King of Clever Systems: Les Schwab
Here is an excerpt from our book, Intelligent Fanatics Project: How Great Leaders Build Sustainable Businesses:
And what probably happened here, obviously, is this guy [Les Schwab] did one hell of a lot of things right. And among the things that he must have done right is he must have harnessed what Mankiw calls the superpower of incentives. He must have a very clever incentive structure driving his people. And a clever personnel selection system, etc. And he must be pretty good at advertising. Which he is. He’s an artist. So, he had to get a wave in Japanese tire invasion, the Japanese being as successful as they were. And then a talented fanatic had to get a hell of a lot of things right, and keep them right with clever systems.
—Charlie Munger, “Academic Economics” Lecture 2003
The success of any business is directly correlated to its ability to motivate its people through clever systems and incentives. Les Schwab understood this like no other and was constantly tinkering through trial and error to get the most out of his people.
As early as 1954, Les Schwab was working to unlock the “superpower” of incentives at his tire store. Early in his career, Schwab experienced the power of incentives, and he knew that if he were to unlock this superpower, his employees would become very successful and his business would be the main benefactor.
Schwab’s first employees, Bill Welch and Frank Canady, originally were part of an informal profit-sharing agreement, though the incentive was unusual: Schwab split profits with employees fifty-fifty. By the time Schwab had his second store built, in Redmond, Oregon, he devised a formal profit-sharing contract that laid the groundwork for future incentives. In this agreement, Frank Canady ran the Redmond store, paid $200 per month in rent, and took a salary of $400. Again, the profits were then split evenly with Les Schwab, Schwab’s piece of which was reinvested for further expansion of the business. Splitting profits with employees was an unusual and unconventional incentive for any company in the 1950s.
Quality incentives are only good if the growth opportunity for the company is present and significant. Originally, Les Schwab operated under the O.K. Rubber Welders franchise, but he was thinking much larger. The third and fourth stores were named Les Schwab O.K. Rubber Welders, with the idea of eventually dropping “O.K. Rubber Welders” from the name, to build his own brand.
By the time he had his fourth store, Les Schwab was already thinking of doubling his store count. “I told [my wife] Dorothy I was jelling an idea for the future; that I was going to build me a small warehouse, move Mildred, my bookkeeper, out with me; that I was going to buy the tires, do the advertising, price the tires, do the books and maybe build six, seven, or eight stores someday.” Schwab wanted to create his own independent chain of tire shops where he had full control to create and implement his own policies. His vision was to provide opportunities for other young men to become successful.
It would not have been a surprise to early observers of Les Schwab that, by the twelfth year of the company’s operation, in 1964, he would change his profit-sharing arrangement to evolve with his growing company, now at seven stores. As stores grew and turned into what Schwab called “supermarket” tire centers, the number of employees needed to manage the operations increased, from a manager with a few helpers to six or seven individuals. Schwab, understanding the power of incentives, asked managers to appoint their best worker as an assistant manager and to give him 10% of the store’s profits. Schwab and the manager each would give up 5%. Not many managers went along with the change, even when Les Schwab sent the following bulletin to all workers:
TO ALL STORES . . . If a bright, young, ambitious man joins our company and wants to make our company his career, does he do it because he likes Norm Nelson and wants to help Nom, Gordy, or Bob, or Denny? Do you men think that some little fairy sent you this man just to help you build your bonus? Do you think that this man is going to work ten hours per day, miss meals, have ungodly hours at home, just to help you build your stores? Do you think this man is going to work for low pay, year after year, just so that you can build your profit share contract into a nice fat nest egg??? No, I don’t think so. He wants to see results, just like you did when you started up the ladder. This man didn’t join the company because of the future of the store manager, or for that matter for the future of Les Schwab personally. This man joined the company because of his future with the Les Schwab Tire Centers, NOT IN YOU PERSONALLY. If you block this man, you are being selfish.
Les Schwab was smart enough to know that even good, honest men sometimes need guidance. He gave managers an incentive to change. A new rule was put in place stating that if managers did not have an assistant manager by the end of the year, Les Schwab would take 55% of profits and leave the manager with only 45%. Once the new profit-sharing arrangement became a rule, and managers were further incentivized, there was little friction from managers.
To put into perspective how special Les Schwab’s policies were, we need to understand the common policies of the tire supplier industry of the time and how poor the incentives were. Firestone, for instance, incentivized their salesmen the wrong way. A salesman only earned a top bonus if he signed up new dealers and sold the most of various products. As Schwab himself summarized it:
No credit for holding the top dealers, and no credit for holding the high sale. In attempting to sign new dealers and the other business practices he irritated his present dealers. What a stupid program coming from such a large corporation. I thank them for making it possible for us to succeed.
Les Schwab was never satisfied with his systems, especially the employee incentives, and always strove to develop better programs. This stands in stark contrast to most corporations, which prefer conventional thinking or are at the mercy of corporate bureaucracy. Over the years, other companies tried to borrow Les Schwab’s programs, but they were unsuccessful, because they usually had taken “the guts right out of the basic programs.” One company, Discount Tire, led by Bruce Halle, did incorporate many of Les Schwab’s programs in the independent tire business, and succeeded; it is now the largest independent tire retailer. Halle was relentless in his focus on maintaining Schwab-like systems.
Les Schwab was hungry to achieve more, to operate more efficiently, and to develop better systems. These traits and characteristics were identifiable early, before the systems were fully developed. Early on, it was apparent that Les Schwab’s motivation was not to get rich but to provide opportunities for young people to become successful, as he had done in the beginning. This remained his goal for decades. Specifically, his goal was to share the wealth. The company essentially has operated with no employees, only partners. Even the hourly workers were treated like partners. It would have taken time and effort to get to know Les Schwab and his aspirations, but deep analysis of his organization, competition, and strategy would have revealed him to be an intelligent fanatic.
You can read Les Schwab’s story in our book, Intelligent Fanatics Project: How Great Leaders Build Sustainable Businesses. Become a Member and we’ll send you the eBook-Kindle version for Free. [Join Today]