Too many employees today believe they're entitled to a paycheque simply because they show up for work. Brad Hams, founder and president of Ownership Thinking, contends that the spread of this mindset is crippling companies. His Lakewood, Colo.-based consultancy and training firm has worked with almost 2,000 businesses to help them replace cultures of entitlement with cultures of earning.
Brad Hams spoke in Toronto May 8, 2012 at an event, Ownership Thinking, presented in partnership with PROFIT Magazine.
In this interview with Jim McElgunn, a senior editor at PROFIT Magazine, Hams explains why the entitlement mindset is so harmful, and the three keys to overcoming it.
PROFIT: What is an entitlement mentality, and why is it such a problem?
BRAD HAMS: People with this mindset believe, "I should get things because of who I am, not because of what I do." They've grown up with warped expectations of what they're going to contribute versus what they're going to receive, and with being rewarded for activity rather than results. For example, we don't keep score in games at school because "everybody has to be a winner" and everybody gets a trophy.
So much effort has been put into the notion that our kids should never feel bad, and we've created school systems in which they can't fail. That doesn't cut it in business; because if you don't have results, you don't survive.
What is the appeal for employees of an entitlement mindset?
A lot of people have fallen into this mentality because that's what they've been taught. And they're drawn to this form of security because who's going to say no to something being given to them.
But ultimately, people want to be purposeful in their lives. And going down the road of entitlement leads to dependence, which crushes potential and makes people lose confidence in their ability to get out and do well on their own. That's a miserable place to be. The way to get people out of the entitlement mentality is to take away their entitlements and require them to participate and take responsibility.
So, by combating the entitlement mindset, firms are acting in their employees' interests, not just their own?
Without question. We've implemented ownership thinking in close to 2,000 companies, a fair number of them in Canada, and the results are crystal clear. Although their employees benefit financially from the incentive plans these companies fund that reward them for achieving results, the monetary side isn't the biggest deal. It's the fact that these companies are transparent and employees can see their contributions and that they're part of a winning company. And employee retention is significantly greater in companies that go down this path.
You've identified three strategies to get employees to think like owners. The first is to teach them the fundamentals of business and finance, including how the company makes money and how employees add or take away value. Why is this crucial?
If you don't teach employees this, they make mistaken assumptions that affect their behaviour. When I did some employee training recently at a fuels and lubrication company, I asked a group of them, "What percentage of the company's $120 million in revenue do you think was profit?" One guy raised his hand and said 50%. It's very common for employees to guess 35% to 50%. But we've never worked with a client that made 50% profit, and this client's profit was actually 0.2%.
The employees' assumption that the company was making 35% to 50% led to very wasteful behaviour. People wasted materials and caused errors that had to be fixed with overtime, but their attitude was, "Big deal, they're rolling in the dough"—with "they" being the management. Their mistaken assumptions had a significant impact on performance and morale.
The second strategy you advocate is making key performance indicators highly visible and holding people accountable for achieving them. How does this combat an entitlement mentality?
The better performers want to be held accountable. They also want their peers to be held accountable and to be punished if they're not doing their job correctly. When you create a high level of accountability in a positive fashion, good people stick around and they show the door to the poor ones.
To engage employees, you need to focus on key performance indicators of their day-to-day activities. Build your metrics and your scoreboard around those, then meet regularly about them—rather than after the fact. This forces employees to learn about the impact their part of the company has on the whole, and shows them the correlation between what they do and the financial impact on the company.
The third strategy is to create self-funding incentive plans that clearly align employee behaviour with the firm's business and financial objectives. Why is this essential?
It's very important not to reward just activity. A lot of companies fall into this trap. They have a bunch of incentive plans, maybe by department or even individual, that are tied to specific activities but not to the company's overall financial performance. You get people building silos and saying, "I'll focus on my deal, and I don't care what happens to the rest of the company."
Most incentives should be tied to a single number: the company's profit before tax, which is the score at the end of the game. You need to teach everybody how to achieve that. That's where all the tools in ownership thinking come into play: educating employees about the business, identifying the right key performance indicators, using scoreboards to forecast and creating rapid improvement plans to drive performance one key indicator at a time.
All of these drive profitability, which is what funds the incentive plan. And it's really important that an incentive plan pays for itself. If it doesn't, you've created an expense and entitlement, which is exactly what you're trying to avoid.
What ROI should an incentive plan have?
It varies by industry. We build a plan by identifying a minimum acceptable threshold of profit that will satisfy the needs of the company as it relates to ROI, debt retirement, capital for improvements and things of that nature. Then we identify stretch goals and see by tracking progress on key performance indicators where money is falling through the cracks.
It's common for an incentive plan to equal 25% to 40% of the dollars of profit above the minimum threshold, or roughly 8% to 12% of wages.
Why do companies hesitate to adopt ownership thinking?
There are three common fears. One is, "If my employees know how much money the company is making, they'll want more." But employees often think you're making a 50% profit and are shocked when they see the real cost of doing business.
A second fear is, "What if my competitors get their hands on this information?" But they're in the same industry, have the same kinds of cost structures, supplier relationships and so on, so there probably wouldn't be any big surprises. And if there are things you sincerely believe might hurt you, you don't have to share them.
A third fear is being too tough on employees. A lot of business owners want to protect their people, and sometimes employees want to be taken care of too. So both of them support a patriarchal culture that doesn't hold people accountable.
But as a business owner, you have to be clear that people are tough. The vast majority of employees have the capability and the interest. You need to get past your fears and just do it.