I Sacrificed Higher Profits for Happier Employees -- and Came Out Ahead

Last Updated Jan 14, 2011 3:21 PM EST

By Ben Kirshner, CEO, Elite SEM, New York City
I've been in the search engine marketing business since 1998. When I launched my own company, Elite SEM, in 2004, I knew I wanted to break from a few industry trends. In particular, I wanted to turn the employee compensation model on its head.

In this industry, you find a lot of unhappy employees -- they're underpaid and underappreciated. They rarely stay in their jobs for long, so search marketing companies constantly work to fill vacancies. Even though these firms are known for their high profit margins, business-as-usual seemed like a real headache to me.

So I decided to pay the highest compensation in the industry to my employees -- our account executives' total compensation are well above $50,000, whereas the average starting salary is only $35,000. And our generous commission structure puts them over the edge. Though my profit margin is lower than other companies, we are still profitable. In exchange, I've avoided the challenges of dealing with high employee turnover -- not a single employee has ever quit in over 6 years.

The disadvantage of putting profit first

The search engine marketing industry -- which helps businesses target consumers online through pay-per-click advertising -- has grown by leaps and bounds. When I started my company, search engine marketing was a $4 billion dollar industry. Just six years later, it's reached $18 billion.

The rapid growth of the industry makes it difficult to find qualified employees. Search engine marketing campaigns are more labor-intensive than traditional media campaigns, so companies often need to train candidates in-house. You have to figure out which keywords to target, how the ad campaign will look, and which webpage it links to. Companies usually need to invest in a lot of training to get a good account manager.

However, all of this training often goes to waste because of high turnover. Most account managers start with a low salary and end up jumping around to different agencies or directly to the client side every few years because they get better offers. That leaves former employers scrambling to fill vacancies -- not to mention explaining to a client, "Ron left, but I have Paul here, and Paul is great," without touching on the fact that Paul has less experience.

While these firms are very profitable, the client is left in the lurch because the knowledge leaves with the employee.

Incentivizing the right behavior

When I started Elite SEM, I wanted to trade high profit margins for happier customers and employees. Change started with how I recruited employees. I pay the highest compensation of any search engine marketing company. I offer benefits such as free meals, 401(k) matching contributions, and unlimited sick and vacation days. And I've worked hard to create a positive work environment: There's no dress code at the office, employees can work from home whenever they want, and I don't micromanage. We also avoid a sense of hierarchy by putting all 20 employees, myself included, in an open space.

In addition to all of the perks, I give my employees financial incentives to work hard. Starting on day one, each employee gets equity in the company. I also have a unique bonus structure based on referrals. If you recruit someone to work for us and they stay for three months, then you get $500. Every year that employee stays with us, an additional $500 is added to the bonus. One employee brought in four co-workers when we started. He got a $10,000 referral bonus last year. This bonus structure encourages people to help fellow employees succeed.

Finally, account managers earn more than 50% of the total company profits, so they bust their butts to make money for our clients.

The payoff

My unique approach has made a real difference. Our clients tend to stay with us twice as long as the industry average, and that's at least partly because we educate them about how our model leads to more experienced employees. Now, when competitors call our clients to try to earn their business, our customers know to ask how much experience their account managers have and how they are compensated.

Shrinking our profit margin hasn't hurt the company, either. We are growing at a healthy pace. According to the 2010 Inc. 5000 List of Fastest Growing Private Companies, our revenue hit $2.6 million - that is up 292% from 2006 -- and more clients now identify our approach as one they want to work with.

I could make substantially more profit if I ran my company like a traditional agency, but I choose to run it differently. Avoiding the headache of employee and client turnover make it all worthwhile.

Ben Kirshner is working on a book that teaches companies how to use search engine marketing techniques themselves. In his free time, he is an adjunct instructor at New York University's School of Continuing and Professional Studies.

-- As told to Caitlin Elsaesser