“Businesses Hire When They are Swamped with Demand, Not When They Have High Profits”

November 26th, 2013

Mike Sankowski has been banging his spoon on the high chair about this forever. And rightly so.

Repeat after Mike. And keep repeating it to anyone who will listen. The “higher-corporate-profits = jobs” meme is perhaps the most pernicious falsehood in political economics.

How Business Owners Think

For almost ten years I was co-founder and CEO of a rapidly growing seven-figure company: thunderlizard.com (now sadly defunctified by the folks who bought it in 2000). My partner and I made a very conscious decision early on: Don’t get bigger. Get more profitable. (This was not our genius. The Aha! moment came from one of our employees. Thanks Toby!)

We decided to maintain our current staffing levels (10-12 of us), and throw all our efforts at generating more profit with those same folks — building killer-efficient management and organizational systems, developing world-class direct-marketing and customer-tracking tools and methodologies, etc. (Plus requiring everyone to document all those systems; we all hated that part but we had to do it.)

It worked brilliantly. This meant that 1. Our employees were able to do more creative, thinking work rather than administrative drudgery, and 2. We were able to pay them well. They did well in the buyout as well.

Our biz: we created, owned, and ran high-tech professional conferences around the country. (“Conferences with Content.” Catchy, huh?) The only way we “hired more” was when we sold a lot of seats at our events, so the hotels/trade centers/etc. had to bring on more staff for all the lunches, receptions, and such. More demand, more sales, resulted in more hiring. Our profits had nothing to do with it.*

And no: higher profits didn’t spur us to produce more events. That would have required hiring more staff (who we’d have to manage…). By the end, we were making all the money we wanted or needed, and then some.

A note to “incentive” fetishists: as profits grew, we had less incentive to work more or harder. One day near the end stands out. We had two events running simultaneously — one of them the biggest, best, and most profitable we’d ever run. And…wait for it…my partner and I were lounging on his boat in the middle of Lake Washington, on a glorious summer day. Ask yourself what you’d do in that situation.

As another former CEO, Nick Hanauer, says (1:50): “Everyone who’s ever run a business knows, hiring more people is a course of last resort for capitalists. It’s what we do if and only if rising consumer demand requires it.”

When we generated great profits, yeah we were able to pay our employees more. But mainly, we banked it. We certainly didn’t think, “Oh gee, great! We can hire more employees!” That would be stupid.

Money-grubbing entrepreneurial capitalists like us may be many things, but we’re not stupid.

* We had a joke back then: “You know what we do with empty seats after a conference? We burn them.” Excepting some events that sold out, the “resource constraint” on supply consisted of asking the hotel to put out more chairs. As we sold more seats, the marginal cost of production dropped to laughably low levels, and marginal profit skyrocketed.

For our business, at least, the (neo)classical production function was an absurd parody of reality. Economists will tell you that modern economics is much more sophisticated than that, and it is, but still: most of them are still running the Econ 101 parody version in native mode in their heads.

Cross-posted at Angry Bear.


  1. barleysinger
    December 29th, 2013 at 14:37 | #1

    Good for you. Great that you knew not to confuse your company size, with being profitable, and that you paid your people well.

    Unfortunately, there is a major difference between your business model and the ones commonly found today.

    You limited your size to what worked, not mistaking SIZE for PROFITABILITY.

    You also you paid your talent well (again) which is early heard of in anything related to I.T. these days. A senior I.T. engineer (20+ years of experience) who is a salaried employee, usually gets no stock, no bonus and makes less in salary than a lot of 1st year grade school teachers do (my sister started her first full time teaching job at a higher pay per year, with 3 months off a year, than my brother in law makes who – before the recession – was the head of a major It department for a major US shipping company).

    What yo did is rare

    A lot of that fact comes down to the desire to grow huge and fast, and the temptation do that by getting “cash injections” from investors (which nearly always comes with losing control of the company).

    Most “start ups” in the computer world, are begun by techy people who have a love for the tech. They are creative and inventive people. They start out hiring ONLY other people who have serious talent (degree optional) and who also take joy in the tech.

    As the company grows they realize that they MUST hire other NON-TECH people to deal with day to day things such as phones and orders, because those sorts of interruptions mess up your productivity. The problem is that they then rakl a critical point in growth and most of the time they make a fatal decision.

    As the company grows the founders find that they are spending less and less time doing what they love, and more and more time managing things, day after day spent in meetings that often accomplish far less than they used to get done in an informal 5 minute conversation, while setting up a machine in the server room.

    So, in exasperation, they bail on the idea of being managers, and put THEIR business (the one with the happy well paid employees that is so profitable and rapidly growing) into the hands of people who know nothing about that business (often know nothing about the industry) – usually MBAs.

    This is understandable to some extent. These are creative and smart people (in their own field that is) and they are going nuts dealing with people problems and financial issues. They hate the fact they don’t get to “do tech” and make anything anymore and so they hire people to handle the day to day business slog, so they can stop spending their lives in meetings (and regain the joy that they used to get from working) not to drown in bureaucracy.

    This is nearly always the beginning of the end for the “quality of product” that was giving the company its rapid rise into high profits.

    Rapidly what was a growing company with happy well paid employees, becomes a business with serious profit shortfalls, a pay structure that is VERY top heavy, with low talent retention, no worthwhile new hires (they would cost too much), long hours with all of the most important techy decisions being made by sales and marketing people.

    As problems with cash flow arise (and they always will) instead of going with “slow an steady wins the race” they go for cash injections from outside. By then their old reputation of quality is beginning to suffer and so there are shortfalls in predicted sales; as well as and larger and larger bonuses up top which can only be covered by MORE injections of cash

    Essentially the begin the downward slope of trying to borrow it way of of debt, and get venture capital to grow the company on, which loses them all internal control of how things are done.

    Soon the work environment is intolerable. Pay drops, stock options and bonuses evaporate (unless you are in upper management, sales or marketing), group leaders can’t hire good talent (not at those pay rates and bad house, and not with the “human resources” rules now in place).

    Wave after wave of primary talent quits in waves of growing sizes (every 12 to 24 months on average) and profits continue to fall.

    this lack of retention, lack of creative control, lack of IT knowledge by those in charge and desire to borrow their way out of debt becomes a cycle – and even as the company goes deeper and deeper into a financial hole, salaries up top RISE DRAMATICALLY.

    If it does become evident that an upper level manager is an incompetent idiot, that person is REWARDED when they are fired with a “golden parachute”, which quite often is larger than the productive staffs pay for several years.

    Given enough time in this cycle, what was once a rapidly growing company with happy well paid employees, faces certain bankruptcy with a mass of loans that cannot be paid. So they either wind up closing their doors, or (if they have anything inside the company of worth) the company gets purchased, and most of the staff is laid off.

    *** THE MORAL ***

    * Never lose control of your company
    * Do not try to grow a company more rapidly by using “venture capital” (see first rule)
    * Do not confuse size with profitability, or confuse # of items shipped with liquidity
    * Managers work for the creative staff (so they are free to create) not the other way around
    * Never make business decisions based on your emotional state – ie, personal unhappiness with being in a responsible position
    * never try and borrow you way out of debt

  2. barleysinger
    December 29th, 2013 at 15:10 | #2

    pardon, it is “rarely” heard of these days. Very few companies of any sort pay the people responsible for their profits anything close to what they are worth. This eventually limits their ability to stay viable, but in the mans time a great deal of nastiness is visited on the employees.

    Also unlike most people you paid your staff well when you sold. Most of the time the owners take all the cash and the employees just lose their jobs.

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