We had our annual employee benefits meeting the week before Thanksgiving. Andrew did this interview with me the day afterwards, and I thought it might be useful to share along with a written version below (so you can avoid my “Um’s” and throat clearing…
Long Term Employees are Important and Cost Efficient
Part of Bob’s continued ramblings.
The starting premise is that employees are the key to having a company, especially a software company that is continually evolving. And the longer employees stay, the more valuable they are because they become more and more efficient as employees grow their knowledge and careers. Replacing employees is costly to a business. The company loses the knowledge of the software they built, or the customers they served, or their accumulated domain knowledge. Plus, if you have good people, it is nice to have them hang around.
So our benefit and compensation plan is built with the idea that we want people to stick around a long time, The following are the key programs we have in place to provide the financial structure for this (although the cultural part is just as important that are encapsulated in our Guiding Principles).
Benefits
We have two key benefit programs – healthcare and our 401K plan.
The company pays for the healthcare program for employees and their families. It is a high deductible program, with a max out of pocket for employees of $2,500 for the individual and $5,000 for the family. To offset, this, we make a $2,000 contribution to all employee Health Savings Account. So for an employee, the max yearly out of pocket cost is $500 or $3,000 for their entire family. Most employees fortunately have lower annual costs than $2,000 so many have built up a saving balance in their HSA accounts, which they can manage themselves and contribute to. And it is very cost efficient for the company (at least as far as providing healthcare is concerned).
For employees who are covered by another insurance program, we pay a $2,000 bonus to them (although it does not have the same no tax advantage of an HSA), as well as the additional amount the insurance costs on their other plan for the employee. As an example, if Bob is covered by Marlise’s health insurance, but it costs Marlise an additional $100 per month to carry me on her insurance, then RunSignup pays Bob the $100 per month.
Our 401K plan is administered by Vanguard, which provides a wide range of options for employees to invest their money. Employees can make payroll deductions and the company matches contributions up to 4% of their compensation. We have 100% participation in our 401K plan, and it helps employees think of their long term savings plans.
Annual Budget Cycle
We begin our annual budget cycle starting in August and completed by our late October board meeting so we have full plans for 2024 approved as we head into the annual review and bonus season. It should be noted that we do track our performance on a monthly basis and adjust the original plan based on what is actually happening.
Growth of our total revenue is important as it determines how much money we have for increased costs in running the business (like healthcare and free email), new hires, and salary increases.
We will talk about the Performance Bonus and Profit Sharing Bonus program below, which are used at the end of the year so there is an impact on relative performance to plan based on how a year ends relative to the initial plan. This provides us financial flexibility to share success and failure as a team.
Annual Reviews
We like an annual review cycle that begins once the budget is set. Everyone gets reviewed in late November thru mid December. Managers get a budget for their departments in early November and get approval for those salary increases and performance bonuses based by mid November. We like the efficiency of an annual process so managers can think holistically and in a concentrated way. It also allows a manager to make sure employees within a job function are evaluated comparatively based on performance and contributions to the company.
The review is meant to be more of a conversation where the employee shares what went well and what they feel they could have improved, and a conversation about the future goals and what they need from the company to grow – whether that is different types of job challenges or perhaps education or learning projects.
Annual Salary Reviews
Salaries make up the bulk of the costs of our company. So the annual salary budget increase has to be offset by expected growth of the business. We need to have two basic things in mind when we allocate this budget – keeping up with and hopefully a bit ahead of inflation, and considering that employees are advancing their careers to higher levels of contribution to the company. We also consider the overall compensation by job type. As an example, great developers are costly in the job market, and we need to be competitive to hire and keep great developers. This is especially important to a software business like our, especially one that operates on a Product Led Growth model like we do.
Performance Bonuses
Performance bonuses are part of every employee compensation package. They are based on a combination of the salary, the level they are at within a job category, their level of contribution for the year, and the overall performance of the company. Most people in our company are meeting the expectations of their jobs and therefore are eligible for a “normal” performance bonus. If they did something exceptional in the year they might be eligible for something a bit more. Most of the variation will be if a person is underperforming, which fortunately is not frequent.
The biggest variability has to do with if the company misses our plan, as happened in 2020 and again in 2022. In 2020, we simply did not make enough money to hand out bonuses. In 2022, we significantly underperformed and performance bonuses overall were down 25%. This was largely due to our strategic mistake thinking that GiveSignup would grow more than it did. That was mostly my fault, so I did not get a bonus last year, as well as the executive team, who got bonuses that were below 50% of plan.
Profit Sharing Bonus
In 2023 we introduced the idea of a Profit Sharing bonus in addition to the others. We had a good year, where we performed above plan and switched to a company strategy of focusing on running a moderate growth, profitable company. So we will be sharing a % of the profits of the company with employees. This year it will amount to about 2% of salary depending on where we end up for the year. What is great about this program is if we overachieve plan, there is automatic sharing in the profit of the company. This helps customers because employees stay longer and can produce better software and provide better service.
Company Owned – All Employees are Owners
The final piece we have is that all employees receive stock options so they can have ownership in the company. This means that when our customers are talking with any of our employees, you are talking with owners. This means employees can benefit from dividend payments as we grow. It also ensures employees share in the growth in the value of those shares.
Summary
We think about keeping a balance between Employees, Owners and Customers – the far right virtuous cycle in our Guiding Principles. Taking care of employees is the lynchpin to our company’s success.
Also, Harvard Business Review had a good article comparing the total cost of labor between Costco (pays high) and WalMart (pays low), and that Costco’s total cost is actually lower because of the lower cost of turnover – https://hbr.org/2006/12/the-high-cost-of-low-wages.
