Rewarding performance can be either a huge motivator or a highly divisive distraction. Structure it right and your staff will be striving for profits, get it wrong, however, and those gains could be gone for good.
When Tom Hitchman bought Naylor Group Inc. in 1984, there was one change he knew he'd be making as the company's new president and CEO. Hitchman had participated in a profit-sharing program as an employee at a previous job, and he wanted to bring that same motivation, inclusion and pride to his own staff of 200 employees at Naylor. "I appreciated being rewarded financially for my work," he said. "I see the staff of this company as stakeholders in the business and as stakeholders I think they're entitled to financial rewards beyond their normal income structure."
Three years after purchasing Oakville-based electrical contracting firm, Hitchman introduced profit sharing, and he hasn't looked back since. How does Hitchman know it's working? Aside from boosting morale and unifying the team, he says attendance at Naylor's annual meetings, where cheques are handed out, is consistently 100 per cent. "And my employees send me emails thanking me, so I know it gets their attention."
Getting employees' attention is one of the main benefits of any pay-for-performance program, such as profit sharing, says Toronto-based management consultant David Tyson, who focuses on compensation issues.
Lots of companies, big and small, use pay-for-performance strategies, says Tyson. But they're not all doing it right. "Pay-for-performance is one of those things that's always talked about but widely misunderstood," he says. He defines pay-for-performance as any compensation program where part of the cash compensation is determined by individual or group performance. If you offer your staff something above and beyond their regular pay cheques for meeting certain goals-whether it's simply turning a profit or securing a certain number of accounts-they're going to be that much more motivated to keep company profits climbing, says Tyson. The danger, he cautions, is getting sucked into a system riddled with policies, forms and complicated formulas.
That's why he likes the simplest of the pay-for-performance techniques-profit sharing. Tyson recommends offering employees 3 to 5 per cent bump on their base pay to get their attention. If it's implemented the way Hitchman does it-as a standardized bonus for all employees and not tied to any kind of performance appraisal-it's as good as gold, for both the employee and the employer. "If a prospective client came to me and said we want to put in a profit -sharing plan but want to allocate it on the basis of performance appraisal, I would say it'll cost you more in time and effort to put in appraisal system than profit sharing itself will, he explains. "They're hard to administer, require tons of effort and just ain't worth it."
Tyson isn't a fan of traditional merit increases as a form of pay-for-performance for that very reason-the performance appraisal. "But lots of companies do it," he says. "You go through enormous rituals to rate everyone and then the increases are so small you don't even get your staff's attention. Why bother?"
Individual bonuses, another category of pay-for-performance, on the other hand, do get employees' attention. But they don't come without their own pitfalls. Because they are centred around individual goals, they can foster competitiveness rather than unity. Profit sharing, on the other hand, gives companies the opportunity to create goals for entire departments or even the entire firm. "I think eventually we're gong to see individual bonuses die out," says Tyson. "Companies are moving more towards team effort and away from individual effort. We're going to see that reflected in compensation strategies."
In fact, it's already begun, with about 20 per cent of Canadian companies offering profit sharing programs. And when it comes to pay-for-performance, size really doesn't matter, says Tyson. "Any excuse not to offer it is a cop out, no matter how small the business is," he says. Hitchman suggests that lots of small business owners don't offer profit sharing because they're not prepared for the transparency it demands. "As the owner of a private company, you're used to only sharing financials with a small group," he says. "With profit sharing, all of a sudden you have to share your objectives and your outcome with your staff." Not only are you opening the company's books, but you're also making yourself, as company owner, more accountable, he says. "In a way, I'm now working for my employees."
Even though Tyson recommends the simplest profit-sharing plans for small and large business alike, he points out that small business owners must take on such plans with the awareness that they're making a commitment. "It's not a magic bullet that you can just walk away from," he says. "It does require some effort."
That effort begins with listening to employees. He suggests small business owners considering profit sharing set up an employee committee. "Pay-for-performance is not a scientific thing," he says. "It's a judgmental thing. Getting your employees involved is crucial."