In the construction supply businesses we are constantly looking at reducing our overall expenses. One of the largest expenses is typically payroll dollars. So why not start with the largest expense first?

But, instead of just whacking the expense, look at payroll dollars as a percentage of sales dollars and think of what can be done to improve those numbers.

In the NLBMDA [] 2007 Cost of Doing Business Report using 2006 data, a typical contractor oriented dealer had payroll expenses as 10.41% of sales while total operating expenses were 14.69% of sales. Profit before taxes was 6.67%.

While payroll expenses as a percentage of sales is important, consider looking at payroll dollars as a percentage of gross profit dollars. Simply stated, are your employees productive?

Let's return to the survey, which compiled reports from 89 dealers where sales to pros provided over 75% of revenue-thus the "contractor-oriented dealer" label. This group had typical sales volume of $30,167,252, employed 57 people and racked up $6,298,911 in gross profit. That works out to $110,486 gross margin per employee.

I have used the results to also calculate that the payroll cost per employee is 49% of the gross profit dollars. This means that almost half of every gross profit dollar for the typical contractor-oriented dealer is invested in employees. Is this a wakeup call or what?

You can gain productivity of employees by performing objective employee evaluations. Following my method, conducting at least two employee evaluations over about a six month period, you should see an increase in productivity.

How? I see a trend in the LBM industry where leading companies are managing employee productivity through well planned evaluations. If you are looking for a simple form to use in the evaluation process, I recommend that you consider using a form by Select Form. In particular I recommend [] Employee Performance Evaluation. I have used this form for almost 10 years and it works well for our industry.

Next, do this:

  1. During the interview process when hiring a new employee, review the evaluation form with the prospect.
  2. After the first week of employment, spend time on a verbal evaluation with the employee. It is as important to receive feedback about the job as it is to provide feedback about performance. Use the evaluation form only as a guide.
  3. Ask the employee to give his/her score on each objective that you are measuring. In my experience, I have never had an employee give a higher overall score than the manager did. Employees are usually tougher on themselves than the manager doing the evaluation.
  4. Once the employee provides feedback for each objective, I recommend that the manager follow. I like to always ask "Why" to the employee regarding that person's score.
  5. After the first 30 days of employment, conduct a second evaluation.
  6. On the six month anniversary, do another evaluation following the same format. This time, use the prior evaluation as a baseline looking for improvements from the employee.
  7. Don't sugar-coat the evaluation. Hit the issues head on and don't jump around. It is important for an employee to receive constructive criticism about performance. For example, if you have an employee that is always late for work, be precise about the dates and number of times that person was late.

While the employee evaluation may seem like a huge investment of time over a one year period, I again challenge you to the following: If you have an employee that is 10% more productive or that can add 1% to the bottom line by operating more efficiently, then should you not invest the four hours or less over a one year period to work with this employee? How about every employee?

People want to be associated with winning companies and companies can't win against their competition if they don't evaluate their employees.

If you have any questions about employee evaluations, please e-mail at [mailto:[email protected]] [email protected]. I have a vision of our industry changing from no evaluations and one way streets to objective evaluations and two way streets, adding to bottom line profitability. I have a vision that we will return to a 10% pretax bottom line by reinvesting in people.