Tom Matthews
In my previous article: the superpower of incentives, I covered how incentives play a significant role in the success or failure of a company. If there is one book that really demonstrates the power of incentives and shrewd compensation systems, it is the autobiography of Les Schwab. Les Schwab had a chain of tire shops across the US. He made a huge fortune in one of the world’s really difficult industries by having shrewd systems and harnessing the superpower of incentives.
Background to Les Schwab
Born in Bend, Oregon, in 1917, Les Schwab was orphaned at age fifteen. To support himself, he became a newspaper distributor for the Oregon Journal and later the circulation manager at the Bend Bulletin. During World War II, he enlisted in the Army Air Cadets and moved his family to Texas. After the war, the Schwabs returned to Bend and Les resumed his newspaper job, but his goal was to run his own business.
In 1952, despite never having worked in the tire business, Schwab bought OK Rubber Welders in Prineville with about $17k (all of it borrowed). Within a year, he had increased sales nearly fivefold, from $32,000 to $150,000. By 2020, the company had grown to over 500 stores and was sold for a rumoured $3.3bn.
The secret of Les Schwab’s success
“Incentives rule everything around you.” – Charlie Munger
Les realised that success is a two-way street. Les Schwab’s tire business would only succeed if his employees delivered world class customer service. To incentivise them to do this, Les provided his employees with generous bonus and benefit programs (Les shared half the profits of each store directly with those key employees who worked there).
Incentives drive behaviour
“The most important rule of management is get the incentives right.” – Charlie Munger
Les Schwab had a fundamental understanding of human nature and magician like powers with sales, persuasion and incentives. Les Schwab realised that he could only be in one shop at a time. If he wanted the business to grow into hundreds of tire stores, then, because he couldn’t be there everyday to oversee them, he needed an incentive structure to ensure the people running them do the best job possible.
A partnership approach
This is when he realised “what if I make each store essentially a partnership structure?”. You’ll see in this article, how powerful that one insight was. Les Schwab’s philosophy was: “I’ll bring you in, I’ll share 50% of the profits and that way, when I’m not there, you are heavily incentivised to grow and manage the store to the best of your capabilities.”
This partnership approach is similar to how we use incentives at our partner companies at Pemba. We prioritise motivating the key people running our partner companies by offering incentivisation mechanisms, often equity participation, to ensure their interests align with the company’s success. We look to bring these key individuals into the equity structure and support their transition from employees to equity owners.
Appeal to interests and not to reason
Les Schwab understood that all people are inherently self interested – they want to see results just like he did – and that you need to appeal to interests and not to reason.
Each store was structured as a separate entity and run as a separate business. The key store employees shared only in the profits of the store they worked in. The person running that store was only incentivised, paid and rewarded (or punished), based on the performance of that individual business and not the group as a whole.
The superpower of incentives
Let’s explore how Les Schwab leveraged incentives, including profit-sharing arrangements, to achieve extraordinary results.
- Customer-centric culture: Les Schwab’s commitment to “Legendary Service” is deeply ingrained in its culture. The company incentivises employees to prioritise customer satisfaction through recognition programs, performance bonuses, and commission-based incentives. By rewarding exceptional service, Les Schwab fosters a customer-centric mindset that sets it apart in the industry
- Empowering employees: Les Schwab believes in empowering employees to make decisions and take ownership of their roles. This sense of ownership motivates employees to go above and beyond, driving both individual and collective performance
- Sales excellence: Sales performance is crucial in the retail environment, and Les Schwab incentivises its sales teams to achieve and exceed targets. Whether through sales contests, performance-based bonuses, or commission structures, employees are motivated to drive revenue while upholding the company’s commitment to integrity and customer satisfaction
- Recognition and appreciation: Les Schwab places great importance on recognising and appreciating employee contributions. From employee of the month awards to peer-to-peer recognition initiatives, the company celebrates achievements and fosters a culture of appreciation and camaraderie
- Profit sharing for key employees: Les Schwab’s profit-sharing program exemplifies the company’s commitment to harnessing the power of incentives. Profits are distributed according to a structured formula, with managers and assistant managers receiving a share of profits based on their contributions.
Summary
Les Schwab Tire Centers exemplifies the superpower of incentives in driving performance, employee engagement, and business success. Through his fundamental understanding of human nature and magician like powers with sales, persuasion and incentives, Les Schwab built a culture of excellence that fueled its competitive advantage and enduring success in the highly competitive automotive tire industry.
Next steps
If you’d like to learn more about Les Schwab and how he utilised the superpower of incentives, then I’d suggest reading his autobiography. Unfortunately, there are only about 20,000 in the entire world, so if you can’t get a copy, then you can listen to a great summary of it on one of my favourite podcasts by clicking the following link: https://open.spotify.com/episode/2xvwlzC9gq9xVzQ6DQ5KwZ?si=P7KTIIUdRjSOWFLr790vhA
