Creating Your Organization

One of the most exciting aspects of starting your own business is the fact that you are able to create an organization of your own choosing.  You can start with a blank sheet of paper and just create.  The way you want.  You’re the boss, right?  But wait a minute.... once the excitement wears off you’re either going to start setting things up the way they were at your last office, or get into the trap of putting together an organizational chart to be filled in later.  Right?

I ask you to consider doing things a little backwards of the initial thought.  Consider building your organization around your people.  If you will take your time to hire the best people you can, you may find that their abilities and strengths/weaknesses can have an impact on how you set up your business.  For instance, start with yourself.  If you are weak with the details, consider looking for someone within your new organization that will compliment yourself.  You may or may not find this person as you start looking for key employees.  Your organizational chart will change drastically depending on who you hire and what their skill set is in relation to yours.  While this logic is unconventional, a small business does not have the luxury of having too many boxes in their organizational chart.  The trap of filling boxes with names is it overlooks the flexibility that may be required in hiring the right people and putting them to work productively.

Start Lean and with the right people

In the first few months you have the opportunity of choosing the people you will spend more time with than your family over the coming years.  Shouldn’t you spend a lot of time and energy choosing well?  The fact is, you are better off to start with fewer, better people.  These people can also assist with structuring your organization to make it more efficient, also.  They can be a part of putting together the business plan.  And why not?  They will be responsible for implementing the plan, right?  They will be responsible for implementing the plan, right?  If you start off too fast, with too many untrained and unqualified people, you will immediately create more management problems for yourself.  This detracts from your primary responsibilities of starting the company right by selling, promoting, organizing, etc.  Start lean and mean in the beginning.

Empower them and pay them right

Empowerment is one of those buzz words that large corporations have adopted for the last few years.  It is really just giving your employees the responsibility of doing the job right and making decisions.  If you took time in hiring the right people this makes empowering much easier.  Another key is training.   You should invest in your people to give them the skills necessary to do the job right.  Lastly, you must pay for talent.  If you start lean and mean you will actually end up paying less anyway.  And your employees will do more and more for you in the process.  One of the most significant goals for a small business is to strive to have the best quality, highest paid employees in your industry.  Also, think of them as “your people” rather than your employees.  Being your people lets them know that they are special, not just an employee.  They are your company and they will represent your best interest in running your business.

Create self-managing work groups

The days of having organizations with managers is on the way out.  The problem has always been that with this mentality, in time you need managers to manage your managers.  Pretty soon everybody is managing and nobody is doing the job of your business.  By having an organizational chart that creates such a structure, you are locking yourself into this forever.  Instead, consider organizing your employees into groups that are responsible as a whole.  These organizations will transfer the traditional management tools to the workgroup who will do the job for you.  They can become self-managing in time, where new employees will be trained and developed by other members of the team.  The team will look out for others on the team for the betterment of the company.

Outsource wherever possible

Outsourcing is using contracted persons rather than employees.  This has many advantages, the best being that you do not need to pay them as an employee, hire or fire them, or otherwise follow the myriad of laws and rules that apply to employees.  Also, these persons can be experts in their field and you don’t have to do their training or pay for their education.  If you need a person for 20 hours per week you don’t have to find something else for them to do the rest of the week.  One warning, however.  Do not try to hire all contract employees when this is not normal for your industry.  The IRS will not, in all likelihood, allow it.  And their fines can be substantial.

Some of the jobs that you can typically outsource are payroll accounting, training for employees, temporary staffing, bookkeeping and accounting, just to name a few.  You can also use temporary employment agencies, who can provide information on their temporary services and even some new, innovative services such as “employee leasing,” which is similar to hiring contract labor.

Recruiting your people

This is the first step in building your organization.  When you begin market research for your new firm, you will probably be visiting competitors.  Keep an eye open for possible employees here.  Often, the best first employee is someone like this who has the years of  “on the job” experience required, along with the right attitude and knowledge of customers.  In the beginning do not make the mistake of going to classifieds.  You will not find many qualified, organizational-building employees in the paper.  And this will end up being a monumental task, sorting through dozens or even hundreds of applications.  Talk to your professional advisors about your needs.  They can often be a good source of referrals.  Also, consider college recruiting.  Recent graduates are a good source of young, energetic people.  They will be light on practical experience, but will often make up for this in terms of enthusiasm.  Friends and family are definitely a double-edged sword.  They can be a good source of referrals, but caution should be used in employing family or relatives.  If you have good ground rules, are careful in setting expectations, and hire family or friends, you still run the risk of having hurt feelings at family or social gatherings should things not work out and you have to fire this person.  And your other employees will always wonder whether your motives in hiring them were business or personal.  In general, it is difficult to pull this off to the benefit of all concerned.

The employment application

It is recommended that you start by having all potential employees fill out an employment application.  The Small Business Development Center has an Employers Handbook they will provide you that has a sample form you can use.  Also, you can borrow the forms used by major corporations.  Often, they have an entire packet of information that they provide prospective employees on their business.  With the employment laws being numerous and complicated, it is important that your application not ask illegal questions (i.e.: age, do you smoke, etc.).  These can lead to legal difficulties should a problem arise or an applicant recognize your error.  Also, the application is an important legal document which should be kept and references checked for all employees hired.

Many firms are using a release form where the applicant agrees to allow your direct contact of former or current employers, personal and employment history, and any appropriate governmental agencies.  A copy of a sample release is also included in the Employers’ Handbook you can obtain at your Small Business Development Center.

The interview

The interview is the best means of selecting your people.  Again, from the legal perspective, it is best to develop a formal process which is well described to potential applicants.  Many organizations today use panel interviews, where three to five people are selected to conduct the interview, ask a series of predetermined questions, and rate the applicants to make an objective selection.  This is not always recommended in all situations, but the idea is to provide a process that can substantiate your decision.  Unfortunately, too often today we have to justify employment decisions to courts or other governmental agencies to comply with the laws.  The formal process allows us to demonstrate fairness and consistency in complying with the law.  Like the employment application, there are a number of questions we cannot legally ask.  Also included in the Employers’ Handbook is a list of sample interview questions, along with a list of those you may not ask. 

To make sure you hire the right person you might consider more than one interview.  This will allow you to narrow your field of choices, but more importantly, demonstrates your thoroughness in selecting the right person.  If you take that much time and effort in hiring an employee then they will appreciate that you are serious about getting the right person.  They will also feel that they are well-suited to the job and attribute greater value to their position.

If you document your employment selections on a point system or otherwise, you should dispose of any notes or subjective thought processes after the selection.  It is recommended that you keep all employment applications and summaries for at least two years beyond the date of selection.

At this point, before making selections, you should do the reference checks.  Call former and current employers (current only if allowed by applicant), personal references, and other key verifications.  This can prevent problems in the future which would be brought out by doing the direct checking.  On a resume everything can be made to look positive (in charge of sanitary engineering and environmental conveyance systems is really just taking out the trash).  The discussions you have with others will really help read between the lines.  Also, it is not recommended that you document these discussions by having notes in file.  In fact, if you let people know that their comments will be “off the record,” they will often be more open in what they will tell you.

The offer

Once you have made your selection it is a good idea to get out your employment offer letter to the potential employee right away.  A sample letter is included in the Employers’ Handbook previously cited.  The offer letter outline the terms of employment and gives the employee a limited time to respond and accept the job.  Also, it should contain verbiage that acknowledges Arizona is an “at will” employment state.  This, in theory, means that employment arrangements can be discontinued at the discretion of an employer or employee, regardless of the circumstances, based only on either parties desire to terminate the relationship.  In practice, however, it is becoming more and more difficult in Arizona to discharge workers without showing just cause.  Having this clause in the offer letter can serve to remind the court that the employee was notified of the “at will” nature of the relationship up front.

Orienting your new employees

In the beginning your new business will in part be structured around your new employees.  Ultimately, you will have an organizational structure that will be static, and will benefit from having a formal process that helps to orient new employees.  With any informal process things tend to be missed, or an employee will be thrown into your organization unprepared.  A formal system will prevent these problems and make the employee feel important to the organization more quickly.  Copies of checksheets for new employee orientations are included in the Employers’ Manual, also.  It is recommended that you utilize a formal process and follow up in one to three months to have feedback from the employee on how they felt the process went, and suggestions for improvement.  Often, they employee can assist in making your orientation program more effective in the future.

Company personnel manuals

Having a “company manual” has become a controversial issue in recent years.  Such a manual will typically contain a companies operating procedures, policies and guidelines for employees.  The advantages to having one are the employees will know what your policies are and they can look things us as a guide to problems that arise on the job.  The disadvantage has been that in more and more instances disgruntled employees have been using the manual against their employer in court to justify their grievances or what they perceive as violations of applications of policies by the employer.  For this reason, if you decide to do a manual, make sure you have help in making sure the manual has the required disclaimers and can’t be used against you.  There are some good software packages available that can help you draw up your manual with these required disclaimers.  In terms of importance, employment manuals are low in ranking of priorities.  It would be better for an employer to focus on getting job descriptions for all employees, so the individual knows their job better, before committing the time and resources to preparing an employee manual.  A policy manual can never define all the factors, or cover all the situations that may arise.

Personnel files

This is an area that most small businesspeople are poor in keeping up, that probably deserves more attention.  You should maintain a file for each hiring situation, as previously mentioned, and keep the applications and score sheets for at least two years.  From there, the individual employee needs a file, which will contain their application, reference checks, and orientation forms that you may use. 

Another key area to use the personnel file, that many small employers fail to follow up, is doing write-ups on problem situations.  Whenever you have a problem situation with an employee, whether you take them aside and have a short talk, or you have a more formal sit-down and discuss in your conference room, it should be written up in a short memorandum and dropped in the employees file.  If the problem should continue, and subsequent counselings and actions lead to discipline or termination, your record of actions will be important in substantiating your actions.  Despite Arizona being an “at will” employment state, we are getting more and more litigious when it comes to employment matters.  Unfair discharge suits are a part of this changing environment, where you will need to be prepared to justify your actions, sometimes in court. 

Performance appraisals

This is an area of traditional employment dynamics that has become more controversial in recent years.  The traditional school would have you sitting down with all employees at least once per year and doing a formal evaluation of their work.  (Two or three times per year would be even better under this approach.)   This method is still widely employed by the larger corporations in the U.S.  There is a school of thought, and many firms are making a shift away from the traditional method, that the use of performance appraisals is outdated.   As firms have progressed away from the organizational structures with managers into self-managing work groups, the need for such programs is brought into question.  Especially if you run an incentive program, the need is questionable. 

Under self-managing work groups, problems with employee performance aren’t allowed to go unnoticed for even a week, let alone a month or two.  These organizations will tend to correct performance problems more rapidly and eliminate the need for frequent counseling.  Combined with an incentive program, the need becomes less significant, as the goal attainment or lack thereof replaces the traditional counseling matter.  We will discuss incentive programs in depth later in this Module.  For small companies, both self-managing work groups and incentive programs set up up front will all but eliminate the need for performance appraisals.

Recognition Programs

Also called incentive programs, these are the best way for any small business to keep their employees excited and looking to make more money for you.  The key to success using incentive programs is to structuring it so that for every incremental dollar the employee brings in to your company, the incentive rewards the employee and the company.  Done correctly, these programs are very time-consuming up front in that you have to have them based on production or sales or whatever.  You can provide incentives to virtually any job, based on their contribution to your bottom line.  Once you have set up a program you should stick with it.  If you are indiscriminate in making changes to such a program, the effects on morale and empowerment will be very negative.  That’s why it is so important to take your time in setting things us right at the start.

An incentive program will often replace the need for performance appraisals.  You will need to maintain systems to monitor employees performance under the program.  These performance benchmarks do a better job of letting the employee know how they are doing anyway.  Having goals that are based on positive contribution to the company are always better.  The employees lack of goal achievement will mean they will not receive incentive pay or recognition.  This will often have a bigger impact on improving their production than a traditional performance appraisal.

How often you pay incentives is dependent on your companies sales cycle, and other conditions specific to you.  If you can pay incentives at least quarterly - monthly is better - you will see better results.  Incentives are based on performance objectives being met.  Don’t make the goals so easy that every employee receives recognition every time.  Likewise, don’t make the goals so difficult that no one can make it happen.  Also, avoid paying incentives when the goals weren’t met.  If employees believe that they are automatic, then you will not be providing an incentive at all.

Incentive programs don’t have to be based only on money.  In fact, those with dollar incentives should not be without other forms of recognition.  Have plaques and other forms of recognition as a regular part of your operation.  Having a rotating employee of the month award that goes with the employee to their workplace for all to see goes a long way.  A simple thank you from the boss means a lot.  Don’t be one of those bosses that is afraid to show your emotions.  Walk among your people and let them know what they’re doing right from time to time.

Idea sharing programs are another way of recognizing your employees.  Have a form that they can submit their ideas on to make the company better.  Really good programs will pay incentives to those ideas that make money for the company, and feature some small recognition such as a tee-shirt, pen or whatever, for every submission (as an incentive to get more submissions!).

Employment Taxes

In Arizona, when you hire your first employee you will need to begin paying the various taxes quarterly.  In Module 1 I described the types of taxes payable, which are numerous.  I strongly advise you obtain professional assistance from an accountant or payroll service to make sure you do things right from the start.  I also have discussed the value of having an accountant as a member of your team, but a payroll service can be another option for this area.  I have included a couple of references in the resources section of this book.  With a service you send them a listing of your payroll (or call for smaller payrolls), and they prepare the payroll checks and forward them to you to pay the employees, make deductions for you, prepare quarterly returns, and pay the taxes for you.  For many small businesses a payroll service will eliminate the need for an employee to be trained to handle these functions, which may only represent a portion of their total job.  For more information on employment taxes refer to the Employers’ Handbook you can obtain from your local Small Business Development Center.

Employment laws[1]

Once you hire that first employee, you are responsible under the following laws:

Fair Labor Standards Act:  Establishes the minimum wage.  Requires poster to be posted at your place of business.

Immigration Reform and Control Act:  Requires an I-9 form be filed for each new employee.

Worker’s Compensation Law:  Requires Worker’s Compensation insurance for all employees.

Child Labor Laws:  Restricts the hours of children under age 18 can work for your company.

Arizona Wage Statutes:  Concerning the payment of wages, frequency, severance requirements and deductions.

 For firms with larger numbers of employees, you are also subject to more laws and regulations:

 Occupational Safety & Health Act (OSHA):  Federal act that looks at safety issues, reporting accidents and requires a poster.  (For firms with 11 or more employees.)

Civil Rights Act of 1964, 1991 & Arizona Civil Rights Act:  These laws prohibit discrimination, and the Arizona act requires you display a poster.  (For 15 or more employees.)

Americans with Disabilities Act (ADA):  Prohibits discrimination of persons with disabilities, facilities that meet certain requirements, and requires display of Equal Opportunity poster.  (For firms with 15 or more employees.)

Age Discrimination in Employment Act:  Prohibits age discrimination for persons age 40 or older.  (For firms with 20 or more employees.)

Family & Medical Leave Act:  Requires employers to grant up to 12 weeks of leave to employees who qualify, and requires a poster to be displayed.  (For firms with 50 or more employees.)

Worker Adjustment & Retraining Act and Plant Closing Laws:  Requires notice for plant closings and provision for transfer of jobs and/or retraining.  (For firms with 100 or more employees.)