Spare him the gurus – B. Thomas Golisano, founder and CEO of Paychex, Inc – related article: One analyst’s view of Paychex

Spare him the gurus – B. Thomas Golisano, founder and CEO of Paychex, Inc – related article: One analyst’s view of Paychex – Cover Story

Andy Meisler

What has made the founder of Paychex very, very successful is brains, drive, and tenacity. And those are the very qualities he wants in the people he hires and trains. Contemplative “visionaries” need not apply.

B. Thomas Golisano, founder and CEO of Paychex, Inc., is worth reading about for three very good reasons.

Reason One: During the past 32 years-by working incredibly hard; giving open-ended opportunities to bright but uncredentialed young employees; and using old-fashioned training, promotion, and compensation policies-Golisano has exploited a profitable, albeit unsexy, niche market.

He has led his payroll and benefits outsourcing business from a one-man enterprise into a 7,400-plus-employee corporation with $954.9 million in annual revenue. A graduate of a little-known state college and the son of a pasta salesman, he now has a net worth of more than $1.1 billion.

Reason Two: During the past 15 years or so, he has attempted, without complete success, to do several other notable things. He has run for governor three times and lost badly, the last go-around, in 2002, costing him $60 million from his own pocket. He has jump-started many major charities, giving away several fortunes. And, most recently, he bought the Buffalo Sabres, a woebegone nearby National hockey League franchise that was $94.5 million in debt.

Reason Three: He’s living proof, in these business-guru-ridden times, of the worth of a passionate and well-executed business plan, the value of effective employee training, and the futility of any one-size-fits-all theory of workforce management. And everyone at Paychex understands this perfectly.

Except maybe Tom Golisano. “I’m afraid I have a reputation of always looking at accountability and results. I think that applies pretty much across the board,” he says with a wry smile. From his assertively nondescript headquarters in a suburb near his hometown of Rochester, New York, he adds, “I’m a big believer that you can control a lot of things-if you put in the effort and have the creativity to get it done.”

Why Paychex succeeds

By all accounts, the husky white-haired leader plans to keep the plates spinning indefinitely. At the rate he’s going, he should run out of money–well, never. Which is good news for the political consultants, fundraising executives, sports agents, and Paychex employees who work for him.

The newest members of the Paychex team are especially excited about their boss. “I’d really love to spend my entire career here’ says Kerry Davis, speaking recently to a reporter outside the corporate training center, located pointedly–to demonstrate the company’s emphasis on training–off the first-floor lobby. She’s on the third day of a two-week training course to become a payroll specialist, an entry-level number-crunching and client-hand-holding job. A 23-year-old from Portland, Oregon, with two years of community college and no degree, she is one of 27 men and women–all dressed in new off-the-rack business attire–in her training class. This is just a small fraction of the newcomers Paychex will hire in this opportunity-challenged near-recession year.

Davis joins a company that has never had a layoff. Over the last six years, Paychex has exceeded a 23 percent annual profit. It has about 475,000 clients and 101 offices in 36 states and the District of Columbia. The company ranks 22nd out of 712 corporations in the Wall Street Journal’s Shareholder Scorecard and is 88 on Fortune’s current list of “100 Best Companies to Work For’ In 2002, Davis’s new boss and role model (“I know everything about Mr. Golisano!” she says excitedly) made $744,230 in total compensation and was number 3 on Chief Executive magazine’s Market Value Added ranking of CEOs.

Most interesting, perhaps, is that to win a job at Paychex, Davis and her classmates didn’t compete against people considered prime corporate recruiting material elsewhere. According to Tom Golisano, having an MBA won’t necessarily eliminate an applicant from consideration at the firm, but experience as a consultant or as a manager in a large corporation is a showstopper.

“We expect our senior management to be hands on,” the CEO says. “And I think when you talk to a lot of people who come from larger organizations, a lot of times they come from a different culture and it’s hard for them to adapt. They expect in most cases a much healthier benefits and wage package, okay? They expect larger support staffs. They expect a little more freedom in their time and movement than we’re willing to give them.”

Some also tend to be “visionaries.” Unfortunately. “I don’t think a person can have meaningful visions unless they have some good knowledge of what to do,” Golisano says. “Chances are, for new people walking into an organization like that, they are going to come up with an idea. And that’s great. We encourage it. But quite frankly, if they’ve only been here for several months, they’ll probably find we’ve already thought of most of them. Okay?”

The value of hiring and training

This year Paychex estimates that it will receive more than 25,000 applications for about 2,000 open positions, most of them for payroll specialists or sales representatives. “Tom looks for people who want to be successful and are looking at Paychex as their vehicle for personal success,” says Walter Turek, the company’s vice president for sales and a 22-year veteran of the firm. It means that the person doesn’t have a track record of being successful in business or at another company, he explains. It also means that this hasn’t discouraged him.

Turek adds that most successful candidates have experienced “moments of success”–high-school sports stardom, for instance, or being the first in their family to attend college. These “moments” no doubt serve them well during an arduous selection and training process, which starts several months before they even begin their training in Rochester.

“What we don’t want,” says Will Kuchta, the company’s vice president for organizational development, “is to find out on a new hire’s first day of work–after we’ve spent $13,000 on his or her training–that he or she isn’t right for the job.” Kuchta, who worked on an assembly line and as a lathe operator before returning to college to get his Ph.D. in education, supervised the design of Paychex’s current hiring and training systems and works in the top tier of management beneath the CEO.

The organization rarely advertises for entry-level employees, Kuchta says. In the case of payroll specialists, it recruits via “ambassadorship” relationships between its branch managers and accounting professors at local colleges. “To tell you the truth, we have better luck at JCs than at four-year colleges,” he says. “Most of the people in junior college are working their way through school. They know how to get up and go to work each day. Most people with baccalaureate degrees, they’ve only worked as lifeguards.”

Applicants take a test to measure their basic math and logic skills. Kuchta says the exam was designed at about an eighth-grade level. They also undergo four increasingly lengthy interviews with employees and managers at the branch. During the interview process, most of the square pegs “deselect” themselves, he says. New hires are assigned a mentor and spend a month at the branch observing, learning, and dipping their toes into actual work. Only then are they flown to Rochester for formal classroom instruction.

“We have about a 99 percent success rate among the people who make it to the two-week course,” Kuchta says. Paychex instructors are available for remedial tutoring practically anytime after school, including weekends. After returning to their respective branches, new hires start work and complete an average of about a year’s worth of home-study learning “modules.” Their education doesn’t stop there. Paychex employees spend an average of 109 hours a year in training classes–which is almost twice the average in Training magazine’s Top 100 (this year Paychex ranked number 33). In this no-frills, no-nonsense regimen, little or no time is spent on team-building exercises such as rope climbing or corporate singing. And for most employees, training never stops. Every Friday afternoon at every branch, time is devoted to instruction in new products and techniques. Managers on the promotion track return to Rochester every two years for further intensive training.

As for compensation, the pay is very good, if not awe-inspiring. A payroll specialist can make up to about $70,000. And the best salespeople, who work on commission, clear $200,000. In addition, every Paychex employee–except Golisano, who owns 10.5 percent of the company–is eligible for stock options and/or profit-sharing. On the evaluation side, every employee–including Golisano, who is evaluated by the board of directors–is issued yearly goals that he is expected to eventually meet and is given ample coaching and mentoring.

The goals for payroll specialists, for example, would be a certain (undisclosed for competitive reasons) number of accounts handled and a maximum percentage of accounts lost yearly. For sales reps, they would be a certain (undisclosed) percentage of sales per minimum number of sales calls. The goals are fairly inflexible, but employees who meet them are assured of further employment. “We don’t grade on the curve,” Kuchta says. “We set a number that’s aggressive, and not everybody makes it–but everybody can. Whether you’re number 49 on the list or number 51 doesn’t really matter.

“This method works for us, though we don’t assume it would work anywhere else. A person from GE couldn’t work here, probably. Could our people work for GE? Probably not.” At Paychex, he adds, teamwork and collegiality yield better results–for both employer and employees–than fierce intra-company competition.

Citizen Golisano

Paychex’s corporate culture, of course, is in large part a reflection of Thomas Golisano himself. After growing up in Rochester, he applied for entry-level jobs at Kodak and Xerox, the two largest employers in town. Both companies rejected him, for reasons that Golisano suspects had something to do with the vowel at the end of his name.

Gloria Austin, his first wife and the mother of his two grown children, agrees. “His parents were Italian immigrants. I’m sure that [his rejection] was part of his drive to succeed. Anytime you face rejection, you’re even more determined to get revenge, which is tremendously sweet. It gives you the will to go and do. Tom has got tremendous drive. He’s extremely talented.”

After missing out at Rochester’s Big Two (currently two of the most distressed corporations in America), Golisano enrolled at Alfred State College, 75 miles south. He earned a two-year business degree in 1962. At 30, he was working for Electronic Accounting Systems, a company that processed payrolls for big companies. He proposed to his boss that EAS service companies with fewer than 100 workers. He was turned down flat. The next year, 1971, he quit, rented office space from his former employer, and started Paychex. Then as now, he used the selling point that many small businesspeople are deathly afraid of running afoul of the government and/or irate employees by miscalculating salaries, taxes, and other deductions while squeezing paycheck-writing duties into their busy workdays. Golisano took responsibility for government penalties or lawsuits if his company made any mistakes.

By 1974, Paychex was up on its feet-but the long hours and years of financial uncertainty had fatally strained his marriage to Gloria, whom he’d married in 1961. By the end of the decade, Paychex consisted of 18 partnerships and franchisees. One franchisee: Gloria Golisano, who insisted on getting Paychex’s New York City franchise as part of their 1977 divorce settlement. At that point, Paychex had more than 6,000 clients. In 1983, Golisano bought out everybody, turning many into millionaires, and took the company public. Over the years, Paychex has branched into other areas, including employee benefits, workers’ compensation, and claims settlement.

Golisano retains approximately 11 percent of the company’s stock (which last month was at $29.41, down from its 52-week high of $36.58). Although he says he isn’t especially enthusiastic about the executives he meets in the nonprofit sector, in the past three years alone he has donated $40.6 million of his own money to various causes including the University of Rochester, which received $14 million for a new college of computing and information services, and Strong Children’s Hospital, which is connected to the university and was given the same amount.

Golisano also has contributed mightily to the bemusement of New York political pundits. He run for governor in 1994, 1998, and 2002, on a platform that included such politically radioactive planks as reforming Medicaid and decriminalizing marijuana. He topped out in the most recent race, winning 8 percent of the vote. This translates to approximately $100 per vote. “He wasted a lot of money on a lot of high-priced political talent,” says a person close to the 2002 campaign, who spoke on condition of anonymity because Golisano may run for office again in 2006.

During the campaign, he was greeted with skepticism when he announced that he wanted to buy the Buffalo Sabres, which had been abandoned by its disgraced former owners, the Rigas family of Adelphia Communications infamy. “It sounded like a tired campaign trick to win votes from hockey fans- but we were wrong,” the political expert says. And at the time, several Wall Street analysts who recommended Paychex stock were quoted as saying that they were extremely nervous about Golisano actually winning the race, and running New York instead of Paychex.

The self-made billionaire says with a grin, “Maybe I was, too.”

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RELATED ARTICLE: One analyst’s view of paychex

Charles Trafton, a Boston research analyst at Adams, Harkness & Hill, follows Paychex and other workforce-management vendors so that he can make recommendations to mutual funds and other clients. Because of several short-term challenges such as Paychex’s high stock valuation, Trafton has recently been telling clients to reduce their shares of Paychex. In the long run, however, he says. “it’s a fantastic company.” His other thoughts:

On the wealthy CEO B. Thomas Golisano: “Look,” Trafton says, “billionaires are just like you and me, they just do different things for fun. He’s spent tens of millions of his own dollars running an almost hopeless campaign [for New York governor]. But the investment community is quite enamored with him. Paychex has had incredible earnings and cash-flow growth rates for 20-plus years, and Tom’s been at the helm of that.”

On the quality of the Paychex workforce: Trafton says that as Paychex’s stock has skyrocketed, employees have reaped the benefits. “It’s a fantastic company’ Trafton says, “very well run, and Golisano is looked at very positively by investors and by his employees. There are a lot of millionaires at the company that owe him. He’s got a very strong, very deep management team. A lot of middle managers at Paychex are given a lot of authority, and they make a lot of money. He’s very well respected internally, within the Paychex sales force in particular. The sales force is very aggressive and very high performance.”

On the company’s strengths: Trafton says that Paychex still has a large market of businesses to tap into. “The beauty of Paychex,” he says, “is that there are millions of small employers, and most of them still do payroll in-house-gas stations, restaurants, liquor stores. It’s so cheap for Paychex to take it over and take over the liability and do it correctly.” In many companies, Trafton says, the small-business owner doesn’t want employees to know how much everyone makes, so the owner does payroll alone. This is a time-consuming hassle that Paychex can help take off a business owner’s desk. “Paychex is at the right end of the market with the right kind of services; they’re paying a nice dividend and growing very quickly. They’re more profitable than Microsoft.”

On Paychex’s challenges, and the competition: Automatic Data Processing, Inc., a leader in payroll, human resources, and benefits, has a division that focuses on small companies, and the firm has a record of consistent growth that most any corporation would envy. Still, Trafton says that ADP’s weaknesses leave a big opening for the company. “Paychex has very high client retention,” he says, “unlike ADP, which has a reputation for poor service and has very high client turnover. Paychex is very client-centric and is very efficient.”

In addition to ADP, Paychex is competing with small businesses and local CPAs around the country. It also has Intuit nipping at its heels, trying to succeed at the payroll business by buying up payroll-processing companies. Other Paychex competitors include Fidelity and Ceridian.

On top of that, Paychex has more obstacles to face, Trafton says. First, unemployment is up, which means fewer checks to process. Second, there are fewer new businesses starting up, and small businesses are Paychex’s sweet spot. Last, interest rates keep getting lower, which hits Paychex’s “float”–the interest it generates while it holds on to a company’s tax payments, waiting to send them to the IRS. In fact, says Trafton, “future upside [for the company’s business] is in the hands of the Paychex sales force, but probably more so in the hands of the Fed and its interest-rate policy.”

Todd Raphael

Andy Meisler is a Workforce staff writer. E-mail editors@workforce.com to comment.

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