RISKWISE

Here's how to develop simple “pay-for-performance” programs that give employees the incentive to think like owners.

Many employees, if not all, can be paid based on performance. Determine the three biggest profit drivers in your enterprise. For your crop enterprise, these could be timeliness, yield or cost. In a feedlot it might be feed efficiency, rate of gain and death loss.

Then determine a performance threshold level for that profit driver that will create acceptable rates of return on assets and equity.

Any performance below that predetermined level results in no performance pay. Granted, some things are beyond employees' control, but your intention is to get them to think like owners. You, as an owner, face the same challenges.

Our experience shows that employees can influence more than they think if there's an incentive.

Levels of performance above the threshold can be calculated to determine the effect on the bottom line. A portion of that difference is then paid to employees. I usually suggest starting at 25% and you keep the remaining amount — in this example, 75%.

Performance pay should be paid over and above base pay. Putting part of the employees' pay at risk usually de-motivates employees.

Know the rules. Everyone on your team wants to win, but experience tells us that, in many cases, employees don't know what the rules are or how to keep score.

You can clarify the rules by opening your books and showing how profit drivers affect the bottom line, both from revenue and cost standpoints.

Keeping score may be clarified by sharing monthly or quarterly goal data on key profit drivers or profit and loss statements.

Communication pays big dividends and makes your job easier and more fun.

Know when to fish or cut bait. We all make mistakes in selecting employees. If finding, training and paying employees was easy, anyone could do it. When we make mistakes and find we have the wrong person in the job, we need to put someone else in that position.

This may mean ending employment or shifting an employee to a different job. In any case, it's the best thing to do. I've often referred to this process as “selective redemption.” By making a change when you need to, you're saving that employee from suffering agony in the wrong job.

Following these rules of human capital management should better prepare you to win in the game of production agriculture.

Find Help To Manage Help

Our experience shows that, for operations larger than 3,000-4,000 acres, managing people is the largest impediment to moving to the next farm size and profit level.

In many cases, the challenges are in managing or working with family members. This may go beyond normal employee relationships; you may need to factor in potential succession or inheritance issues.

There are companies that can help with functions such as employee selection and pay. A few provide comprehensive personnel advice for farmers. Look around.

Another tip: Network with other growers who have experience in getting from where you are to where you want to be. Eliminating mistakes other farmers have made can save you time and money.

To determine how much you can afford to pay for labor to fuel an expansion, first determine your labor cost per acre at your current size.

To do that, total all your family living costs, including medical and Social Security taxes. Add to that the cost of all hired labor. Then, divide the total by total harvested acres.

Next, multiply that figure by your anticipated expansion acres. This is the figure that you can spend for labor in the expansion and still maintain your current efficiency. Drop it a little and you increase your labor efficiency. The figure will surprise you and provide a whole new perspective on what you can afford rather than trying to hire someone and pay the least amount possible.

Moe Russell is president of Russell Consulting Group, Panora, IA. Russell provides risk management advice to clients in 15 states. For more risk management tips, check his Web site (www.russellconsultinggroup.net) or call toll-free 877-333-6135.