in Japan. It’s not at all unusual to visit large and seemingly progressive building material dealers and find compensation systems in place that are heavily based on management discretion:

• No merit-based pay.

• No job descriptions.

• No measurements.

• No formal performance reviews.

• No minimum conditions of employment.

• No guidelines for overtime pay.

Management has always been a tough job, but the most profitable companies I visit have managers who are goal-oriented; they set strict standards and reward the employees who meet and exceed those standards. 

The most effective managers have the reputation for being tough, but fair.  Employees who are just “holding on” are not tolerated.

Many managers who are critical of our government’s entitlement programs are equally guilty of tolerating them within their own companies. 

Ask yourself these questions: 

• How many of my employees who received raises in 2006 actually deserved them? 

• How many of the employees who are currently on my payroll have I given up on and should replace?

• How many of my current managers earned their promotion as a result of longevity rather than merit?

• How many of my current managers have stopped growing?

Bloated payrolls will eventually lead to financial disaster in any industry. Our industry’s performance standards of just five years ago are no longer adequate for dealers to effectively compete, especially in large metro areas.

Our initial research on productivity was completed in 1988. At that time, we found that $55,000 in gross profit per full-time-equivalent employee to be optimal. 

So far in 2006, we have found 56 companies in our industry that are achieving more than $100,000 in gross profit per full-time-equivalent employee. And the new record: an incredible $176,000.

Change is no longer a choice

If you’re not setting performance-based conditions of employment in your organization, you will soon find yourself unable to compete, especially on the highly competitive jobs: the gross profit you are able to generate will simply be inadequate to cover your cost of doing business.