The impact of Supply & Demand on Compensation

12/23/2021

The NCAA Football world has been in a constant buzz with the Power 5 head coaching changes over the past month. The clash of emotional fandom meeting sound business practices creates a high level of entertainment. "How could Lincoln Riley leave the Oklahoma fans and team in the lurch?" or "Brian Kelly shedding his rosary and St. Christopher pendant and developing a southern accent overnight to bond with his new LSU family." What I find more interesting - how can USC afford to pay Lincoln Riley a $110m contract over 10 years? How can one person be worth $110m, $11m per year?

Compensation is complex and challenging for any business to approach. It is certainly not a one-size-fits-all problem. Wage surveys are highly flawed and virtually useless as the information is irrelevant, they often do not apply to your business or talent pool you are sourcing people from. What's at stake? When compensation is structured accurately, it aligns people's behavior with the company's strategic and tactical objectives, generating maximum cultural and financial performance. When handled poorly, the effects can be devastating; demotivation, misaligned objectives, or loss of key talent can quickly combine to deeply damage any business.

There are a few questions that I have found to be practical and universal when mapping out compensation solutions.

What are the Supply and Demand factors? 

How does the broader market value this talent? 

What is the value of this position to our company?

What are the intrinsic (non-monetary) aspects that attract talent?

Supply and Demand:

Econ 101:  The higher the supply of people who desire a position and can be successful in the role, the lower the compensation.

The higher the demand for people with a specific set of skills, expertise, and experience, the higher the compensation.

Let's apply the principles:

Teachers:

Historically, teachers' compensations have been low compared to other industry professionals with the same level of education. 

There has been a high supply of people with a bachelor's degree requirement who want summers off and a work schedule that aligns with raising children. The trade-off for cash compensation is the intrinsic value around social community impact, continuing personal education, work hours, and summers off. Historically, demand for new teachers remains low, as the number of teachers needed stays relatively static. High Supply: There is a solid pipeline of student teachers and substitute teachers developing the skills required to enter the profession. Further, there is a well-defined career path to retain teachers. The education industry has excelled, creating an encouraging, welcoming culture for minorities who are promoted based on performance, increasing the supply of teachers.

Power 5 NCAA Football head coaches:

There is a low supply of excellent head coaches who can succeed in the role due to the extremely high levels of skills and expertise needed, combined with sacrificing life balance. Developing players with a constant 25% turnover, game tactics, scouting opponents, managing boosters, managing the university's board of regents, and recruiting activities never stop. Many coaches simply don't want the role due to personal and family lifestyle sacrifices. Demand remains high as top head coaches generate $100m in direct annual profits to the universities. 

Wage surveys work well for teachers and NCAA head coaches. The roles, responsibilities, resources, and expected outcomes are relatively straightforward, the information is definable, and the scenarios are similar. The compensation is public information for coaches and teachers. Information about the level of difficulty and predecessor's history of performance in the role is also easily accessed – such as graduation rates, social-economic information, youth crime, and delinquency rates for teachers. Coaches can watch a stack of game tape performance; Bowl wins are certainly public information.

LBM Presidents, Vice Presidents, and General Managers:

Demand is very high. The housing market demand is high, and the value that talented leaders deliver to businesses is the difference between a 5% and 10% plus profit or higher. In 2021, 12-17% profits have commonly been reported. The supply of LBM (lumber and building material) leaders is low. The LBM industry struggles to develop leadership talent in a number of ways. Developing, mentoring, and promoting leaders is not a priority in most LBM businesses and it is rarely measured or incentivized. The "lean and mean" approach to labor cost limits the number of leaders developing in the GM and VP pipelines. LBM companies are averse to accepting talent from outside the industry, further limiting the supply of leaders. The lack of a systematic approach and standard operating procedures (SOP) limits training and scaling success compared to other industries, again shrinking the supply of leaders. Independent companies are private about their compensation structures, and the business models have a wide range of differences. The combination makes collecting relative compensation information difficult. 

The LBM Dealer space has lived through turbulent times in the past, which is typical. What is unique in this cycle is that the volatility adds up to the highest profits for LBM dealers I have ever witnessed in my 20 plus years of serving the industry. Poor to average businesses without manufacturing (pre-hung doors, trusses, and wall panels) are making 10% EBITDA. The profits are so significant that even the most miserly and unsophisticated "mushroom" owners (who hide the P&Ls from the people and pay discretionary bonuses) are forced to increase their compensation plans to keep people. The pervasive nature of the compensation increases, seemingly covering all geographies regardless of company size, combined with the percentage of income increases, requires everyone to take notice.

As usual, supply and demand rules and the LBM space remain oddly isolated. In other industries - manufacturing, oil, industrial steel, and transportation – it is common for leadership talent to shift with demand. LBM leaders struggle to hire business leaders from outside the LBM industry, a key reason the LBM segment is behind other industries. The industry's chaos, volatility, and variation remain a barrier. Here is an article I wrote earlier this year, using is a simple box in box out distribution model intended to help LBM leaders hire young leaders from outside the industry. Ice manufacturing is easy – bag it, but it is similar to the LBM space in ways.

LBM is fragmented and complex: The silos around engineering and design, off-site manufacturing, and efficiency on the job site exist due to each role's complexity in specialization needs. The selfish demands of each silo amplify the industry's inefficiencies and support the fragmentation. At what level? A level so great that McKinsey and Company authored a study reflecting the enormous inefficiencies of the industry, only to shut down their building products division due to the fact that "the complexity and fragmentation of the space make it too difficult for them to be profitable." I spoke directly with the executive who shut it down.

Two steppers/wholesalers are creeping into the dealer space rapidly. These companies see the opportunity of taking share from the LBM dealers who are slow to add off-site manufacturing to the distribution model. (Millwork, pre-hung plants, truss, any pre-manufacturing/fabricating reduces job site labor constraints.) They also see the LBM dealers struggling to satisfy the demand of single-family new construction, multi-family, and R&R customer segments. Yes – selling direct to the builder, remodeler, and general contractor is increasing fast. We expect this trend to put added pressure on an already depleted LBM leadership resource.

Presidents, Vice Presidents, and General Managers:

Understand how much your value to the industry has increased in the past 12 months. Depending on your expertise and performance, the level of company awareness, and proactive compensation assessment, your value has likely increased 50% or more. Please reach out to the Misura Group team for a free personal compensation review.

Leaders and Independent Owners:

LBM leaders evaluating the complexity of the role, skills, and expertise needed to be successful are closer to NCAA coaches than teachers. The demand for LBM leaders is more relative to NCAA coaches as it's easy to draw a direct line from their leadership skills and business acumen to the profit line. Compared to other industries, the LBM industry's poor history of developing a pipeline of leaders and welcoming minorities contributes to the low supply.   

Do you know the market value of your key talent? Invest the time and effort to understand how the competition compensates their leaders. Determine a method to understand each key leader's value to the company. If that leader left, what would happen to the profits in the first year? Understand how outside leadership talent evaluates the intrinsic value of being a part of your company. Supply and demand factors cannot be avoided. Embrace the facts and take the necessary steps to control the desired outcome. If you have reaped the benefits of a "lean and mean" labor expense approach over the past 5-10 years, you might be due to pay the piper.

Hire Smarter™ – Tony Misura