Episode 18: Everything I Learn, I Have to Learn the Hard Way

Before the crisis hit, Jay, Dana, and William talked about what they thought the next recession might mean for their business and the benefits of starting a business during a recession: “What I've learned is, when things go bad and I lose $300,000 and I take out a second mortgage on my house, no one comes into my office and says, ‘Hey, boss, can I give you some money?’” Plus: Some making tough decisions on employee compensation.

Episode 18: Everything I Learn, I Have to Learn the Hard Way

Guests:

Dana White is founder and CEO of Paralee Boyd hair salons.

Jay Goltz is founder and CEO of Artists Frame Service and Jayson Home.

William Vanderbloemen is founder and CEO of Vanderbloemen Search Group.

Producer:

Jess Thoubboron is founder of Blank Word Productions.

Episode Highlights:

William Vanderbloemen: “I think if we were not in that recession when we started, we would have oversold what we could deliver and would have just imploded.”

Jay Goltz: “Taking on debt could be the safest thing you could do because when things go bad, you can’t borrow money.”

Dana White: “If the economy isn’t doing good, we have a lot of factors that bode well for us. That’s why the experience is very important. That’s why the price point is very important. Your higher-end salons, they do see a downturn, because women aren’t paying $200 to go get their hair done.”

Full Episode Transcript:

Loren Feldman:
Heading into 2020, I want to talk about how you guys are thinking about the new year, what you’re expecting out of it. Are you concerned about the economy? Are you planning to grow? Are you expecting to hire? What has to happen in the coming year for it to be a successful year for you?

William Vanderbloemen:
We started our firm in the fall of 2008. I quit a secure job to start a business, which is a brilliant move, right?

Loren Feldman:
Well, it seems to have worked out for you.

William Vanderbloemen:
We started in the greatest recession and had good growth. I was hopeful we would be able to do well. Somebody told me one time—I don’t know if it’s true or not—they’re like, “Man, I like your business.” “Why is that?” “Well, if the economy’s doing well, people are hiring. And if the economy’s doing badly, everybody needs religion. So how do you lose?”

Loren Feldman:
I’ve actually spoken to a lot of people who think starting in a recession is a great thing.

William Vanderbloemen:
It was great for us.

Loren Feldman:
It’s harder. But if you survive, it gets easier when the economy gets better.

William Vanderbloemen:
Oh, that’s a good lesson. I’d add one that I think is true. We tapped into a felt need, but very few people had the money to try this new thing in 2008. I think if we were not in that recession when we started, we would have oversold what we could deliver and would have just imploded, because everybody would have said, “Sign me up, sign me up,” and, being the sales sort of guy, I would have said, “Yes, yes, yes, yes, yes” and then would not have been able to deliver. It’s almost like, I don’t know if you guys have watched the old Karate Kid movie, but 2008, 2009, and 2010 were wax on, wax off, learn the craft.

Loren Feldman:
Are you expecting a recession going into 2020?

William Vanderbloemen:
I’m just a preacher, Loren, who’s trying to learn how to run a business. I really don’t know. I think that whatever the economy does, for us, we’ve said the future in our business—and I think it probably translates to other sectors—belongs to the agile. So if opportunities for growth pop up, we need to have cash in reserve and systems ready to go, ready to move. If the bottom falls out, we don’t need to be tethered to long-term overhead costs that we can’t shed quickly. We’ve been focusing over the last year on increasing our agility, rather than worrying about what the economy is going to do, so that if we surge forward, we’re ready. If it shrinks back, then we can make those contractions and not be caught in some long-term mess.

Loren Feldman:
What does that mean to you? How do you increase your agility?

William Vanderbloemen:
For us, agility means that we’re trying to be financially agile. For us, and this isn’t true for everybody, that means we just don’t take on debt. That way, we don’t have a note we have to pay. And we also don’t take on investors so we don’t have to answer to the “Why?” and the return here, here, and here. If we choose to take a down year because we want to try and expand while the economy is contracting, that’s our call.

Now, smart friends of mine have very different approaches on this, but for us, agility is cash agility, and then it’s also space agility. We’ve done this recently. We made a move over the last year. We’ve tried for a number of different reasons to have our systems and our process to be much more of a thing that’s taught than caught. I’m a horrible manager. I’m terrible. “How do you learn search?” Well, the answer used to be, “Hang out with William for a few months.” That was the onboarding process. That that doesn’t scale. Now, we have systems that can be taught well enough that we can say, “Well, you don’t have to be in Houston.” We could have regional offices where we’re closer to our customers, not all virtual, but regional. That means we have less central office space, which means we have a lower lease that we’re responsible for. If for some reason we need to expand, we could open more regional offices, and if we need to contract, we can just close them down. I’d use the word “WeWork,” but I think “WeWork” has become a four letter word.

Jay Goltz:
That would be six, but who’s counting?

William Vanderbloemen:
Something like we can start small with our model, with the no debt, no investors. We can get a shared office space in Atlanta and start with two or three people and build it up, and then when it’s shown enough legs that we’re ready to buy a building that we own, rather than leasing, we can do that, and we have agility. We’ve done a few things. We’ve tightened up our systems so we can make them more portable. We’ve tightened our office space here to lower our commitment to a lease, which I don’t think I’ll ever do again. And then we have made sure that we’re cash positive so that we have the agility to expand or contract as as circumstances dictate. I think the future belongs to the agile.

Loren Feldman:
Dana, how about you? What are your expectations heading into 2020?

Dana White:
I have this pie in the sky, “Oh my goodness, this will be a great year if we do this.” But over the past couple weeks, after spending time with my mentor, talking to business owners whom I really truly value their feedback, the pie in the sky may come, but this year for me and for Paralee Boyd, it’s just about buckling down and getting even more into the weeds of the business. I am a very process-driven person.

Paralee Boyd runs on process. We have an onboarding process that we track. We have so many processes that we track. I think processes aside, I really want to focus on the culture. I’ve done that a little bit, but I want to start kicking it up to the point where the processes and the culture run hand-in-hand, because it’s the culture that makes the processes applicable, if that makes any sense, because of the people. It’s really about getting my hands deeper into every aspect of Paralee Boyd. William said, “Hey, I’m a horrible manager.” I am not a great manager because I’m a former labor organizer, so for me, “Does this feel good? Even if it might hurt the business, as long as it feels good…” That can’t be my managing style anymore. I have help with that, but I’ve also grown as a manager in the past year.

My goal for 2020, as far as management, is just being able to put my hands deeper into every aspect of my business and managing the finances. I think when we talk about getting your hands dirty in the business, I have a very good sense of my numbers, but having a better handle, touching my numbers every day, three or four times a week, just to manage that better. And then lastly, just growing the business.

My challenge has always been getting the word out: marketing, marketing, marketing, marketing. I’ve already begun putting the team together, giving me low-cost options to do the social media and digital marketing that I can do before I pay to hand it off, and by the time I’m ready to pay to hand it off, I will hopefully yield results with butts in seats from what I’ve done already.

William Vanderbloemen:
I love your self-awareness that if it felt good, that was good management. I think for me at a younger age—and maybe some other entrepreneurs can relate—it was: if it’s shiny, it must be good. It was like a garden hose nobody was holding with water spewing everywhere.

Dana White:
Yeah, our analogy wasn’t shiny. For us, we use food. So oh my gosh, it’s this beautiful ganache, chocolate layered cake, but we can’t live off of that. We need protein, right? We need carbs and vegetables and fruit. And so even though green beans aren’t sexy, it’s what you need to live.

Loren Feldman:
You’re in the hair salon business, right?

Dana White:
Yes.

Loren Feldman:
Yeah, you’re not opening your restaurant on the side, are you?

Dana White:
No, I’m a diner. I love to dine. That’s like my hobby. But that’s how we say, “Marshmallows are great, but you can’t sustain off of marshmallows.” For 2020, it’s really about getting those meat, potatoes, vegetables, and fruits and setting up our buffet. And then, towards the end of the buffet, oh my goodness, we have this artisanal cheese. Woo! The pie in the sky for me is potentially franchising or opening up another location. I’m still kind of back and forth on the franchise bit because it’s a huge commitment. But yeah, that’s my 2020. What about you, Jay?

Jay Goltz:
I’ve been through… I don’t know, I’ve lost count. I’ve probably lived through seven recessions and I’ve learned that you just can’t predict anything, and we’re living in such volatile times that you need to stay flexible. My main thing is, given that my business is fairly mature, I have to continually keep my eye on evolution and keep changing it, because the market’s changing dramatically. I’m working on that and I’m working on making sure I have cash.

I just want to defend something that’s got a terrible reputation: debt. Most people who are rich anywhere have used debt to get rich and most people who go broke have used debt to go broke. Debt is not good or bad. William, in your case, you don’t have inventory, right? I don’t think you have inventory.

William Vanderbloemen:
Not that I’m aware of.

Jay Goltz:
You don’t have equipment. You’re not buying hundred thousand dollar printing presses or something. For someone like you, it probably makes sense not to take on debt because it begs the question: why would you need to? You don’t have to.

William Vanderbloemen:
Spot on.

Jay Goltz:
Someone like me? I have to tell you, taking on debt could be the safest thing you could do because when things go bad, you can’t borrow money. For someone like me, it might make great sense to go take out a mortgage on a property that there’s no mortgage on, get a pile of cash, stick it into an account, and have it there if you need it, because if the economy goes bad, the banks go hide under the table. Having debt actually gives you cash, in some cases.

Loren Feldman:
What are you thinking heading into 2020, Jay? Are you concerned about the economy? How dependent on the economy do you think your businesses are?

Jay Goltz:
I’m concerned about the country. I can’t turn on the TV. For the first time ever, I work out every morning on the elliptical and I always put on one of the news stations, I’ve had to stop doing it because I can’t deal with it anymore.

Dana White:
Yeah, it’s a lot.

Jay Goltz:
On the car drive in, I thank God for Sirius radio, because I can listen to the Frank Sinatra station and pretend like everything’s okay. Because if I turn the news on, by the time I get to work, I’m already anxious and depressed. So yeah, I am concerned about where things are going. Yes, I’m watching cash, for sure. I’m absolutely watching long-term commitments. I’m staying flexible. I do agree with William, and this is a general comment, the no-partner thing, I think that’s a good plan.

Loren Feldman:
No partner, no investor?

Jay Goltz:
I think that’s always a good plan. Now I recognize that some people need to do that, and I’m not criticizing it, but I think it’s a true statement to say: If you can avoid having investors or partners, that’s a good idea.

William Vanderbloemen:
I just remember when we first started out and it was just me, staff meetings were awesome. Everybody got along and all the votes flew through and everything got done right on time and nobody felt like it went too long. Now it’s like my investor meetings are awesome.

Jay Goltz:
Someone gave me some good advice. The guy was in his 60’s or 70’s by the time he told me this. He said something very poignant. He said, “Long-term, you have three potential enemies in business: your landlord (true, I own most of my properties, it makes my life much easier), two: partners (don’t have any), three: the bank (I’m not painting the banks as bad guys, but they’re your partners on some degree). They look at your books and they can control you. I am very close to getting rid of the bank because I just had the revelation of: there’s two sides of the bank: there’s the real estate side and there’s the business side. When you do business loans, credit lines, they crawl into your…

Loren Feldman:
They crawl into your what?

Jay Goltz:
They’re in your business, they’re looking at everything, and you basically have to answer to the bank. You know what, I don’t want to answer to anybody. I just figured out lately, I’ve had this revelation. All I need to do is go take a mortgage on a property that I have no mortgage on, take that cash, and use that as my credit line, quote, unquote.

The bank, the real estate side, all they care about is, “What’s your debt to equity on the building?” They’re not coming in and asking about your sales projections. I encourage people to think about, if you can buy the property that you’re in, not a bad thing, because most of the risk to real estate is having a tenant who pays rent every month. If you’re your own tenant, it’s a no-brainer.

If you talk to attorneys and accountants, they’ll tell you there are plenty of people who end up retiring off of their building they sold when they were done because the business was worth so little. One of the greatest things that the government does are the SBA loans. You can buy a building for 10% down, which is what I did. Those are all long-term strategies that can be extremely powerful. As far as the moment, what am I looking to for next year?

Loren Feldman:
Yeah, that’s the question I asked!

Jay Goltz:
Possible volatility, election coming, making sure that I have enough cash to withstand whatever comes along, and at the same time, keeping an eye open for new opportunities, because the internet is still wreaking havoc with the business world, and there are opportunities to be had from it. The world’s changing very quickly, and you need to keep your eye on it. 40 years ago, I watched my father’s dime store—if anyone still knows what that is—slowly die over 20 years. My father-in-law had a clothes store slowly die. I’m very aware of the fact that you can’t just put your head in the sand and say, “Ahhh, computers, schmooters. They’re gonna be gone in a few years.”

Loren Feldman:
Dana, how about you? Do you think your business is sensitive to the ups and downs of the economy?

Dana White:
Yes and no. It depends on where you are financially. I think my business is priced at a point that I’ve been told is somewhat recession-proof. I do believe we will see a downturn if the economy tanks. However, I’m providing a service that is needed. We provide a basic service.

We might start losing people because they do it at home, but also it helps in a recession, similar to alcohol, you can pour a drink at home, but it just feels better when you’re at a bar for some people with other people. It’s the same thing with a hair salon, like it’s just done better. You might save some money, but it’s a whole experience. I think for Paralee Boyd, if the economy were to tank, we would see a little back beat, if you will. But I do think that we’re one of those businesses that wouldn’t tank completely because of the economy.

Jay Goltz:
I think your business is recession-resistant to a degree, clearly, but I read an article years ago that was really insightful. It talked about guys who go to country clubs to play golf and looking for the ball. They found out that when the economy got bad, people would spend more time looking for their ball than when the economy’s good, because they can’t do anything about their car lease, they can’t do anything about their mortgage payment, they can’t do anything with their health insurance, but they can spend five more minutes looking for their ball.

I think that haircuts are similar. I think there are some people who will think, “You know what, instead of getting my hair cut every four weeks, I think I’ll stretch to 6.” There will be some of that for sure, sure.

Dana White:
Absolutely.

William Vanderbloemen:
I’d have to look on the interwebs to find it, but I read a study not too long ago, Dana, that Revlon’s biggest boost was in an economic downturn. Women wanted something to make them look good when everything else was bad.

Dana White:
They wanted to feel good. That’s exactly it. If the economy isn’t doing good, we have a lot of factors that bode well for us. That’s why the experience is very important. That’s why the price point is very important. Your higher-end salons, they do see a downturn, because women aren’t paying $200 to go get their hair done. I’ve only been open for seven years—there were some “Eh, jobs aren’t as great right now”—but we saw women who had appointments based at higher-end salons, they started coming and we gained new customers because, “Hey, you do my hair just as well. Why am I spending $100 more?” A lot of it was a social status thing. Sometimes women go because they want to be known to go to that salon. I’m not really seeing where the economy is affecting this too badly.

Loren Feldman:
Okay, next topic. Also, relevant for this end of one year, beginning of a new year time period. I’m curious how all of you handle performance reviews and also bonuses and compensation. Do you tie them together? Is it a once-a-year thing? William, why don’t we start with you?

William Vanderbloemen:
This is a new thing for us. As a startup, I was and still am to some extent, highly allergic to overhead. It causes rashes and things. We would pay people a fair wage as a base salary, but hey, trust in us and when we grow, we’ll share the growth. We had to learn to not call it “profit sharing” because then you’ve got to issue K1s and all kinds of things. Okay, so bad preacher joke, but we named it “prophet sharing.”

Dana White:
That’s funny!

William Vanderbloemen:
It was basically, if we grow, we all grow together. We didn’t know until the end of the year. We’re an S Corp. The books close on December 31st. There’s all this, “Get all the cash in that you can by December 31st so we can share all we can.” We had big fun and the most fun meetings of the year were at the end of December. Go have a beer with William and get your bonus check. It was awesome.

Now, we’re paying better base salaries, we have benefits. We’re like a real business. We still want to share the growth, and we do, but we’re moving toward a different model where it’s not so much of the compensation tied to bonuses. You don’t have people running around at year end wondering what’s going to happen. We’re actually moving toward intermittent bonuses and rewards tied to particular performances throughout the year. If there is an annual bonus, it will no longer happen in December. It’s like, who wants to be the Grinch at Christmas?

When we first started out, we were on meteoric growth. It’s like, “Well, that’s fun.” But when you have a year of 8%, 9%, 10% growth, and it’s not 50%, and the check’s not as fat as it was, then you’re talking to Clark Griswold in Christmas Vacation and he’s like, “Where’s my bonus? I need to build the pool,” or whatever it was that he wanted. We’ve tried to remove it from the holiday season, just so we don’t run the risk of messing up holidays or mixing the message.

Then we’ve also moved to lower percentage bonuses to a healthier, more predictable workplace. Then we’ve also said, “Let’s not make it all one annual bonus, but let’s do some that are intermittent.” I jokingly said, “We probably ought to study how slot machines get people coming back. How often do you pay out so that people come back?” And I don’t mean that crudely because I love our people and I want to reward them, but we think that a combination of an annual reward that’s not tied to Christmas, and some seemingly random but tied to performance rewards throughout the year, will actually create a happier, more fulfilling experience for the employees.

Loren Feldman:
What do you see as the real goal with these bonuses? Are you trying to motivate people?

Jay Goltz:
Is it an incentive, or is it a thank you?

William Vanderbloemen:
For me, we’re still small enough. We’re a micro niche business, and we have 45 full-time employees. I would love to have the upside of people feeling some ownership stake in the company. Now, we’ve not done an ESOP kind of program, and I don’t know that we’ll ever do that. But I think the value proposition in an ESOP is everyone feels like an owner and they pick up a piece of trash in the hall when they see it. Or they take care of something that’s not in the job description. There’s more of an all-in mentality. The best days for us are when we’re all working together, irrespective of whether it’s not what my team does or what my job description says. I may be living some utopian dream thinking that can keep happening. Maybe as you grow as a business, that gets harder, but we’re going to try and maintain it. One of the ways we’re trying to maintain it is through basically saying, “If the company grows, we all grow.”

Loren Feldman:
How about you, Dana?

Dana White:
In our last podcast, I shared about me hiring a new operations manager, and that’s working out very well. Now that we have more structure in regards to performance reviews with this new operations coordinator, we gave everybody a raise, and we’ve been very deliberate about incentivizing people financially through performance. For us, no bonuses. We have a younger group, and this is not a salary-based position, so definitely not profit sharing. But what we do do is, based on your performance, here is $100 gift card, or based on your review—we don’t really incentivize for their review—we are starting to say thank you.

Next Friday is the gift exchange. We do these little things that go a long way with the staff. We’re going to start doing PB bucks—Paralee Boyd bucks—and the managers will start giving those out to staff members during shifts, as well as reading the kudos. We have a kudos box and they leave notes to each other. We read those out loud and give them to them. Then when somebody performs well, we give you a Paralee Boyd buck, and then you add those up. If you get up to $100, or whatever denomination you want to get to, you can redeem those for a gift card of your choice for that amount.

We don’t really base it on performance, as far as incentives. We don’t say, “Hey, good review. Here’s, 500 bucks.” But through our key performance indicators, you’ve been performing well, so we incentivize you with a reward of some sort.”

Loren Feldman:
Do you do annual performance reviews?

Dana White:
We do quarterly.

Loren Feldman:
Is that working for you?

Dana White:
Yeah, it is because we measure your consistency and speed. We understand that there’s a person behind that flat iron. We want to check in when we notice, “Hey, the timing is going down” or any variants. We bring it up at that next quarterly review, and then they’re not punitive at all. That’s just not our culture. It’s a check in with you so you can let us know how we’re doing. We check in with you to praise you, and recommend any areas of improvement.

If we see areas of improvement, it’s based on the connection we have with you as your employer. “How are you doing? Because we’re noticing in your work that…” It’s talking about what’s going on with them, and how we can help, not so much in your personal life, but how can we refocus you to come back and perform? A lot of times, that conversation is all that’s needed. No added training needed.

Because we’re watching that, we connect with them and say, “Hey, what’s going on? How are you doing?” And then they turn it around because they know they’re being watched. Because you work for an employer that cares, and we want to help get you to perform at your best. We’ve also had reviews where they’ve outgrown the position, so now we’re looking to transition you out. But it’s all above board. It’s never nasty. Some people would like to make it nasty, but I have a really strong management team that keeps it even-keeled.

Loren Feldman:
Do you tie compensation discussions to the performance reviews?

Dana White:
Annually we do. When we get to that fourth performance review, we for the most part give you a raise for your time in—a raise or a promotion, or both.

Loren Feldman:
People have an expectation that, at the end of the year, they’re likely to get a raise?

Dana White:
Based on their performance, and they’ve known over the year, this is how you’ve been doing. We also give them time to correct whatever’s going on. For the most part, they do. We have not not given somebody a raise. With training, it’s about communicating clearly to your staff what they need to do in order to perform well at this position. Either they want to do it or they don’t. For those who don’t want to do it, we have a way of transitioning them out. For those who do want to do it, we have a way of working with them to get them to where they need to be.

They’re not hard tasks, they’re not, “Hey, we need you to stand on your feet for 18 hours a day.” No, they’re just, “Hey, it’s taking you 40 minutes to curl one head. We need that done between 15 and 25. Why don’t we set you up to go to these following trainings to get you there?” And there’s all the encouragement that we give them along the way. We really clap for them along the way. Then when their review comes up, you’re not surprised because you’ve been performing like a rockstar.

Loren Feldman:
Do you worry about creating an expectation for an annual raise that you may not be able to meet in coming years?

Dana White:
I would if we didn’t communicate clearly. Our raises aren’t huge. They’re incremental. They’re like 25 cents, 50 cents. A lot of times, the raises come when we promote them. If we take you from stylist to lead stylist, your commission goes up. They’re still based on the amount of heads that you do, and your hourly salary. Your hourly salary may go up 25 cents, but you’re actually up for a promotion for the lead stylist where more money comes in. That’s where you want to make your money. But we are very clear that if you’re not performing, I don’t care if you’ve been here for five years, you’re not going to get a raise. But we’re going to do everything that we can to help get you there.

Loren Feldman:
How about you, Jay?

Jay Goltz:
I’ve been all over on this thing. I used to give everyone bonuses, and then what I’ve learned the hard way is—because everything I learn, I have to learn the hard way—when things are great, everybody’s happy. But as I said, I’ve been through several recessions. The last one in ‘08 was brutal, and you can explain it all you want. At the end of the day, people are really unhappy that they didn’t get their bonus, and I’ve come to the conclusion: they’re not my partners. What I’ve learned is, when things go bad and I lose $300,000 and I take out a second mortgage on my house, no one comes into my office and says, “Hey, boss, can I give you some money? You gave it to me on the upside, so I want to be there for you on the downside.” I’ve recognized they’re not my partners, A. B, a lot of them are making $30,000, $40,000, $50,000—they really need the money. This is just my opinion at this point, but it’s a well-educated opinion, because I’ve got everyone from salespeople to production workers to guys working on the dock—I would not want a big percentage of their income to be based upon this, because they just can’t afford that.

This is what happened to me. I was giving out bonuses every year. ‘08 happened. I’m lucky to be in business still. I’m in the home furnishing sector between the home starts. Picture framing is absolutely a luxury item unlike haircuts. You could stop picture framing for a year and nothing’s going to happen to you. Your life will be a little less happy, but you can just stop. My business literally took a 30% hit overnight, and I was in no position to be giving out bonuses. Every year, I thought, “Okay, this is going to be the year. I’m going to start again.” And then every holiday season, I have to stand there in front of everybody with this albatross and say, “Listen, guys, sorry, but we’re still not where we need to be. I can’t give it.”

Every year, I would dread this thing. I finally figured out—I went back to my old thing. For production people in particular, I’ve got like 50 people, and we give out like 25 bucks a year. It’s just something to say, “Thanks for hanging around.” The new employee gets lunch, but the person who’s been with me for 20 years gets $500. Now, I did that right before I came here to get on this podcast. I just had the handout. My top guy’s been there 33 years. He got a nice big check. I’ve got lots of people who have been with me for 20 years.

And you know what? The five or ten grand that I ended up giving out is never going to make that big a difference in the scale or the size of my company. I got rid of this huge albatross around me now, and I can’t tell you how much happier I am.

Loren Feldman:
What’s the difference? Jay, why is the albatross gone? You’re still giving out—

Jay Goltz:
The albatross is gone because I don’t have to worry about, “How much money did I make? How much am I going to split it up?” No matter how much money I make, there are years where I make a good amount of money, and there are years that I lose money, and there are years that I make $50,000. The albatross is off because the five or ten grand that I’m giving out of bonuses is just not going to make a big difference.

Loren Feldman:
You’re always going to give that amount.

Jay Goltz:
Yeah, unless it’s really bad. And if it’s really bad, everybody’s going to be happy to have a job. I would never say, “I’ll always give it out.” But if the economy really goes bad, everyone will understand that we can’t do it. I can’t tell you how much better I feel that I don’t have to worry about it every year.

I know this sounds preposterous to people who aren’t in businesses like mine—I have such a huge inventory and so many costs, I really don’t know how much money I make until I take inventory. I’m not selling televisions where they’re all in a SKU, we can barcode them. I’m using framing material. I’m selling things at different prices. There are sales. There could be a huge swing, depending on what the inventory is. I don’t even know how much money I made in December.

I just feel so much more relieved now that it’s just clean and simple. People are happy. The first time I went to it, I had a woman working for me who had only been there for a year, and I gave her the check. I go, “Sorry, it’s not much.” She goes, “Oh no, that’s okay.” She appreciated the fact that they’ve been there for that long, and they were getting their $200, $300, $400, or $500. There was no resentment whatsoever. It’s just clean, simple, one hundred percent fair. Everyone knows what the formula is. Versus you start giving it out based on, “Oh, he really worked hard this year,” and all of a sudden, the raise review and the bonus are mushed together. I think that’s a huge mistake.

It also helps when I give the raise reviews now. How long you’ve been here is out of the formula, because I will tell you what I’ve seen companies do. They give their 3%, 4%, 5% raises every year, because you can’t give the guy a quarter. And the next thing you know, 20 years later, one person is making $20 an hour standing next to someone who’s doing the exact same job making $15 an hour. That’s how you go broke slowly. It’s really helped me to keep that out of the formula. We do once a year raise reviews, but we do reviews every day. If somebody is doing something, well, hopefully we notice and say something if there’s a problem so that we don’t store it up and have one dumping on them once a year, once a quarter.

I feel very comfortable. It took me 41 years to get to this place. Dana, I’m glad you said, “I’ve only been in business for seven years.” You’re right. Seven years isn’t a long time. It really isn’t. People need to understand, in business, this takes years to figure out. I’m very comfortable with what we’re doing now. I know this open book management thing, a lot of people swear by it. I’m not criticizing it.

I just know that you’ve got three choices: no bonuses (I wouldn’t argue, in some places that works), a badly done bonus program (where people feel like they didn’t get their fair share, which is worse than no bonus), and then there’s my approach, which is just a yearly thing—no harm, no foul, clean, simple. I’m sure not as good as a well-tuned performance bonus thing, but better than nothing. I’m comfortable with where I’ve landed. I continually try to figure out, “Is there some way I can do more of this whole participative thing?” But it’s very, very tricky. I’ve got all different kinds of positions and jobs, and it’s just not worth the brain damage to me at this point.

Loren Feldman:
William, I’m curious, do you think your employees compare notes on how much they make or what they get in a bonus? And do you worry about that?

William Vanderbloemen:
Is there a company where people don’t compare notes on what they make?

Jay Goltz:
They do it in the bathroom, by the way. I used to have parties. They go in the bathroom and open up the envelopes. They don’t do it in front of you. But they’re doing it.

William Vanderbloemen:
There’s this word that’s used throughout the New Testament, “and there was murmuring,” and I think in describing most businesses, there’s murmuring.

Loren Feldman:
Do you try to manage the murmuring?

William Vanderbloemen:
No, there’s nothing punitive. I don’t even know if we have anything prescriptive: “Do not talk to each other about what you make.” I think it’s going to happen. We certainly don’t post it. I don’t think that’s helpful. But I just don’t know how you govern that, and maybe I’ll be back on this podcast in a year or two talking about, “Oh man, did I learn the hard way.” But for now, it’s just not something that we publish, nor try and protect.

What happens with the bonuses, that used to be a bigger conversation than it is now. We did finally put our salespeople on a form of commission mainly because they came to me and said, “Even if you paid us all the very same amount of money, we are all going to perform better if we have a number on our head,” which was really interesting. So we did finally say, “Okay, we all are no longer part of bonus. Let’s just put you on straight. Here’s what happens if you sell this, and if you sell that.” I guess people know sales numbers.

Jay Goltz:
There’s just nothing to argue with. They know how much they sold. They know the percentage. That’s clean.

William Vanderbloemen:
It’s your annual review. I think we all have a mutual acquaintance in Cliff Oxford. Cliff wrote an article, I think for you, Loren, years ago: “What Do You Do With the Brilliant Jerk?” I guess the idea, or at least what I took away from it, was: what do you do with the sales guy who’s hitting all the numbers but is a total rear-end around the office and ruins your culture?

In our annual review, for years, we’ve codified what our nine cultural values are, what it means to live those out, and the employee gives their version of how they review themselves. The manager or direct report says, “Here’s how I view you,” and your compensation is directly tied to how well you’re living out the cultural values. It’s not all of your merit pay, but it’s certainly part of it. The sales guy could make all the sales, but if he’s a rear-end, he’s not going to get all of his commission.

Jay Goltz:
That’s an ongoing problem with outside salespeople. It’s common that the person who brings in all the big business comes in and dumps stuff on the desk and says, “Here, I need this by Thursday,” and the rest of the people are aggravated at him, and they know they make way more money. It is an ongoing regular problem for many businesses.

Loren Feldman:
Which is why some people don’t pay sales commissions and even put salespeople on straight salary. But that’s a conversation for a different day—in the time we have left, the biggest story in entrepreneurial compensation I think over the last five or six years, is this guy Dan Price, from a company in Seattle called Gravity Payments, who got a ton of publicity when he decided a few years ago to give all of his employees raises so that everybody was making a minimum of $70,000 a year. It was in the news again recently. We had it in the Morning Report because he has bought a subsidiary and he did the same thing there. All along, this has created all kinds of publicity for him. I think there’s been a Harvard Business School case study about him. He’s become kind of a brand name. I’m really curious what other business owners think of him.

There was another side to this story. He had some employees who had made more than $70,000 who quit when this happened. He had some vendors, business owners, who felt that this sent a very bad message and stopped doing business with him. There was a story in Bloomberg that he had some litigation with his brother, who was a partner, and they raised the question of whether he cut his own salary because he didn’t want to be liable for a larger payment to his brother if he lost the litigation. I’m curious what you guys think. How about you, William?

William Vanderbloemen:
Well, I’m all for innovative ideas, and I love giving away things. I love being generous. Then with all those things I love, let me just put a caveat in, I don’t have an MBA. I don’t know all the cool business rules, whether this is right or not, but something in me feels like this is a little bit of an idealistic chasing of a windmill, and it’ll come back to Earth.

Loren Feldman:
Bloomberg called it a “capitalist fairy tale.”

William Vanderbloemen:
That’s kind of what I’d call it. I just don’t see this as a universally applicable rule. Maybe it’s cost of living, and Seattle’s going through the roof. I mean, real estate values are up 15% year-over-year, ever since Amazon and a lot of tech have moved in. Maybe to keep good people up there, you have to do unusual things. Maybe there’s a contextualization, and maybe there are all these other things, the fight with the brother. But for universal application, I can’t see it. I’m just a struggling preacher trying to build a business.

Loren Feldman:
Dana, any thoughts?

Dana White:
I think it served his purpose. In part, I think he got the publicity he needed. I think it was a very… not a PR stunt, but I think that was more to it than just making sure that his employees were all compensated at $70,000. It’s just not a model that would work for my business. I want to caution business owners who want to pay a salary. You want to make sure that the output, the work that they’re doing—I’ve had conversations with people about salary raises, and they’re like, “Well, this is what’s going on in my life, so this company should compensate me for that.” My thing has been, “The company had no choice, no hand in the decisions that you made in your life. If I’m in a certain situation or if I have a gambling issue or whatever… “I owe $500,000. I have a job. I’m working here. You should help me with that.”

Loren Feldman:
Have you actually had somebody come in and say that to you?

Dana White:
I’ve had people in my company who have felt that, “I have made these choices and I’m here at this point in my life. I need a job that will help me compensate for that.” And then I said, “This is not this job. This is what you do, and this is what I believe is a fair compensation.” Based on my research in this industry, and based on how I feel comfortable putting my head down at night when I see your check. I’m like, “Okay, that’s fair.”

I just think we’re getting into this period, Loren, where the business owner is the bad guy, where back in the day, when you look at old movies, like It’s A Wonderful Life, the business owner had the opportunity to be the hero. It wasn’t, “Oh, you’re making money. Oh, you’re awful.” When I read that article, I said, “Hmm.” He got me to read the article, but it’s just not something that I would do at Paralee Boyd, is pay everybody $20 an hour to make the statement of equitable wages. At Paralee Boyd, everybody knows what everybody makes.

Loren Feldman:
Interesting.

Dana White:
Yeah. Everybody knows where they fall in the commission. They know what the lead starting commission is.

Loren Feldman:
They know what they have to do if they want to make more.

Dana White:
Absolutely, yeah, everybody knows. It’s already the beauty business, it already can be very competitive.

William Vanderbloemen:
Maybe a little drama. Is there drama in the beauty business?

Dana White:
Yeah, so let’s just remove all that. You know, she just started, and this is where she’s starting at. Yes, she has 20 years of experience, but she doesn’t have 20 years of experience at Paralee Boyd, and Paralee Boyd is different. I just thought it was, I don’t want to say a “PR stunt,” but I just…

Jay Goltz:
It could be though. You could call it a PR stunt. That wouldn’t be unfair.

Dana White:
Thank you, Jay.

Jay Goltz:
Now Dana, you said something that I think you’re right about with paying market wages. But you said, “They made choices.” They might not have made choices. Maybe they’ve got a sick kid at home. It might be no choice, just bad luck. Does that mean if someone has horrible bad luck in life, that the business owner, it’s now their responsibility? I mean, that’s a slippery slope.

Dana White:
Very slippery.

Jay Goltz:
The problem with this guy’s story, and Loren, I believe you left the most important part out of the original story. He cashed in all of his money. He funded this business as though it was a not-for-profit. He decided that it wasn’t important that he made money. He’s giving it all away. The problem with that—

Loren Feldman:
Wait, wait, wait.

Jay Goltz:
Yeah, read the original story. He went ahead and he was cashing out all this stuff so he could fund this. That’s what the story was.

Loren Feldman:
I don’t think that’s right. His original salary was more than a million dollars. He cut his own salary to $70,000. But I think the company remained a for-profit business.

Jay Goltz:
For sure. But I’m saying, cutting your salary from a million dollars to $70,000 is basically saying, “I don’t have any rights or expectations or needs as a business owner to make money. I’m just going to give it all away.”

Loren Feldman:
Wait, he still owns a company.

Jay Goltz:
He kind of does, but to what benefit? He just gave away the profits of the company to the employees.

Loren Feldman:
Sure. He retained equity in the business.

Jay Goltz:
What good is equity if you don’t have profits? He’s giving the profits away.

Loren Feldman:
I don’t think we know that.

Jay Goltz:
Aha! There’s the point. We don’t know anything. We have no idea how much money he’s making. We have no idea whether he’s actually paying all these people. The newest article I read about that ratio people use with how much does the CEO make compared to the average employee—that is preposterous in a privately-owned subchapter company, because what that means is, if you own a $50 million company and you’re making 2%—which would not be anything to brag about—and you made a million dollars, and you say, “Oh, that’s terrible. This guy’s making a million dollars and his average employee’s only making $40,000.”

They are dangerously close to going out of business, because all that would have to happen is a hiccup and now the company doesn’t make money at all. That whole ratio should not apply to people who own the business. There’s supposed to be a return on investment and you need a return on investment for the longevity of the company to stay healthy in business.

Loren Feldman:
You know what’s interesting, Jay? What you were just talking about now is one of the strongest arguments, I think, for doing open-book management, which you raised before. The people who do it tend to make the argument that they decided to open their books because they knew that their employees just assumed that the owners were making even more money than they really were, or way more money than they really were.

Jay Goltz:
Or losing money.

Loren Feldman:
By opening the books, they changed that. They allowed employees to see how the business really does.

William Vanderbloemen:
Loren, I’m going to push back on you here. We’re in an industry where we have a very clear margin—I don’t want to go into those margins—we need to clear a certain EBITDA to be a healthy business. If we ever wanted to take on investors, they’d look at our books and say, “You’re healthy, you’re clearing the right amounts.” So if I had 100 stock owners, and I were distributing our profits among 100 stock owners, nobody would have a problem with that, but because there’s one stock owner, they’ll look at the number and say, “Oh, that’s too much” I don’t know how to get around that. And I think it’s a Pandora’s box to open that. You want to talk about water cooler talk and murmuring?

Dana White:
Oh my goodness.

William Vanderbloemen:
I don’t see the value and I’ll push way hard against you, Loren, as a guy who’s the sole owner of his business.

Loren Feldman:
For the record, I don’t mean to be selling open-book management. I just think it’s a really interesting debate.

Jay Goltz:
No, it shouldn’t be a debate. Some people it works for, and they’re happy, and other people aren’t. The most misused word lately is the word “transparency.” That’s good for government. It doesn’t apply to a privately-owned business. Since when is it, “Oh, William, you need to tell everybody how much money you’re making. We need to be transparent.” Where did that come from? Who says it’s our responsibility to show transparency to everybody? It’s really not right. It’s not capitalism. It’s not even healthy for the business.

Loren Feldman:
I don’t know about it’s not capitalism. I don’t want to be in the position of selling open-book management, but one of the things that does happen at companies where this works, is if employees know that the company’s not doing well, they often come up with ideas that wouldn’t even occur to the owners.

Jay Goltz:
No argument. Capitalism does not mean that you have to be transparent with everything you do in your internal business. That’s all I’m saying. We don’t owe it to the population or to our employees.

Loren Feldman:
I’m just objecting to it’s not capitalism. I think there are different ways to be a capitalist.

William Vanderbloemen:
I do think it’s a one-way street. I don’t know how you open the books and then ever close them again.

Loren Feldman:
Okay.

Dana White:
Yeah.

Jay Goltz:
Just to be clear, I’m saying government should include transparency. That’s what government is supposed to be. It’s our government. Included in capitalism should not be the notion that as business owners, we have a responsibility to be transparent. That’s a crock. It’s just not true. It’s nobody’s business if we’re losing money, except the bank.

Loren Feldman:
Well it’s an employee’s business, isn’t it?

Jay Goltz:
Did they sign the lease? Are they the one who’s going to lose their house if things go bad? How is that the employee’s business? Explain that to me. They have a job.

Loren Feldman:
But people change jobs too. That’s certainly something that they might consider, if they have a job offer somewhere else.

Jay Goltz:
Is that our responsibility to tell every applicant, “Oh, by the way, before you take the job, I just want you to know I could be out of business in two years”?

Dana White:
It was brought up during the Small Giants Forum, and I looked around like, “Okay, am I the only one here who thinks this is a little much?” I would not do open-book management at Paralee Boyd. Oh, no!

Loren Feldman:
We are out of time! My thanks to Jay Goltz, William Vanderbloemen, and Dana White for another lively conversation on the 21 Hats Podcast. Thank you all.

Dana White:
Thanks for having us!