Profit Sharing: Entitlement or Motivator?
April 26, 2010 by Harvey Wigder · Leave a Comment
Background
Many business owners believe in profit sharing because of their personal values and also because they believe that profit sharing motivates employee loyalty and performance. This second conviction remains firm even though research shows that for incentive to impact behavior, there must be a clear link between the behavior and the reward. Because most jobs are so far removed from a direct impact on profits, this condition is seldom met.
Employees are unhappy when they do not get profit sharing and are happy when the do. Therefore, profit sharing can have a positive impact on employees’ feelings about their company–but it does not motivate performance.
The original purpose of Geiger’s profit sharing plan was to reward associate loyalty and compensate for lower pay during a period when the company was struggling for survival. Third generation President, Ray Geiger, promised to his new employees, “If you help us earn a profit, we will share it with you.”
That period of struggle has long been over, and Geiger is now one of the largest and most stable companies in the industry.
The Geiger Challenge
A few years ago I was hired by Geiger to conduct a systematic review of all compensation programs with the goal of ensuring equitable and competitive compensation, including incentives at all levels.
The mechanics of Geiger’s profit-sharing plan were typically straightforward. After the end of the financial year, the company allocated a portion of profits to a profit-sharing pool, which was distributed to associates in the same ration as individual wages to total wages. Management felt the associates didn’t understand the plan and were distrustful of the way is was administered. They wanted to turn this around and get them to share some of management’s concern for profits.
Plan Design
The most dramatic change in the new palm was to base the program on company and business unit earnings targets that were clearly stated at the start of the year. This meant that instead of having to wait until year-end to learn about their shares, associates were given a score-card to keep track of company results and their own share of profits.
At the start of the year, each associate is presented the financial targets for the company overall and for his or her division and department. Each associate’s incentive is linked primarily to the department performance, but at the same time it was decided that everyone should have no less than 25 percent of the incentive linked to the results of the company as a whole. Geiger hoped everyone would fee part of the total Geiger “family boundaries.
Due to budget constraints, hourly associates were targeted to earn a meaningful but modes 2.5 percent of annual compensation if targets were achieved–and proportionately more if the targets were exceeded. Some selected manager had higher earnings targets consistent with increased impact on overall results.
The plan had a minimum threshold for overall company profitability below which no payments would be made to anyone. Employees were told how their payment would increase, decrease, or fail to be paid depending on actual results.
Questions and Concerns
In the process of designing this program, management had numerous concerns and questions about the plan design. Here are some.
• Keeping It Understandable. It is very easy to overcomplicate a plan so that employees don’t ..understand how it works. If they don’t understand the plan, motivating value is lost. Indeed, lack of ..understanding may even result in a negative effect if people feel something is being put over on them. ..This suspicion existed with the previous plan.
• Non-Financial Performance Measures. The company had quality metrics for its Departments. They ..could be part of the scorecard. Theoretically, it would be preferable to base bonuses on some ..combination of profits and other metrics. However, this would be too difficult administratively. It was ..decided to continue to provide feedback on the quality measures but base the profit sharing payoff only ..on profit targets and results. The question remained: Were profit targets (which were more removed ..than team quality targets) be enough to drive performance?
• Making it Meaningful. The bridge between individual jobs and Department results is more direct than ..that between corporate results and individual jobs, but not as direct as desirable. The way to make the ..connection was with good communications and through wide spread problem-solving meetings. Could ..management pull this off?
• Size of Rewards. Were the target bonuses too small? The $775 shown in the example translated into ..about 1.3 weeks’ pay. Some employees even had smaller dollar targets, depending on annual wage. ..Was this amount large enough to make employees care about whether the company and their unit ..achieved its goals?
..Difficult Economic Times. The industry and company were going through difficult times. Because the ..economy was weak, client advertising budgets were down as were company revenues and profits. Did ..it make sense to launch a plan like this in a year when it was possible that there would be no profit ..sharing bonuses?
• The Unknowns. There were probably unanticipated consequences. What would they be? Would they ..be damaging?
Geiger management decided to implement the plan despite these concerns and evaluate results, making modifications as appropriate.
Results
The company’s experience in the second year of the plan shows the value of connecting the profit sharing plan and individual rewards to unit performance. Company revenue ended significantly below plan, yet profit exceeded targeted profits. As a result most employees received profit sharing payments that exceeded their original targeted amounts.
Why did this occur?
• Managers reported monthly (verbally and with graphs posted) to all employees how their units were ..performing compared to target. The CEO issued quarterly reports the overall company performance. ..Employees knew of the sales struggle and understood the need to focus on cost reduction
• Employees clearly understood that cost cutting was necessary if they were to get bonuses and put ..pressure on management to do so. Was the size of the potential reward large enough to motivate ..employees? The result indicates that potential bonuses were enough and additionally, that employees ..understood how the system worked for them.
• One large unit did not achieve bonuses the first year. What impact did that have on morale? The unit ..was particularly diligent about costs the second year, and successfully achieved bonuses. The first ..year was very disappointing for that unit. This disappointment seemed to focus the unit. When the unit ..made target and bonuses were paid the second year, there was a big celebration.
• The company had training programs for managers and employees on leading teams and motivating ..quality performance. This helped the process on involving employees in cost cutting and other ..improvement strategies and minimized resistance to implementation of the plans..
What were the unintended consequences?
The pressure on managers to achieve targeted goals came from above and below. In particular, the head of the largest division understood that the performance of her unit was critical to the company’s overall profits and, therefore, to whether the company reached the minimum threshold for any bonuses to be paid at all. She reports lost sleep over the challenges. The plan can hurt morale in units that get low bonuses because of unit performance. It is up to the unit leader to mobilize people.
Some scorecards had to be fine-tuned to better reflect circumstances in the unit. The biggest adjustment to the plan was in the sales organization. In the first year, bonuses were paid on profit as in other units. The results were as indicated above: costs were cut and profit targets were made. However, there was concern that this worked against building new business. Therefore, for the sales organization there was a major change. Now, half of the target is for building revenue and half for profits. This made the job of the sales executives more complicated but prevented the plan from motivating only cost cutting.
In any planning process, some executives will provide stretch targets while others will be conservative to both protect themselves and make bonuses more attainable. It is very important for a plan like this to provide a level playing field. Management must be diligent to prevent “sandbagging” and make goals uniformly realistic.
Conclusions
Everyone Understood The Link Between Profits and Their Personal Reward. This plan was dramatically successful in getting employees involved in the profitability of the business. It gave them a meaningful stake in the business’s success. Everyone at the same organizational level in the same unit had the same scorecard. Therefore, the plan provided group rather than individual incentives.
Hourly and Management In Same System. The plan proved meaningful to management and hourly employees and tied them together with a concern for company profits.
Beyond Entitlement To Earned Reward. Employees are still disappointed when there is no bonus. In this regard such a plan is no different from when profit sharing is seen as entitlement or a benefit. However, when bonuses are received they are seen as something earned and are celebrated. Structuring a plan in this way allows profit sharing to impact business results.
Employees Understood Rules and Wanted to Play. The success of this plan also reinforces research that indicates it is not the size or amount that counts. What counts most is making the ground rules clear and giving employees a means of making an impact on whether they receive a reward.
Ongoing Involvement By Senior Management. Finally, and most important, Gene Geiger and his management team wanted this program to succeed. He and his management team believed in sharing success and in profit sharing. As a result they were willing to invest effort in the communications and the process of reacting to events and making changes when necessary to make the program succeed. Their reward was that the profit sharing plan helped them improve corporate performance.
Seven Smart Compensation Strategies
April 26, 2010 by Harvey Wigder · Leave a Comment
If you are like many of the owners I work with, you struggle with your compensation programs. You want to control costs, be fair and reward the top performers. You understand that a strong and balanced compensation plan will help you attract, develop, and retain productive, happy employees. Maybe you want to improve your plan, but you haven’t had the time to work on it.
How do you get from your current situation to a compensation program that is a truly fair and equitable ?
Let’s start with the state of many small company pay structures. I typically see a structure that has evolved over the years based on two principles. The first is to keep payroll costs low. The second is based on expediency and involves paying what is demanded to keep staff happy.
The longer these “structures” evolve, the more they become internally inequitable and out of sync with the market. They create problems because they cannot be justified to staff and have a negative impact on the level of talent in the company.
Interestingly, once you start thinking about how to make it better, the steps flow one to another. The first step is to create a structure.
The structure is a progression of salaries with the midpoints ascending in relation to market value and value to the company. Each job has an associated range, demarked by a midpoint, minimum and a maximum. A compensation professional can help you develop and manage ranges. Once these ranges are defined, your options and strategies expand. Here are seven ways a compensation structure will help you manage smarter
- Structure helps you build for the future. In my experience, and to the surprise of most owners, when a structure is created most employees fall into the appropriate range. True, employees may be low in their ranges. However, management is not compelled to give anyone a raise. Having ranges creates an opportunity to think about what your employees can do to increase their value to the company. Increases can then be tied to performance and development targets.
- The mid-point, not the maximum, is the target. If the structure is properly positioned in relation to the market, the mid-point tells what a fully qualified person should be paid. This means that smaller and slower raises are appropriate for those who haven’t developed target skills and faster and larger raises are given your top performers: those who have skills and have showed they can use them. Communications with individual employees about compensation isn’t limited to reactions to employees asking for more money. These conversations become about the how the employee can provide more value to the company in order to increase their compensation.
- Being creative about the range between mid-point and maximum. Employees who are paid above the mid-point should be the top performers. It is likely that they are more valuable to you than to another employer because they know the culture, values, procedures, and personnel in your company. They should be paid for their value. At the same time the current employer should recoup gains for training them. These are the employees who can be challenged creatively. How can the organization make their raises and bonus rewards contingent on company performance and individual performance?
- Change from profit sharing to incentives. Individual incentives must be part of a top-down goal-driven initiative. The CEO, owner or General Manager defines corporate objectives in very specific terms. The acronym is SMART (Specific, Measurable, Attainable, within Responsibility, and with Time Frames). SMART goals build in criteria that allow everyone to see whether they have been achieved. The corporate goals are then parsed between departments and within departments between people. In theory, everyone has goals. Bonuses are tied by a formula to corporate and individual results. Expensive? It doesn’t have to be. Research shows that the goal itself provides motivational incentive and that moderate rewards work as well as big ones. The important feature is that individuals have some control over the size of their rewards. That gives incentive programs the motivational value that profit sharing lacks.
- Harness the power of groups. Should you have only individual goals, or do group goals work as well? The advantage of group goals is they can bring group social pressures as well as economic incentives into play. Once again, research says that having them is more important than their size. Brainpower and creativity is more important than cash in making these work.
- Communications about company performance becomes meaningful. Performance goals encourage communication about the performance of the company and give employees a reason to care. At least three meetings are mandatory: (1) a meeting at the start of the year to share corporate goals and the ground rules of the incentive program; (2) a mid-year review to discuss results and encourage performance; and (3) an end of year summary, congratulating staff for good work or reviewing what was learned, so there will be greater rewards for all next year.
- Performance management and reviews can become a way of life. What is the purpose of a performance review in a performance oriented culture? One purpose is to look back and evaluate what was done the previous year. The fact that you have created performance goals and development goals makes this a more productive exercise. The creative part is that you can look forward and begin dialogue on how to do better next year.
Is this a program that can be put off, or should you be working to rationalize your compensation program, starting today? You have to ask yourself, as the small business owner, what is the danger of not putting a solid compensation plan in place, and allowing the current situation to continue?
If you believe in the value of money, you should ask is you are getting as much as you could from your payroll expenses. If the answer is no, it is time to start making the changes that will help you get more value from your investment in people.
Either way, you must believe in the value of people. It is your human capital that will grow your business, develop loyal customers, and contribute to your increased profitability.
What Will Happen When the Recruiter Calls
April 26, 2010 by Harvey Wigder · Leave a Comment
I just completed two searches that I’d like to share with you. The companies that I “stole executives” from made it so easy for me. My message to you is this: plan ahead, take steps to retain your key employees, and “go on the offense” to prevent people like me from easily stealing your people.
The first search was completed for Tom, who owns a profitable $8 million dollar manufacturing business. When we first started talking about finding someone to be GM of his company, Bob was dubious. “Why,” he wanted to know, “would someone from a bigger, more sophisticated company, want to come into a small basic manufacturing company like this?”
I knew that someone would be delighted to take the job Tom was offering. The most important reason had to do with Tom himself. Tom is direct, honest, and open. His employees seem to like working in his company. Although Tom didn’t see this as special, I knew that he was undervaluing a big asset. I was also very confident that the business had good growth potential and that candidates would welcome the opportunity to make a contribution.
After I spoke to Larry, I knew he had all the skills for the job. His personal values included having respect for others, and personal integrity. The company he was working for had asked him to turnaround a failing plant. As part of that process he negotiated stretch performance goals with the people who were directly responsible for implementing changes. Everyone worked together and the goals were dramatically exceeded. Yet, when it was time to pay the promised incentives, the CEO refused, arbitrarily. That CEO didn’t understand why this might be short sighted and poor leadership.
I met Larry shortly after that incident and he was very ready to accept my recruiting call. Needless to say, I had no problem showing him a greener pasture.
In my an early Ezine (Wigder Reports, same title), I talked about a client who had the courage to search for a new Sales Manager, even though the one who was being replaced had performed adequately. Ralph, who had great success with a larger competitor, loves being in sales and sales management. However, he was just completing his third year in a marketing job and was itching to get back to sales.
Ralph took my recruiting call after he had completed fruitless discussions with his superiors about getting back into sales management. He was easy to recruit as well.
What do you want your employees to say if/when a recruiter calls? How can you be sure that your people will say no when the recruiter calls? Here are some valuable tips to ensure that key employees are retained, happy, and resistant to the tempting calls of the recruiting sirens:
• If you do not want them to welcome a call from a recruiter start now, before it is too late. The first ..step is to start by paying attention to their goals and values. You will not keep good people if you are ..not creating an environment where they can obtain the rewards that are most important to them.
• Start talking to them about their feelings about working for your company. Although the answer might ..stretch you to go outside your current assumptions, paying attention will make you less vulnerable. ..The questions to ask might include–What changes might further our mutual goals? How satisfied are ..you with your job at this time? Are we satisfying your career goals?
• Ensure that your key employees are truly valued, and have a fair compensation plan in place. Be sure ..you know what motivates them, and respect their personal goals and aspirations. You can’t have loyal ..employees until you have happy employees first. Put yourself in their shoes once in a while.
Sharing this sage advice could make my job more challenging, but I’m confident that there will always be a good pool of business owners and CEOs who continuously neglect their people. Of course, I hope you will heed this advice because I honestly do wish you success in building your team. Any CEO worth his or her salt is never surprised when a key employee leaves. There is usually an underlying issue that nobody wants to address.
When it comes to preserving their current team, I encourage my clients to do it themselves or use my help in this dialogue with employees, and understanding the meaning of the answers. The owners who find a solution keep their best people because they constantly are finding new ways to grow together.
Who knows… I may be calling your company soon. Have the receptionist put me through!
Hiring Executives to Run an Owner-Managed Business
April 26, 2010 by Harvey Wigder · 1 Comment
Several years ago, when beginning the process that resulted in the methodologies I now use for search, I took the time to interview owners who had hired executives to run their businesses to understand the issues and challenges from their point of view. My objective was to gain insight that might add depth to my practice and to communicate conclusions that might be helpful to others.
I conducted sixteen in-depth discussions with business owners who had attempted to replace themselves. We talked about why they made the decision to find someone, how difficult it was to find the right person, what difficulties they experienced in turning over the business, and whether they considered the result a success. As you would imagine, the answers were as varied as the personalities of these hard working people.
The Results
The interviews made the highly personal nature of the decision very clear. Each of these businesses was established with a viable future. In the vast majority of cases, the decision to make the change was driven more by personal and lifestyle goals than financial considerations.
Therefore, I concluded that a successful transition has two elements. First, business performance had to be enhanced. Second, the owner had to be satisfied with how the business was run, and the quality of their life after the change. They needed to feel that the business would be in good hands under the new leadership.
The first, and perhaps most important conclusion, is how hard it is to do this right. Only 25 percent of the participants were able to achieve success with the first executive person hired. Another 25% were successful the second time with a second generation of hired executives.
The factors that appeared to be most significant in the successes were:
• The owner drove the process and did not react to outside pressure. (When outsiders drove the change, ..failure was very likely.) In the successful cases, the owner made the decision to find someone new ..and controlled who was selected for the position.
• The person selected fit the job specification and understood that the job was to take charge of day-to- ..day operations. The person’s ego didn’t go beyond that domain. They saw themselves working to ..achieve the owner’s objectives. These people also had relevant, solid business experience and ..management credentials.
• In all of the cases, there were transition issues where the owner had to exercise self-control and give ..the person hired an opportunity to take charge. It was never easy for the owner (or for the person hired) ..on day one.
• In all of the successful cases the business owner relied upon advisors, to help with selection and for ..guidance in the transition process.
I found the last conclusion most interesting. Is this a recommendation for advisors? Advisors can be very useful but that isn’t the principal point. I think it is because the owners who were successful had the self confidence to realize that they didn’t have the ability to do everything themselves. They were open to the input of others and to trusting others abilities. That made them, more than the ones who failed, ready to share authority.