One topic that is all over the news these days is state employee benefits. I understand that compensation is a very challenging issue; with key constituents making powerful points on both sides of the argument. The point, as I understand it, seems to be: “what was agreed to” and “what can afford to be paid.” I tried to think about the issue in basic terms and came up with a similar example that I see time and time again in my CFO consulting practice. So, let’s look at the issue from a business owner’s perspective.
I asked one of my business owner clients how he arrived at the dollar amount of his monthly compensation package. He replied to me that $X is the amount of money that he needs to live on. Gently, I explained to him that based on his company’s current revenue and net income, his business could only afford to pay him $X MINUS $5,000 per month. You can imagine how my response was received by this hard-charging entrepreneur. I explained to him that he (and his business) was sitting on a ticking time bomb that was called “his pay.”
He had already weakened his company over the last year by taking more compensation out of his business than his business could afford to pay him. The problem showed up in the form of a lower-than-usual cash balance, a higher line of credit balance, and a constant scramble to collect accounts receivable in order to make payroll. In other words, the business was doing just fine (financially healthy and growing slowly), but it was beginning to struggle to pay its owner’s ever-increasing compensation demands. I figured that I better press the argument before the company reached the point of no return; aka “ceasing to exist in the business world.”
I explained to the business owner that the growth in his compensation package had outpaced the growth in his business and therefore he was slowly killing his business and therefore his livelihood. Any business, I explained, can only afford to pay its owner “so much”. You have to decide if you can live on whatever that “so much” is or consider other alternatives. You are a risk-taking entrepreneur. You have to decide if you can grow the business to the point that it can afford to pay you the compensation that you desire and refrain from taking your ideal compensation out of the business before that time arrives. If you believe that your business will never be able to provide the compensation that you desire, either deal with it or sell that business and go start another business that will provide you what you seek. No one can answer that question but the business owner.
My client wasn’t having any of it. He told me that he was accustomed to living a certain “lifestyle” and come hell or high water, he was going to live that lifestyle. I explained to him that he needed to reduce his pay or else he would go out of business. There was no other way around it. He is choosing not to do it. He believes that he will grow his business quickly and eliminate the current stress. Ah, the charmed life of an entrepreneur!
The same example applies to the current state benefits debate. The states built the benefits packages, attracted the employees with it, and now revenue has fallen short and the states can’t afford to pay the benefits packages they previously negotiated. The current path is simply unsustainable. State employees refuse to have their benefits reduced and I fully understand their argument and actually agree with them. However, if a reduction is not made to the benefits in order to bring them in line with revenue, the state will be forced to restructure in some way; maybe even lay-offs. What would you do if you were faced with this crisis? It’s not an easy question to answer.
Remember, running a business successfully does not need to be complicated. Keep it simple!