The Game with Alex Hormozi - The Price and Value of Employees | Ep 272

Episode Date: January 28, 2021

Protect the company at all costs. Today, Alex (@AlexHormozi) shares a story of an HR manager’s choices gone wrong, the two lessons he got from this moment, and what “value” really means when running a company.Welcome to The Game w/Alex Hormozi, hosted by entrepreneur, founder, investor, author, public speaker, and content creator Alex Hormozi. On this podcast you’ll hear how to get more customers, make more profit per customer, how to keep them longer, and the many failures and lessons Alex has learned on his path from $100M to $1B in net worth.Timestamps:(0:52) - HR role: not about making people happy, cautionary story.(7:03) - Employees ≠ customers. The company is the customer.(12:27) - Value: marketing/sales primary, operations secondary.(21:00) - Company's value based on people. HR recruits talent, protects.Follow Alex Hormozi’s Socials:LinkedIn | Instagram | Facebook | YouTube | Twitter | Acquisition

Your employees are not your customers, all right? Your company is always your customer. Number one, because the company balances the priorities of everyone, the shareholders, the customers, and the employees. Welcome to the game where we talk about how to get more customers, how to make more per customer, and how to keep them longer, and the many failures and lessons we have learned along the way. I hope you enjoy and subscribe. What's going on, everyone?

I wanted to, I'll probably make a couple of podcasts about my day yesterday, but it was our quarterly meetup for our leadership. and there was kind of, you know, there's a few kind of, I don't want to say teaching moments, but moments where I was kind of able to transfer some of my, you know, more updated beliefs about how a company should run, that they were like, man, I wish we'd record this. Like, that would have been such a good podcast. And so I want to try and do my best and kind of cover some of those points with you here. So you can almost be like a fly on the wall in some of those meetings.

And so the first one was about the role of HR. Now, before all of the entrepreneurs who were listening to this, you know, have that eyes glaze over. This is probably the first podcast I've ever made about, you know, HR and human resources. But I think it's incredibly important and it's not just about if you have an HR department. So for many of you might only have a handful of employees or you're a manager at a company. So if, you know, entrepreneurs, if you have a manager or series of managers or leaders in the company, I think for them to understand what the role of human resources and investing in employees looks like, I think it would be valuable. So I'm going to start with a story of HR gone

wrong and then kind of go from there and kind of dissect it as like a little mini case study or to the best of my ability. And so to expound upon the many lessons and failures that I have had in running the business, a year or two ago, we had an HR director and, and, you know, I'll just tell you what happened. So she had taken upon herself because she didn't have enough work. I know this, but she doesn't know this. It was because she didn't have enough work. And she had over-hired.

She had six people in her department. Six people in HR. Can you imagine? Six. We had a hundred-person company. Like six people. Like it's just so many people. So she had a lot of people and no one had any work to do.

And so she took it upon herself to do a salary analysis, which is basically a study of how much everyone in the company, you know, quote, should be getting paid based on, you know, the role, their experience, with the market's playing, and where they live, right? And this took like 90 days for her to do this for every single person in the company. And so she used up, you know, a lot of company resources, three, four, five employees, etc. For this period of time to do the study. And the result of the study was that she had determined that,

you know, I don't know, 20% or 25% of the company was being, you know, overpaid, and then 20 or 25% of the company was being underpaid, and then about 50% of the company was being paid, you know, appropriately. And so the conclusion that she came to was, well, I'm going to email everyone and just say, if, you know, if they were being overpaid, they were going to stay there, because we're not going to give people, you know, pay cuts. If they're adequately paid, they'll stay where they're at. And if someone's being underpaid, we'll email them and say, hey, you just got a raise. Congratulations. And so this may have been

the single stupidest thing I have ever seen someone do in my entire life. But that was the decision that was made. And so this was reported to me at a, what do you call it? At our quarterly. And this was actually her accomplishment for the quarter. And I just remember

just being so so bewildered, befuddled, dumbfounded by the fact that this person, this human being, had thought that this was a good use of company resources.

And so I'm going to break down the many reasons why this is not a good idea, or this was a terrible thing, and then kind of outline what I believe the ideal role of HR isn't a company. So the reason this was terrible was that So she literally used company resources, probably $100,000 of payroll resources to create this

solution that then just paid out more money from the company, which is just my wallet. It's just my bank account, right? And just paid out more money for no reason and did it in a way that anybody who got paid more had no explanation for why they were getting paid more and provide no value. So she literally wasted money doing it, wasted money for that point going afford in the company because after someone gets that email, I could just be like, oh, by the way, she was wrong. Sorry about that. And then we're just going to keep you back where you were. And so I think the whole thing probably cost me like $600,000 in profit, right? Like, I mean,

like more than she was going to get paid for years, right? And it just seemed like just a small thing. Like, ah, it's just the company, right? And so this is where, you know, if you're a manager in a bigger company or you direct, you know, if you report directly to the CEO or the owner, you have to understand this, right? And so yesterday at our quarterly, our current HR director, that Drake's not with us anymore, was bringing up her, she was kind of giving her position on what she believed her value to the company was. And I ended up kind of giving a talk about this in general. And so this is, for my current HR director, this is not about our conversation or anything like that.

But this is just in general for everyone. So I wrote some notes down because I think it was really important. And so one of the things that I hear a lot is my role is to make employees happy. All right. So I'm going to just hit piece by piece. Your job is not to make employees happy. As an owner, your job is not to make employees happy. As a manager, your job is not to make employees happy.

As an HR director, your job is not to make employees happy. Employees job is to make employees happy. Human beings are responsible for making themselves happy. There are people in Auschwitz who wrote books about how they were happy, and there are people in America living in the top 1% of earners of the whole world who are miserable and depressed. All right. Your job is not to make people happy. People will choose to be happy based on their own beliefs about their circumstances and what their thoughts are independent from the actual things that are happening to them.

So first off, it is not your responsibility. It is your responsibility to try and find people who are going to have a positive, inclination who are going to fit in with the culture so that we can keep an atmosphere that does retain and attract talent, which is the next thing I'm going to get to. But your job is not to make people happy. All right. Number two, one of the things I heard is that employees are my customer, right? If you're a manager or your HR director, like, well, really, you know, everyone who works here is my customer. Incorrect. That is not who your customer is. Your customer is the company. Now, I'm going to be clear about this. The company has three stakeholders. You've got

shareholders, the people who own the company. You've got customers, the people who pay the company. And then you've got employees, the people who run the company. All three stakeholders have to be considered. Now, the reason this is an important delineation is that if you have an HR director who is like employees first, then you have the type of stupid, stupid decision that I just discussed in the very beginning, which is literally just paying out profit for no value. And this is an important point that I need to cover, which kind of leads naturally to the next thing, is that in order for a company to grow, it has to have profit. In order for it to weather storms that it does not see that are going to come in the future,

it needs to have profit to be able to reinvest in new product lines, in legal defense, in whatever it could possibly happen. And when you just choose to buy things for no value, which is essentially what it is when you just overpay, then you put your company in a bad position. So let me explain. So an investor looks at any kind of asset. And a company, the assets of the company are the humans, right? It's human capital.

It's the actual value that get from people, especially if you understand. service business, right? And so you have the value is what you get, and price is what you pay, right? And the goal, I want to be very transparent about this, of the company, is to pay as little as possible for the highest amount of value. And that may make people uncomfortable. But the point of all businesses is to get as much price, they want to have as big of a discrepancy as possible. So if I'm an investor and I'm buying stocks, I want to buy the most. I want to buy the most. most valuable company that I can for the least amount of money, right? It's a price to value discrepancy. The bigger that discrepancy, the better it is. Now, if it's the reverse,

you're paying more for less value, that is a bad deal. It doesn't matter what you're paying. It's a bad deal. All right? And so the reason that that first HR director made such a terrible decision was because she literally just chose to take our good deals and just say, hey, we're going to make bad deals now. And all of our bad deals we're going to keep as bad deals. Right. It just, it just, it just, it just, it just, it just, it made no sense whatsoever. And so that's, that is what we're like, that is the goal here, right? And finally, when I was talking to our HR director about this, she pushed back on this. She was, um, not, sorry, not her, but like you might have, you might have any chair director,

you might have a manager who might push back on this idea. And so I just want, and the two different, two different scenarios came up that we were walking through. and one of them is, well, you know, you as the entrepreneur, you know, you always value the marketing and the sales more than the rest of the company. And I could see that there was, you know, some being at odds with that, right? Like, I don't know if I agree with that. And I want to be 100% clear. I do value marketing sales and product more than operations. Here's why.

not that long ago there was a period of time where I had mentors who were like you need to put operations first right this is part of scaling you have to delegate blah blah blah and so there was a period of time where I put operations on a pedestal and was like no guys we need to just do what operations wants us to do and to be clear for definition operations is everything that is non-core to the value of the company all right that is IT that is HR that is finance that's legal all of those comprise operations, all right? And to be clear about what that means is it's everything that must happen to keep the company running, but is not a core value driver for top line revenue or for customers, all right? And so marketing brings revenue in, product delivers value that is being exchanged for money. That's fundamentally what a company does. It's got stuff and it sells it, right? And as long as you're delivering the stuff or you're selling the stuff that is being delivered, those are core value to the company. Everything else absolutely must happen. But in general, they're not the main value drivers. Now, that being said, there are ways that those other components

can provide value indirectly. And that's what I'm going to cover in this because I think being an HR director or being a manager in a company and being in one of those roles, if you're clear on that, you will be more valuable to your owner. And if you're interviewing for a position and you talk the way that I'm telling you right now to talk to an owner, you will probably get the job and probably stay there because they will know that you understand what you were talking about. So the example. She said, well, you know, I feel like you care more about, you know, sales and marketing, and I said, yes, I do, and here's why.

And by the way, when I did that operational thing and put operations first, the company started going down, and we started making less money, and it was painful and horrible. And I had to basically jump back in and be like, I'm so sorry about that. not a good idea. We are keeping the value we provide and marketing and sales primary. And operations is secondary to that. It is a supporting role. So if sales says, hey, we need contracts to be changed because this is the new offer or whatever, then operations has to say, all right, we're going to go figure that out. And that is the point. The point is that operations should support and always enable sales marketing and product. So she said, well, I feel like,

like, you know, you value, you know, like a star salesman more than you value like a frontline customer service person. And so she's like, you know, there was a, there was a decision that, you know, this has come up. You know, a zillion times over the years is like, you know, I think you value these positions more. And I always have to unequivocally say, I do. Yes. Because people, people like, and I feel like this is, I don't want to say an employee thing or it's just like, they feel like it's like a bad word for me to be like, no, no, no, I do care about more about marketing sales and product, period, period. Because they are the major drivers of value in the company, all right?

And so, for example, if you, Chet Holmes wrote about this in his book, if you have a superstar, this is what I was talking about to the whole company, I was like, if you have a superstar salesperson, and that person, you know, is being paid, quote, above market. right above market value there's two ways of seeing market value there's market value which is like what is the rest of the market paying for this right and then what am I getting in return for this specific person so for like if you have an all-star salesperson like you may have gone through 20 salespeople to find an all-star salesperson for your specific company your specific product right

because there are some sales people who who excel in let's say B to C transactional sales all right and there's some who who excel in you know a long style B2B consultative sales. And there are some salespeople who excel in account management and kind of upselling and kind of like the farming and continuing to grow an account, right? Those are all sales. They're just different. And so I could find a salesperson, right, but that person might not perfectly fit my company and I might not yield the same outcome. Hey, Mosin, Asian, quick break just to let you know that we've been starting to post on LinkedIn and want to connect with you. All right, so send me a connection request and note letting me know

that you listen to the show and I will accept it. There's anyone you think that we should be connected with, tag them in one of my or Layless posts and I will give you all the love in the world. All right, so let's get back to the show. And so if I have, for example, somebody who's selling really well and sells three times, you know, sells more than three times, you know, it would take me two or three normal, quote,

normal salespeople to replace their production. And this is common in most companies. Most people have multiple salespeople. There's one person who, you know, one or two people who always like lead the pack. disproportionately, right? And that person, right, in many conversations, this is one of them, is like, well, if that person came up to you, for example, and said, well, I want a 20% pay raise or a 10% pay raise, she was like, I disagree with that. And I was like, I think that's stupid that you disagree

with that. I was like, make the economic argument. If we lose that person and then we lose half of our sales, how can you tell me that was not worth 10% more on their base salary? It's like, well, I hadn't thought about like that. I was like, right, you need to think like an owner, right? You got to think like an owner. What am I losing here? Right? And to the same degree, the corollary to that is like, well, I feel like you don't value customer service as much. Like, what if we had an amazing customer service role? This is kind of like the counter example, right? Like, well, I feel like you're willing to pay these people more than you are willing to pay these people. And it's like, yes, I am because they provide more value. And I was like, okay, I hear where you're coming from.

What if this person does an amazing job in customer service? And I was like, I get it. So let's say this person disappears tomorrow. How much less are we going to make? So probably not a lot. I was like, right. And so if you wanted to, you know, come to me with a, you know, customer service person and say, this person, you know, saves X percent of people per month and that results in this much money. And the aggregate of adding a dollar per hour, example, to this person's role still doesn't, compared to what everyone else on the team is saving, which would be like what I would consider market, right? Like if I just brought some in who's average and this person is way above average, let's say this person saves, you know, 25% of the whole team saves is from this one person,

then I'd be like, okay, well, there's a number of value to that, and, you know, we can incrementally add a certain amount that would mean it was worth keeping, right? And I was like, but in this example, what we're talking about, if this person stopped and just was gone, I was like, how much do you think that the company would make less? She was like, it probably wouldn't change the revenue. And I was like, right. And for that reason, that is how market value is established. And so for everyone, it's like, this is the real world.

All right. Like, I don't know what the Harvard Business Review says about making happy employees and like all this, you know, whatever, who do. In the real world, you don't get a trophy, all right? Not everyone's first. Not everyone makes the most amount of money. you get paid based on the value that you provide and a good owner understands that right and so when we you know we were having these discussions um i think that uh it was it was good for our whole company to to understand and see like that's the point here like the point is to make a profit

the point is to pay as little as possible for as much value as possible right and assess the value of the individual based on what they contribute to the bottom line right and so you know to wrap this up if you're you know for for for for hr in general human resources it's like well then how do i provide value you provide value by one protecting the company at in all ways all right and the way that you do that is first when people come to you and say hey i want to hire so and so your first answer should probably be no give me a reason why your team is so overworked they can't just work more, right? Show me your hour-by-hour utilization that you have.

And I'll tell you right now, and I've said it in the past, a lot of people don't work that hard, all right? And a lot of people will say that they are overworked because they literally do not understand what work is all the time. I know this for a fact. There are some of you listening to this right now who spend your entire day not working, trying to work. You spend all day getting fuck all done

because you're in your head and you literally have an inability, to focus. That is not a company's fault. That is your lack of ability in being disciplined and learning the skills of learning how to work. You have to get you just have to get things done. And so many people don't get much done in their whole day and then say, hey, I need help. When it's really like they aren't actually overworked, they actually just don't know how to work. And mind you, this is a lesson that I learned because I was younger once and I started working at a law firm. as an intern and I remember a senior partner jokingly said to me she was like you don't even know

what work is yet she's like you haven't even learned how to work and I and I was like offended but then I saw how hard these people worked and lawyers worked you know in in hard her law firms they work their asses off and I was like huh she's probably right right and I started observing the habits of the people work more and how much more they got done so anyways um point is is that people will come and try and hire for help when there really isn't it's not necessary and so that does not protect the company it also doesn't protect the employees because if the company's at risk everyone's at risk right so you have to put the company first right and so that's thinking like an owner so that's number one number two is that you have are

active in recruiting the best talent all right because everyone knows that the value of the company is going to be based on the value of the people the who not the what right a good who we'll figure out the what. And so really good HR is really good recruitment. It's talent, right? It's finding the talent, developing the talent, retaining the talent. Now, obviously not all of that's going to fall under HR, right? Recruiting, absolutely, right?

You know, developing is going to be more underneath the departments, and retaining is going to be a function of, really, the department heads and then the compensation packages, right? But the thing is that I want to be clear here. If you, and this is, I'm going to wrap this back in the original story, when, you know, the HR director, the former HR director, did this big salary analysis, and she said, hey, this is our big success, we're just paying people more, and we got nothing back in value as a company, right?

I was like, why did we do this? And that's the hard question that, you know, obviously she wasn't able to answer. I was like, why did you did it because she had nothing to do, right? But that's actually why she did it. But I was like, what problem were we solving here? what was the objective of this and the answer there was not right because

the only reason that you would want to move compensation is for one of two things either you cannot attract talent or you cannot retain talent so what I mean by that is like the only reason to really increase someone's pay if they are already working for you

is because you value them enough that replacing them with someone else who has a comparable still set would not, the marginal difference would not be, like if the margin difference is huge, right, then you'd be incentivized to retain them, right? And you as a company, in this hypothetical example, have a problem retaining employees. We, at gym launch, do not have that problem. We have incredibly low attrition. We fire people like crazy, but people don't quit.

And that's because we have a really high performance culture. Like people don't last. what I mean? Like it's, uh, like, sorry, low performance don't last. Uh, it's, I, I heard this from Grant Cardone, but I really liked it. It's like, Jim watches a dangerous place to work. Like, if you, if you come in and you get on the train, like, you will learn more from me and us and running a company and learning how to grow things, uh, than ever before, but, uh, you got to perform. Like, this is a winner's environment. And if you are a winner, you will love it here. And if you are not a winner, you will not, I mean, you won't be here very long,

right? Because the thing is when you come, if you've ever played on a high performance sports team in your whole life at some point or any kind of team that was high performing that was a winning team usually there's a culture that if someone is new and comes in they either assimilate or are rejected and the stronger that core team is is like this is how we do it right we wake up at five we go over our scripts we roll play we do game day review from the day before on sales calls blah blah blah blah we you know et cetera and someone new is like oh man that's you guys are waking up early like i'm not really about that life like like the team team will be like, dude, get this guy out of here. Like, he's going to take the team down. And so

having that culture allows you to spit people out quickly, but it also allows you to retain. Now, this is my point earlier, which was why did this HR manager, director, make this call, right? And obviously it was because she wasn't thinking, right? But there was no problem that she was trying to solve, which is, I was like, this was a hard time for her, I can imagine, because it was in front of the company. I was like, do we have a problem attracting talent? It's like, no. I was like, okay. So the pay that we are currently offering is we're having no issue finding talented people to work for these positions at these price points. It's like, no. It's like, okay. Do we have a major problem in attrition? Are we losing employees left and right to competitors who are paying

more, offering more, or that we got headhunters picking off our people? she's like no it's like then why did you just choose to spend $600,000 a year more of bottom line profit why

and the answer she had none right and so it's making sure that we understand why we're doing things right the point of the company is to buy value

at the lowest possible price that is the point I don't care what anyone else says that is the point all right you're going to try and pay for the value as little as you can because that discrepancy is where the profit is.

Just being real, that's where the profit is. You need to have a discrepancy in order to have a profit so that the company can continue to run. That's what it is. And so, anyhow, I share the story at the beginning because that is one of a zillion failures in lessons that I've learned along the way in this game. And if you have a star employee,

I think a lot of times it is worth paying them more to keep them. is you get, like, everyone knows, like, if you have a star employee, they're usually worth, like, three or four employees, five employees in output, right? I'm probably worth a lot of employees in output in terms of top line revenue this business. So I get disproportionately paid. Is it fair? I think, yes, it is fair. I think you should always be compensated based on the value they provide.

I think that's the ultimate fairness. I don't think it's like, oh, he's a human, I'm a human. We should get paid the same thing. That doesn't make sense to me. All right. So I want to make sure I hit all my points. Make employees happy is not your problem. It is their problem.

It is their responsibility. Now, you can equip them with tools and skills about mindset and whatnot. But, like, ultimately, the accountability of who needs to make who happy, you need to make yourself happy. A job is not supposed to make you happy because there are people who are endlessly happy in, quote, terrible jobs, and there are people who have amazing jobs and kill themselves. So it has nothing to do with you. Number one.

Number two, your employees are not your customers. Your company is always your customer. Number one, because the company balances the priorities of everyone, the shareholders, the customers, and the employees. I'm a quote middleman between the employees and ownership. That is not true. You protect the company, all right? These are false beliefs. These are not true.

All right. You know, undervaluing people who are not value, you know, top line value providing, right? They're not delivering on the value that we're selling or selling the value, right? Those are fundamentally what a company does. We sell value and then we deliver on the promise. That's it, right? And if you're not in one of those core things, unless you can make an argument for how you were directly providing value,

then you will probably get paid less. And that's okay. And that's okay, right? Fundamentally thinking about all employees as units of value and ascribing a price to them, right, which is what you pay them. and trying to always understand that you're always going to try and pay as little as you can for the most amount of value. Right? And that's okay.

That's okay. That's the point, right? The only reason that you would pay more is if you have trouble attracting or retaining people. If you're not having any issues or attracting and retaining people, then you're paying fine. Right? Like, you don't need to change the comp. And so finally, that is what I will lead you with or leave you with. in this role of HR and my many, many lessons along the way.

I hope you enjoyed this and click subscribe and all of that good stuff. But I have some passion with this because I've made these mistakes so many times and I've seen these mistakes made on my behalf. And so if you were a manager, if you're an HR director, take this to heart. You work for the company. The company is your only customer. And your responsibility is to protect the company. just like everyone else's responsibilities to protect the company.

And if you can think like that, you will think like an owner, and you will move up in your company. If you live in a la-la land of, I'm supposed to just buy beanbags and keep employees happy, one, you're going to waste money. Two, you're not going to know what actually provides value in a business. And three, if you're in a different company, what may happen, if you don't have like a candid owner or whatever

who wants to like talk real with you um they'll just kind of like put you in a corner right and then just like oh yeah yeah yeah yeah you bet yeah go do that little initiative um but they won't actually see you you as valuable uh because it means because you don't get the game like you don't get it you have to understand it um and then people like you'll you'll get into the in circle i'm trying to say this the right way you've probably had people in your life where you've got you've got your friends right And you're like, she gets it or he gets it, right? You talk to your friends like, no, she gets it, right? She gets how we see the world, right?

The thing is that most business owners see the world the same way. And that's why they are the owners of the business. And that's why they started the business. And that is probably the business has grown. And so it is in your best interest to align with the company overall because a good owner will put the company first, not themselves. Because ultimately, the company feeds them. The company is the goose.

The company is the beast that feeds everyone. It is the thing that plows the field. It is the mule that everyone is fed off of. And so we have to keep the mule healthy. And that is by having the discrepancies and making the hard conversations and making the hard calls and being real with you, which is what I'm hopefully trying to do right now, which is that is the point. All right.

So, anyhow, I hope that was value before you. I hope that made sense. Hopefully you don't have to pay the many lessons and failures that I have. and if you have an HR manager or a manager who, you know, hires and argues for compensation and things like that, send this to them if you think it's valuable. So anyways, lots of love. Case you soon.