Jamie Lippay thought that he'd hit a home run when he launched profit-sharing at Keyora Inc., his Oakville, Ont.-based ERP-integration firm, in 2010. In order to increase profitability and employee engagement, he offered each of his 35 staff the equivalent of up to 10% of his or her salary if the company met its software sales target. Sure enough, the firm hit the mark, staffers got their payout and Lippay awaited a wave of praise and enthusiasm for the profit-sharing program.
He didn't get one.
During year-end performance reviews, Lippay was shocked to learn that staffers weren't fired up about profit-sharing at all. Sure, they liked the quarterly cheques, but they didn't feel driven to do a better job. The general explanation: most staffers felt they couldn't exert any meaningful influence on software sales. "The target was too distant from their day-to-day work to provide any role in motivation," he says. "It was a large payout, and it was having no positive effect."
A rookie profit-sharing mistake negated Lippay's noble intentions: he had failed to create goals to which program participants can relate.
It's a common error, says Doug Kruse, a management professor at Rutgers University in Piscataway, N.J., and co-editor of Shared Capitalism at Work: Employee Ownership, Profit and Gain Sharing, and Broad-Based Stock Options. Kruse says that companies with profit-sharing programs tend to perform better than those without, but only if the program is structured effectively. If it isn't, says Kruse, "at some firms, performance actually goes down."
Thankfully, it's not difficult or expensive to steer clear of that unpleasant scenario. It simply involves crafting a profit-sharing program that gives all participating employees agency in reaching the firm's goals. As the experiences of growing firms across Canada demonstrate, a well-designed profit-sharing plan can boost the bottom line while dramatically improving employee engagement. Here's how to make it happen in your firm.
Tailor the program: Lippay went back to the drawing board immediately after Keyora's initial plan failed. With his employees' feedback still fresh in his mind, he decided to try factoring individual contribution into each person's payout.
Overall performance still plays a role; no one gets a payout unless the firm hits a modest overall profitability target. But whether an employee gets a cut depends on whether her personal "business unit"—be it related to consulting, sales or design—turned a profit. "If we have an account manager who's doing a spectacular job and contributing to the bottom line, they will receive a significant profit bonus, even if the company is only marginally profitable," explains Lippay. "By contrast, if one is running an unprofitable business, they will get nothing."
The new model has caused a sea change in employees' mindsets. According to Lippay, they're seeking out more profitable work and hunting for inefficiencies they can address. In the short time the new program has been in place, it's had a "huge effect" on the culture and performance of the business.
One note of caution from Kruse: it's key not to base programs solely on individual achievement, which can cause staffers to focus inward too much and lose sight of the overall success of the business. An effective compromise, he says, is to measure both corporate and personal performance.
Create a variable kitty: It took Richard Cooper some fine-tuning to arrive at the perfect profit-sharing equation for his Markham, Ont.-based debt-settlement firm, Total Debt Freedom. But he's thrilled with the option he finally settled on.
To start, each employee's payout is based on several factors: tenure is one, as are what Cooper calls "peer points," through which employees rate their co-workers according to how each is living up to the firm's core values. If an employee scores well, he will get a larger share of the quarterly profit.
But to add another employee-performance factor to the formula, the percentage of company profits shared varies from quarter to quarter. Cooper believes his business is all about making clients super-fans, so the company's Net Promoter Score (NPS) plays a big role in how much employees will get.
NPS is an increasingly popular customer-satisfaction metric that gauges the percentage of clients who'd recommend your company to others. If Total Debt Freedom's NPS drops below a fixed number for a given quarter, no profit is shared. The higher the score, the more profit is bequeathed, to a maximum of 25%. "If everyone who works here is focused on creating raving fans out of clients, it's better for the business," says Cooper. "Profits happen naturally."
Employees now place an unrelenting focus on client satisfaction. They're also keen to maximize the company's total profits. "They do crazy things like send around emails if someone has left the light on in the lunchroom," says Cooper. "They take ownership of the business."
From a legal point of view, a variable profit-sharing program is just fine, as long as its parameters are clearly documented in employment contracts, according to Donald Moir, a partner at INC Business Lawyers in Richmond, B.C. Moir says that can be as simple as putting in writing that any such payments are fully discretionary.
Use it as a retention tool: At iData Research Inc., a Vancouver-based provider of market intelligence for the health-care sector, profit-sharing dates back more than three years. With the firm's growth accelerating, president and CEO Kamran Zamanian was looking for a way to reward his small staff, allowing them "to partake in the growth of the company."
Zamanian started by setting a profitability target and worked through how much of it he could reasonably share. "It was a question of 'What can we dispose of without hurting the company's growth path?'" he explains. Once he came up with a percentage, he opened the program to all employees, promising each a payout at the end of the year if the firm hit its target, regardless of individual performance.
iData had a great year, and Zamanian cut a stack of sizable cheques—totalling almost $100,000—on January 1. Instead of being motivated to work harder, "half the company took off to Barbados without thinking of the work they'd left behind," he says. In fact, four staffers, or 30% of his workforce, quit outright. "The initial idea was to boost engagement and retention—not to have everyone take off with large sums of money."
Zamanian has since revised the program. If the company hits its sales targets, a percentage of its profits will be banked at the end of the year. The money is distributed the following year, and in quarterly instalments. Not only does this eliminate the "take the money and run" mentality that had caused problems before, it serves as a potent retention tool. (Employees who leave the company because of a move or another reason management deems "legitimate" might qualify for early payout, but those who simply choose to jump ship won't.) And each employee's share of the action is linked to his ability to meet individual targets, which means staff are extra-motivated to go the distance. "They know their performance means something," he says. "If they work harder, they'll see a huge difference in their profit-sharing cut."
While Zamanian encountered some early resistance to abandoning big annual payouts, he says most staff have come to embrace the staggered disbursements—especially since they are issued on top of, not in lieu of, regular bonuses and raises. Since putting the new program in placed, staff turnover has dropped dramatically.
Pick and choose who's eligible: A blanket profit-sharing program in which every employee participates isn't always the right way to go. Some jobs have insufficient bearing on a firm's profitability. In other roles, individual contributions can't be accurately and objectively measured. If such positions exist at your firm, taking a selective approach to plan eligibility can be more effective.
Maureen Lucas never offered profit-sharing until she was on the hunt for a talented manager to run a new branch of her Windsor, Ont.-based staffing agency, LucasWorks! Inc. The star recruit Lucas had in mind had requested a share of the profits she would generate. After running the numbers, Lucas discovered that there was no way this proposed model could harm the company's performance. Thus, the firm's profit-sharing program was born.
The model has worked. In the two years the program has been in place, the new manager has grown her branch, made it profitable and is accruing a share of those spoils. Not long after, Lucas asked another senior employee in Windsor to join the profit-sharing program, and Lucas expects to replicate the model for the manager of another new location. But Lucas limits profit-sharing to those who are responsible for both the top and bottom lines. Staff without both responsibilities are instead rewarded with bonuses and commissions.
"Basically, if they're responsible for generating profitable business, they're going to benefit from it," says Lucas. She feels that profit-sharing is the ideal carrot to offer bottom line-boosting employees, and that CEOs questioning whether to divvy up the rewards should take a broader view. "Business owners so often want that entrepreneurial attitude in employees but are unwilling to give them the perks that go along with it," Lucas says. "You have to walk the walk."