The "20% Rule"
December 12, 2008
Last Revised: May 23, 2012 4:50 PM
Karl Loren has been "operating on" a rule for Vibrant Life -- a rule now acknowledged and labeled as the "20% Rule." This "rule" is now a Company Policy.
The 20% Rule has its origin in the famous Hubbard Policy, "Production and One's Standard of Living," quoted here, and referenced in many other locations among these Company Policies.
Without repeating that Hubbard data here, the RULE is that we cannot afford to pay more than 20% of our income for salaries, or, per Mr. Hubbard, there will not be enough left for other needed functions and for expansion.
This "rule" has been loosely described as that not more than 20% of VSD could be allocated for salaries. That description, however, is not technically adequate.
The problem with that description is that we do not always make the "usual" or the "desired" gross profit on every sale, or on the sale of every product.
I have tried to correct this problem by placing a vital statistic on the form we use for reporting daily statistics -- that statistic is the "cost of the items included in the VSD being reported for that period."
When we sell $100 worth of products, but the cost TO US of acquiring those products to then sell, is $80.00 for instance, there is no way we can also give 20% of that sale amount as salaries, since 80% of that sale amount is taken by the cost of the product sold.
Therefore, we aim at marking up our product cost by 500% of our cost. This results in an item we sell for $100 costing us $20.00 -- the 20% rule applied to "cost of sales."
When our product sales cost us 20% of the selling price, the 20% rule is not only applied to the product cost, but there is then 20% of that sale which can be allocated to marketing, another 20% for salaries, 20% for administration, 20% for the combination of reserves and profits for the owners, That now accounts for 100% of the amount of INCOME, or CGI.
When we make a large bulk MSM sale, our gross profit on such a sale is much lower than on our "regular products." The cost of product (shown every day on our stat report) often shows that the cost for one day (with a large bulk MSM sale, for instance) may be 60% or even more of the VSD.
We cannot afford to take 20% of THAT amount of money and consider that the SAME percentage may then be allocated for salaries, marketing or anything else.
Marketing, even admin, is often paid on the basis of what is "left over," but salaries, traditionally, come "off the top." That is, the salaries have to be paid even if the sales do not provide enough gross profit to pay those salaries out of the 20% of CGI.
When salaries are paid in excess of the 20% rule, those salaries are paid in violation of the above referenced Hubbard Policy. When THAT goes on too long, the Company is insolvent and bankrupt.
Since salaries are generally the only expense that gets paid regardless of income, the Company MUST be sure that we do not hire or keep staff where those "automatically required salaries" are going to demand more than the 20% of actual income.
At this writing, December 12, 2008, we are coming out of a period when sales were so low that salaries consumed much more than 20% of income. That meant using our reserves for salaries, and neglecting promotion and expansion activities for lack of cash.
Some length of time for that condition, without correction, means the demise of the Company.
OR, an owner can be compassionate about those staff who are contributing MORE in useful products than their 20% "fair share" of income, ensure the survival of the group so that the producers DO still have a job --- and then it is time to let those under-producing staff go, or reduce their salaries.
During the period just preceding the date of the first publication of this Company Policy I, Karl Loren, kept on staff who I did not think were contributing their fair share (per their salaries) to the income.
As of THIS date, December 12, 2008, I am asking THOSE staff members (who have been put on notice of their standing with me) to not only immediately change whatever attitude needs changing, but to start working the 80 hour weeks that I, personally, spent when I was creating this Company 30 years ago.
Beyond the few to whom this may come as a further warning of needed change and proven production, this Company Policy will serve us on through the future, in explaining the "20% Rule" and how it applies for us.
Quotes from L. Ron Hubbard are copyright 1994 © by the L. Ron Hubbard Library. All rights reserved.