This might come as a shock to some folks, but bigger isn't always better. A shock, to be sure. But pick yourself off the floor and listen. Big payrolls don't guarantee success any more than adding cheese to a recipe guarantees an instant gastronomic delight. Sometimes it works, and sometimes it doesn't.
On the other hand, sometimes you can achieve great success with a smallish payroll. What really matters is making smart management decisions. It's those decisions that can make or break a company. And having happy employees helps too. Tom McMullen, leader of Hay Group's US Reward Practice, the organization that compiles research for FORTUNE magazine's "Most Admired Companies" list, said that successful organizations enjoy benefits beyond those that money can buy.
Here are nine shining examples of businesses that have done more with less payroll:
Just mention successful organizations with smaller payrolls, and the Oakland A's top the list. During their so-called "Moneyball" years, general manager Billy Beane used MLB's (Major League Baseball's) draft, free agency and trades to his advantage. By acquiring talent with great potential instead of proven players who commanded high salaries, he was able to maintain one of the smallest payrolls in the sport. Meanwhile, the team made the playoffs year after year, a testimonial to Beane's smart management.
Beane's practice can apply to other industries as well. He looked at the potential of a whole team, not just individuals' singular accomplishments or attributes. Considering the total package is a great way to bring in potential top talent.
What the Oakland A's were to the early 2000s, the Tampa Bay Rays are to today. The team, which maintains the second smallest payroll in all of MLB, has had a remarkable season, showing everyone that their low-pay team can kick butt on the field. Under the direction of general manager Joe Madden, the team is number one in the American League. That success has turned this barely noticed team into the talk of the town.
Perhaps outfielder Cliff Floyd said it best: "Any time you win, you always put yourself on the map to have guys who are successful in the game look at your team. You want to stay competitive, you have to win, and that's the bottom line. Guys don't want to go to losers, and guys don't want to come to the park when you're losing."
Super Bowl XLII was a David and Goliath story. The unbeaten New England Patriots, which had the NFL's (National Football League's) second highest payroll at $117 million, looked poised to shatter both the 1972 Miami Dolphin's unbeaten season and postseason record and to capture Super Bowl glory. But it was the team with the NFL's lowest payroll at $75 million, the New York Giants, which took the win. For their part, the New York Giants had kept salaries low by relying on pay-for-performance through bonuses. In the few cases in which a player commanded a greater salary, it was a true star. For instance, Super Bowl MVP Eli Manning, the team's quarterback, received a whopping $5.5 million in salary plus assorted bonuses — topping the Giants' player salaries.
Beyond the world of competitive American football, the idea of paying for employees' performance is one that could bring some exemplary workers to a company. And since they only command more money if they perform as expected, the threat of a highly paid employee underperforming is nonexistent.
In 2001, Philip Falcone partnered with Harbert Management Corp. to start Harbinger Capital Partners. The New York-based hedge fund was bankrolled with a $25 million investment from Harbert. Today, Harbinger manages an estimated $25 billion in assets. How did Harbinger's fund become so huge? Falcone made a smart bet against the subprime mortgage industry before its collapse, which made him and the fund infamous.
The fund solidifies its interest in investments by aggressively going after key changes like seats on the board of directors. Today, the fund has stakes in giant corporations including Cablevision and The New York Times Co. For its employees, the number of which has grown over the years, smart, thoughtful investments are elevating their pay.
In 1972, B. Thomas Golisano saw a niche market and went after it. With just a $3,000 investment and one employee, his company provided easy and affordable outsourced payroll to the SMB (small- and medium-sized) business sector. The company provided a valuable service to the overlooked sector, and its size and profits grew. In 1983, the company went public. Today, Paychex Inc. has more than 100 locations and boasts revenues of greater than $2 billion.
Paychex's success can greatly be attributed to Golisano recognizing an untapped market in need of a service and going after it. Allowing only enough payroll for one employee at the time, Golisano started his business small and thought big — and his idea became a reality.
Google wasn't always the super Web power it is today. In fact, the search-engine-turned-mega-corp was once just the project of a Stanford University grad student. In January 1996, Larry Page took on a project to develop an algorithm to see how Web pages link together and interconnect. Called BackRub at the time, the plan became the basis for Google's PankRank engine and led to Page's partnership with fellow student Sergey Brin. With an investment of just $100,000, the pair worked out of a garage before eventually building their famed Silicon Valley headquarters. Today, the company is valued at an estimated $157 billion.
In the highly competitive tech sector, Google has made itself attractive to up-and-coming talent by offering perks to help employees manage their lives beyond the office. Case in point: their free gourmet cafeteria is legendary.
In September 2001, Ben Trott was just another unemployed victim of the dot-com boom. He spent his time writing code for a Web service that would ease his wife's blogging woes. That code became Movable Type, the first platform in the Six Apart Ltd. cache. Two years later, Six Apart received its first venture capital and used it to hire more employees and purchase another company. Although the private company doesn't publish how much revenue it makes each year, its value was estimated at $100 million two years ago. And it's only grown since then.
This is another example of a company finding a niche and exploiting it, and then building the employee base as needs allowed.
Terracycle Inc. is a company built on a bunch of trash. Literally. In 2001, Princeton University student Tom Szaky wrote a business plan for a contest. He then arranged with the Princeton dining services to take the dining hall waste and process it in his prototype worm gin. It was a messy undertaking, but successful enough that he kept plugging away. After taking time off from school and winning the business plan contest (and turning down the $1 million prize), he made the company's first big connection when Home Depot began selling Terracyle plant food. Soon, products began popping up in Whole Foods LP, Wild Oats and Wal-Mart Canada stores. Szaky said the business engages in eco-capitalism.
Today, Terracycle has expanded its operations, forming an alliance with Kraft Foods Inc. to use post-consumer waste to make handbags and other items. The plan is ingenious: take something virtually free — waste — and turn it into valued-added products. With only about 12 employees, the company did an estimated $6 million in sales last year.
Mario Lavandeira, better known as Perez Hilton, revealed on The Martha Stewart Show recently that he gets nine million hits to his popular celebrity blog each day. The ad revenue from his sweet and snarky look at celebs is enough to support his Los Angeles lifestyle, along with his mom, and employ his sister as his assistant. Meanwhile Heather Armstrong of dooce also supports her family on ad revenue from her blog. Her husband handles ads and technical issues for the site. These are just two examples amid many of success being found by individuals working with nothing more than an Internet connection and an idea.
The Internet is changing the way people work and who is doing the hiring. Bloggers, often their own bosses, are paid based on how many ads they run, how much promoting they do and ultimately how many people visit their sites. It's a new way of looking at pay that puts the complete control in the hands of the employee. And some of the top blogs pull hundreds of thousands in revenue each month.
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