Matters Column

Got a small job? Hire an appropriately sized firm

January 20, 2017
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What should you expect when you buy someone's time? The concept of hourly compensation is going to become more urgent as we go through another industrial revolution.

When I graduated from high school in 1960, the auto factories around Flint compensated based on an hourly rate, salaried and piece work. Manufacturing processes were labor intensive, and so hourly compensation worked quite well. Salaried employees generally were office workers who did not participate in the manufacturing process. Piece work generally was applied to simple processes on small parts. With the manufacturing processes at the time, the wage calculation was utilitarian.

Then things started to evolve due to computers. I was a CPA for 40 years. In 1968, there were no calculators, copiers or computers. If you made a mistake you threw out whatever you had on that page and started over. You could not erase carbon paper. Today, you do the complete tax return on a computer. The computations are done for you. A mistake is corrected by deleting and re-entering. Totals are forwarded from supporting schedules, and the computations and carryovers almost are 100 percent correct. Entering the right information and knowing how to operate the software almost guarantees a correct return.

I think I was making $150 a week at that time. Given the tools today, how productive could you be? Today, one person with a laptop and good software can produce easily 10 times what a preparer could in 1967. Hourly pay makes little sense, because the skilled person can produce so much more than an unskilled person.

Productivity and results are the only sensible method of compensation.

The American auto industry almost died in large part due to using hours in the plant as a measure of worth. One of my younger brothers has a friend who retired from GM. He is proud of the fact he barely ever worked there. He was employed there; he just never worked there.   

So, one person in the plant produces while another sleeps off a hangover or smokes a joint. Both get paid the same. If you think I am exaggerating or being too harsh, read "Rivethead" by Ben Hamper, a Buick employee in the 1970s.

Commissions, piece work, productivity and results are the only measure of a person's worth to an entity. Hourly pay is meaningless because it is no measure of usefulness. Then you have time and a half. That means in many cases, the people who were not productive in 40 hours are compensated one and a half times more to be ineffective for a longer period of time. 

This concept does not just apply to manufacturing. If you employ CPAs, attorneys, architects, etc. given their rates, things can get really ugly.

We picked up a large client one time because their previous accountant billed them to correct an error the firm had made. The former client inquired as to why he should have to pay to have the firm’s error corrected. The answer was the firm had to expend a certain number of hours to correct the problem, and who else could you bill for those hours? How absurd.

An attorney told me years ago he had a target of billable hours per day. My first question was what if you don't have enough work to justify the hours. No answer. I have seen horrendous bills run up with law firms using the wrong skills for the job. You don't want a divorce lawyer doing your corporate work. As the divorce lawyers spends time researching information a corporate attorney already would know, the fees sky rocket while your hope for a winning result becomes negligible. You will actually pay more for a shoddy job due to the increased time required for filing in knowledge gaps.

Same is true of other professions. Don't use a CPA whose experience is in auditing to do tax work. The fees will be higher and the work will be of lower quality for the same reason as the mismatched attorney. Do you really want to pay for the education of a professional to learn new skills in another segment of their profession? Don't hire home builder architects to do high-rise apartments or veterinarians for heart surgery. It is not just a matter of hours, it is a matter of results.

As a long time advocate for small business, I urge you to choose a small business to do what you need done. The reason dentists don't use oil well drilling equipment in their office is because the size of the solution far exceeds the size of the problem and vice versa. Use an appropriately sized entity for the size and complexity of your entity. A local firm with three employees should not try to audit the city of Grand Rapids. A small manufacturer should not hire (whoops, I almost said Arthur Andersen) Ernst & Young, unless their future plans require such expertise.

Large vs. small is an interesting discussion. The dumbest legal mistake I ever saw was made by one of Michigan's largest and most expensive law firms. One of the most embarrassing situations I ever sat through was when a major CPA firm presented the year-end audit, and a board member pointed out it didn't add up correctly. I have seen small businesses perform remarkable feats and large prestigious organizations fall flat on their faces. And what does that prove? We are all human and capable of performing exceptionally or performing miserably. The odds of failure cost are a function of proper matching of needs to solutions.

So what are you paying for? Results! What did GM gain for the wages and benefits paid to absent, impaired or inept labor? Insolvency. Again, my source is the former GM employee. Pay for what you need not just a blind following of an outdated methodology.

Paul Hense is the retired president of local accounting firm Hense & Associates and past chairman of the Small Business Association of Michigan.

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