Adam Price | Crain's

In this ongoing series, we ask executives, entrepreneurs and business leaders about mistakes that have shaped their business philosophy.

Adam Price

Background:  

Restaurants outsource their delivery services to Homer Logistics so they don’t have to manage their own internal delivery team. The New York City-based company provides both the software needed to manage delivery and the team of people to do it.

The Mistake:

When I first started the company, we knew that the amount of orders coming into the system wasn't going to be substantial and that our delivery personnel make a significant portion of their earnings by the tips associated with these deliveries. And we knew there weren’t going to be a lot of deliveries, so hence they weren’t going to be making a lot of tips.

We didn’t want to concern ourselves with everybody quitting every week because they weren’t making a lot of money because we didn’t have a lot of customers yet. So we decided, “All right, we’re not going to worry about people quitting.” What we’ll do to solve this is we will just pay everybody well above minimum wage, and they can keep the tips. But we knew there weren’t going to be a lot of tips, so their gross wages were predominantly this hourly rate we were cutting them.

Time rolls on and we start getting busy. We’re growing really fast, we’re adding employees, and before we know it, we’ve got 100-and-something people. So now, not only are they making well above minimum wage, but they’re making a lot of money in tips. What happened was, we ended up in a position where we needed to actually take our model and adjust back their hourly wage provided, because now more of the gross wages were being supplemented by the tipping. We had to tell everybody at the company, “You’re effectively going to get 40 percent less on your hourly base pay from us, because now you’re making more in tips.”

That was a horrible experience to go through. It’s a low-income workforce. Some of them are living paycheck to paycheck. Telling that workforce that they’re all going to make 40 percent less on their hourly base pay because now they’re making more in tip wages was just awful. We had a significant amount of people leave the company.

We’re able to retain our workforce because we’re so transparent.

The Lesson: 

We didn’t clearly communicate why we were making the changes or how. What really was going on was we needed the business to be operating at a healthier margin. We weren’t profitable. We were losing a lot of money fast by continuing to pay them more than minimum wage, and we needed to turn the economics of the business more favorable for us to even survive. But we didn’t communicate that with them.

Communication and transparency with an employee makes such a big difference on how somebody feels they’re being treated. When I was in college, I was a surf instructor, and I would’ve done that job for free because I loved it so much. I loved the people that I was working with so much, and it was such an enjoyable environment. We’re creating the exact same thing by being very transparent and creating a very strong culture. We’re able to retain our workforce and have very few people that leave because we’re so transparent and honest about what’s happening.

Follow Adam Price on Twitter at @adampricenyc.

Do you have a good story you’d like to share, or know someone we should feature? Email jfisher@crain.com.

And be sure to sign up for your local newsletter from Crain's.