February 6, 2025

You’re the Boss Blog: Do You Pay Employees to Exist or to Produce?

Creating Value

Are you getting the most out of your business?

Last week I talked about treating your employees as experts at their jobs. I’ve found this is the best way to help a work force develop personal responsibility. The next step in the process of creating value is thinking about how you compensate your people.

Many companies have individual bonus plans for their management teams. If these companies also have bonus plans for the rest of their work forces, they tend to be what I call pennies-from-heaven plans. In such plans, a bonus is given when the owner decides the company has had a good year and wants to spread some of the wealth.

The problem is that when people get that sort of bonus, they have no idea what they have done to earn it. They will probably be appreciative for a few days — and then things go back to normal. In other words, it’s wasted money.

That used to be the way I handled the bonus program at my vending company. If I was going to treat my employees as experts at their jobs, I needed to have a compensation system that recognized what being an expert meant. At first we tried putting individual bonus plans in place for all of our people. The first problem with this was that it took too much time and brought unintended consequences.

When we started down the road of individual bonuses, we had about 40 employees. Preparing individual bonus plans and monitoring them for that many people took too much time. Often, the bonuses we awarded were arbitrary, not tied to any measurement. If the employees did not get the maximum bonus, they felt cheated. Over time, they grew to resent the program.

The other consequences were even worse. There were times when the company would lose money but still be on the hook to pay bonuses to those who had earned them. The second problem was that individual bonus payments encouraged people to perform as if they were working in silos. They would do things that would produce a bonus regardless of whether it helped or hurt the company. Often, it hurt.

I wanted people to share information and work together, but my compensation system encouraged the opposite. When I figured this out, I had some real problems. I had to announce that the plan we had instituted wasn’t fair and wasn’t working. My announcement prompted a mild mutiny. To say the least, my employees were not happy with me.

I had made a major mistake. When I introduced the bonus plan, I never said that if the plan didn’t work, we had the right to change it. When I started to make changes, my employees felt that I was changing the rules unfairly. They weren’t thinking about the company as a whole. This was a pretty bad place for me to be.

One of the changes we made when we went from an individual to a group bonus plan was to start teaching our people about the company’s finances. We hadn’t been sharing our financial results with employees, and it turned out most of them thought we were making a lot more money than we were. They thought our profit margins were around 40 percent. In reality, we were making a 5 percent pretax profit in a good year — nothing to write home about.

We decided not only to use a group bonus system but also to start sharing our financial results with everyone. We did this once a month at a meeting, and we spent most of the meeting talking about what those results meant and how we got there. We started talking about companywide “hurdle rates.” Our hurdle was the profitability number that was required for us to have a healthy company — and to pay bonuses. We changed our bonus program from one where everyone had an individual bonus to one where everyone participated in the same bonus pool.

To receive a bonus, our people had to pay attention to how the company did as a whole. At first, there was real pushback. Most people do not like change, and our employees were no different. They were trying to figure out what we were doing to cheat them. From my perspective, we were not trying to take advantage. We were just trying to create a business that would be economically viable.

We introduced a variable compensation plan. For anyone to get a bonus, we had to hit our hurdle number — a pretax profit in the neighborhood of 3 percent of sales. Once we hit the hurdle number, a bonus was earned for everyone in the company.

We did base the amount of bonus that people would be paid on a point system. The more responsibility a job had, the higher the point level that was assigned to it. This recognized people who had more responsible jobs and whose decisions would have a bigger impact. We found a way for employees to track a number they could influence that would either increase or decrease the bonus paid. We had charts and measurements that everyone could track and see improvements.

When we moved to a group bonus system and everyone had a number, we found our silos broke down naturally. People in different parts of the company started speaking with each other about how to make things better. The results we got were more in line with what I was thinking when I introduced the bonus program.

I found that when we shared information widely, no one abused the privilege. Most of our people became interested in learning more. After all, the more they knew, the more money they could make.

Do you have a bonus plan in your company? Is it working the way you would like it to? Do you share your financial results?

Josh Patrick is a founder and principal at Stage 2 Planning Partners, where he works with private business owners on creating personal and business value.

Article source: http://boss.blogs.nytimes.com/2013/03/14/do-you-pay-your-employees-to-exist-or-to-produce/?partner=rss&emc=rss

You’re the Boss Blog: Introducing: Creating Value

Creating Value

Are you getting the most out of your business?

Business owners start businesses for a variety of reasons. A few do it to make a lot of money, but a vast majority do it for other reasons.

Some have an idea they believe the world needs. Some have a social mission in mind. And some just can’t work for anyone else (I include myself in that group). Whatever the motivation, at the end of the day, it all comes down to creating value, whether it’s business value or personal value. Surprisingly, though, not enough business owners think about this.

When they start a business, they know they have to fill a market need, and they know they have to make a profit. But in many cases, they have had no formal business training, and they don’t speak the language of business, which is finance. And they very likely haven’t stopped to think that they might one day want to leave the business. Instead, at first anyway, they concentrate on keeping their customers happy and having enough cash in the bank to pay their bills.

Here’s another problem: Most owners know more about running their businesses than anyone else in the organization. When it comes time to sell or transfer the business, prospective buyers aren’t interested in the skills of the buyer; they’re interested in cash flow. Buyers want to see regular growth and profit margins and a business that has systems that work without the owner.

I’ve been trying to understand how businesses build value for more than 35 years. One of the things I’ve learned – from the businesses I’ve owned, from reading a book a week for 35 years, from developing seminars for others and attending several educational sessions a year – is that value is in the eye of the beholder.

I grew up in a family business, a vending and food service company. I joined the business after college and within a year had bought a branch of the company from my father. At the time, the branch was grossing $75,000 a year in annual revenue. Twenty years later, when I sold the business, it had grown to four branches, 90 employees and $6 million in revenue. During that time, I made a zillion mistakes and even learned a bit along the way.

After the sale, I tried working for a large mutual life insurance company for a couple of years but learned that I’m a lousy employee. And after that, I helped found Stage 2 Planning Partners, a wealth management firm. My specialty in the firm is working with owners of privately held businesses. In fact, they are the only people I work with.

Some of the things I help clients examine are whether they are on the road to financial independence, whether they are moving from active management to passive management of their businesses and of course whether they are creating value in their businesses.

This fits nicely with the title of my channel on this blog, Creating Value. I believe creating value is a keystone in making one’s life better. And I find that helping clients find out what will create value in their life helps me fill my personal mission of doing interesting things with interesting people.

My goal in writing for this blog is to help the people who read it ask themselves good questions about what’s important to them. In these posts, I expect to explore the importance of passive ownership, performance indicators, cash flow, developing a niche business and hiring and developing employees.

One of the defining events in my life has been my cancer experience. Three and half years ago I was diagnosed with non-Hodgkin lymphoma, Mantle cell variety. This is a nasty and rare lymphoma. Luckily, I’m in remission, which has allowed me to focus on leaving a positive footprint as I move through life. I see the opportunity to write this blog as part of leaving a positive footprint.

Thanks for reading, and I hope you’ll share your thoughts as we go through this journey together.

Article source: http://boss.blogs.nytimes.com/2012/09/13/introducing-creating-value/?partner=rss&emc=rss