This article was cowritten by Yu-kai Chou and Erik van Mechelen.
Paying Contractors late is NOT Savvy
Throughout the years, I’ve worked with many business owners who ask for my expertise in motivation design and gamification. However, I have been surprised by how many times business owners BRAG about how they pay their contractors last moment, or even later than the proposed due date.
“When money is in your pocket, you have all the control. These contractors depend on your money, so they’re not going to stop working for you just because you are paying them 1-2 weeks late. That’s good for cashflow management.”
But, I will make one point very clear:
Paying your contractors late is DUMB. It’s the opposite of being a savvy business owner.
Being an expert on human motivation and behavioral science, even though I procrastinate on paying other bills, I typically try to pay my contracts within 15 minutes of receiving an invoice.
Let me explain why this is important.
Why do people pay contractors late?
The reason why people pay their contractors late are manyfold. For some, they’re just handling too many moving parts and they don’t get to paying people until they must. But for others, they see this as a smart cash management strategy.
Business is all about managing cash flow. Cash is the life blood of a business’ operations. That’s why savvy business owners learn to maximize their cash power by trying to get paid early (even if it means giving people a small discount), while withholding cash until they absolutely have to.
The “time-value-of-money” concept indicates that $1 today is worth more than $1 a month from now. If anything, you could just invest it somewhere and get a small return. For a business, holding onto cash for longer means you could do a little bit more marketing, a little bit more sales, a little bit more R&D, or a little bit more inventory this month without feeling too stretched. This is important especially when you are harnessing the power of leverage, where every dollar can be utilized many times more its worth through credit.
The business author Michael Gerber (who has influenced my career a great deal) even writes in E-Myth Mastery, “Often you don’t even have to reduce the expense to get a [cashflow] benefit, for instance, when you can slow payment or pay over a longer period of time.”
I even have a friend who used to run one of the largest computer companies in the world a few decades back tell me how important cashflow strategies are. He told me that he eventually lost to Dell because Dell’s genius model was to collect cash first at an ultra competitive price for orders, then hold onto the cash for a few weeks. After a few weeks has gone by, the price of computer components would go down, and then Dell would quickly purchase the components, assemble the computer, and then ship it to the customers quickly.
My friend said he couldn’t compete with the prices Dell was offering because of this powerful model. Clearly there is a lot of Business Savvy in the art of collecting money early, and paying out money late.
Why paying contractors late is dumb?
All the above sounds reasonable and good. However, this is a clear example of Function-Focused Design over Human-Focused Design.
If people were robots that are meant to serve a function, then as long as they don’t shut down, paying them late would maximize your cashflow AND get the business value you need from them.
However, people are not robots. They have feelings, emotions, insecurities, dreams, and needs. When a HUMAN is wondering whether they would get paid on time or not, they are not working as hard or creatively as they could be, and you are literally getting less for the same money you pay (assuming you intend to pay them in the first place, which would also be a savvy business thing to do).
Even those who have good work ethics would simply do the baseline requirement work that will get them eventually paid, as opposed to go out and give their best.
As motivation designers, we want to utilize empathy and think about it from our contractor’s perspective. To begin with, she has a choice of who to work for (in fact, freedom is a big reason why they become freelancers in the first place). She decides to work with you. Even now, she may have multiple clients. If she has legitimate concerns about being paid, do you think she’s more or less likely to do the work for your company or another client first?
A freelancer writer like Erik gets to decide which work he does first in a day, which articles he spends his best working hours on. Even when he works a 12-hour day, there are certain hours within that 12 hours when he does his best work. As a client, I am vying for the best hours of his workday.
Most contractors (and certainly ones that are worthy for you to hire) have multiple clients. By not paying quickly you are giving them reasons to do your work later and in a less-focused time of their workday.
As a savvy business owner, you want to get the best out of your team. If you aren’t paying promptly (or worse, not paying on time) then you are literally getting less value for the same money.
Of course, it’s worse if you plan to work with this contractor for more than one month or one project. By paying on time every time, you’re signaling your interest in maintaining the relationship and building mutual trust.
But there are other advantages to paying contractors on time.
Paying People Quickly Will Differentiate You As A Business
Another reason why paying contractors quickly is a good idea is that differentiates you as a business.
People talk. Internally, you don’t want contractors complaining and asking about when they should be expecting payment. Even a less motivated contractor hurts team morale. But when a contractor is impressed by how quickly the owner pays (hence “respects”) her, she would pump up the morale and overall productivity of others on the team too.
Externally, you don’t want to lose your reputation because your contractors are often telling their connections, “Things are going okay. I’m not sure when I’ll get paid this month though.” But when contractors are always raving about who they are working for, that leads to potential business and a stronger reputation industry-wide.
I actually know who in my industry treats their workers badly. Because of my solid reputation, it probably wouldn’t be hard for me to recruit them onto my team if I showed them that I would treat them with respect and empowerment.
It’s a sad fact about business, but paying people quickly actually becomes a competitive advantage when it shouldn’t be because everyone should be doing it. It’s like saying, “Everyone treats their customers like crap, so our competitive advantage is that we actually provide great service and respect the customer’s time.”
Paying Quickly is just the start
At the end of the day, paying quickly is just one way to let the people working for you know that you respect their time, effort, and contribution. You are treating them like actual human beings.
Beyond that, there are many other ways to show that you respect your contractors and to bring out the best of them. Apply more White Hat Motivation strategies: give them more purpose and meaning for the work they do; give them proper appraisal and recognition; provide them direct but respectful feedback so they know how to improve; show appreciation regularly, etc. Standard literature in motivational psychology.
If you want a long-term relationship with good talent, exert some effort to build that relationship. Be human. Humans like working with other humans. Design from a Human-Focused Perspective, not a function-focused one.
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