Month: July 2018

July 16, 2018

Do you understand what drives compensation?

“Some feel the rain. Others just get wet.” ~ Bob Marley


The average compensation for Division I (FBS) collegiate head football coaches is $1.64M, for athletic directors it’s $646K, for state governors it’s $70-$190K. Political commentary aside, in the best-case scenario the governor’s salary is 11.5% of their university’s head football coach. Simply there are more people who have skills and are willing to be the governor than the Division I head football coach.

It’s reported the average college undergraduate has $37,172 in student loans. And yet the most popular undergraduate degree is Humanities and Social Sciences, which ranks among the lowest in career field job placement and starting compensation. Why is Humanities and Social Sciences the most common undergrad degree? The students’ high interest level combined with a relatively low academic rigor is a good guess. Why is their compensation and job placement relatively low? Simply there are more undergrads than there is demand for their skills.

It is remarkable the number of professionals who don’t understand the economics of compensation. Employees who blindly move through their careers believing that compensation involves some mystical equation. Leaders who believe they have control over market compensation and are shocked when they lose key talent.

Compensation is a function of supply and demand economics, with an X factor.


The Top 5 factors that drive compensation:

The number of people willing to do the job – Staffing a Starbucks will always be easier than a lumberyard. Coffee is cool. The food service and education industries have the advantage of an alluring appeal, the building products industry by comparison does not have this privilege.    The food and education industries generally have lower compensation rates than the building products industry due to this factor.

The number of people capable to do the job – The level of discipline and cognitive horsepower needed to be a neurosurgeon creates a low supply.

The level of risk tolerance – The window cleaner who handles 50-story buildings is compensated more than the window cleaner who doesn’t own a ladder.

The level of demand for the service/skill – Pharmacists once had a lucrative career path, but now the online and mail-order pharmacy business models are shifting the demand. It’s wise to understand the demand for your skills as well as the economic trends affecting the industry you are serving.

The X Factor… How strong is your network? Hiring Leaders, the depth of your talent pool is limited by the quality and quantity of your network reach. Professionals, the flow of your career opportunities is limited by the reach of your network. Confidentiality and risk will always be significant obstacles for both parties to connect without leveraging a 3rd party recruiting resource. Limited time factors only further complicate this difficult situation. The result: It’s common for a professional’s network to be focused on serving their customers, which is not very effective in serving a hiring process or career search.


The truss, custom millwork and installed segments of the industry are hot. When run well, these business models commonly generate 50-200% more profit than lumberyards. The shrinking contractor labor force, combined with an older-demographic customer base that is shifting from Do-It-Yourself to Do-It-For-Me, creates great profit margin opportunities increasing the demand for service. Trusses, custom millwork, installed services all reduce construction time, on-site risk of injury and the level of on-site carpentry knowledge, all of which increase the demand. General managers, Sales managers and Sales talent in these segments have increasingly complex responsibilities, requiring a broader skill set. Simply, the number of people willing and capable to do the job are less than the number of lumber generalists, leading to a short supply of capable talent. Lumber people – before you send the hate mail, ask yourself: Which do you screw up more often, the lumber pack or the truss bid?

Why are industry leaders commonly compensating truss, custom millwork and installed sales leaders the same as lumber generalists?

It could be a few reasons:

Singular focus of keeping compensation costs low as the objective, rather than the ratio of productivity and profits to compensation.

If talent is not wise to the broader market and unwilling to relocate, does competitive market compensation matter?

It might be a factor of status quo, the less disparity the better. Maybe our industry needs more Humanities and Social Science undergrad leaders – we know they would have learned the lessons from George Orwell’s Animal Farm.

– Tony

 

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