I don’t quite know why I’ve left it this long before addressing this uplifting topic in a blog, but here goes…

A typical reason why particularly lowly-paid employees become disenfranchised from – and sometimes depart – the business that they are employed by is that they perceive that their hard work and dedication is only returning a low/ minimum wage. Yes, most people still measure “value” in terms of “monetary/ financial value” – and I suggest that this value measurement tendency will be a predominant one for many years to come.

As far back as I can remember practicing as a senior manager I have been a strong advocate of “profit sharing” arrangements – where employees are awarded a share of (most typically) Gross Profit that exceeds a specified target/ threshold. Note – I do NOT advocate that profit sharing arrangements be based on “sales” target thresholds being exceeded. Why not ? Mainly because “sales revenue” can be impacted by many variables (e.g. salespeople discounting) that can result in low profit margins – that in turn can then make distributing a share of profit unaffordable. 

Why am I so in favour of Gross Profit based profit sharing arrangements ? Here’s why:

  • They can serve to close (and sometimes even eliminate) the feeling of “us” and “them” that often exists in employer-employee relationship dynamics.
  • They can serve to strengthen the relationships between a team of people who are focused on achieving common goals.
  • They can serve to influence (dissuade) salespeople not to discount so frequently and/ or not to apply high discounts when trying to “clinch the sale” with customers.
  • They demonstrate to employees that their employer takes their contribution to the business seriously, and is prepared to reward for extra effort that leads to better-than-expected financial outcomes.
  • They can serve as a method to motivate employees to perform and achieve beyond normal results.

What’s missing in many businesses today are firm measurements of “outcomes“. The beauty of profit sharing arrangements is that they concentrate the whole team’s focus and efforts on achieving above minimum or typical expectations – i.e. they reward people for achieving better-than-expected outcomes. I used to guide interested business owners to chart their team’s progress towards achieving – and then exceeding – target Gross Profit. All that is needed is a line graph attached to the wall, which is altered each day as each day’s Gross Profit outcome is learned. This visual way of illustrating Gross Profit achievement relative to target allows the team to quickly understand how they’re tracking – and boost performance/ effort where employees can see that unless they do so they’ll be unlikely to meet/ exceed target for the given month.

I have presented three options for structuring Gross Profit based profit sharing arrangements in the past, as follows:

Option #1 – reward individual employees on a pro rata basis based on their relative contributions towards overall Gross Profit.

The main negative repercussion of implementing this option is that individual employees can come to see one another as “competitors” rather than “comrades” as they race to be in the face of customers to try and achieve as many successful sale outcomes as possible. Obviously this is not a desirable outcome. Also, some animosity can arise among those employees who aren’t “client-facing” – and therefore don;t have the opportunity to engage with customers to influence a successful sale outcome (e.g. an office administrator who spends most of their time in an office in front of a computer).

The calculation of a Gross Profit distribution under this option would look like this (for example)…

Target Gross Profit level for the month of July 2018 = $30,000 

Actual Gross Profit achieved for July 2018 = $34,000

So, the “beyond target” amount of Gross Profit generated = $4,000

If Employee A was responsible for generating 25 % of Gross Profit $, Employee B was responsible for generating 20 %, and Employee C was responsible for generating 55 % of Gross Profit $; then each of these employees would respectively receive the following shares of “beyond target” Gross Profit: A = $1,000; B = $800 and C = $2,200. 

 

Option #2 – reward the entire employee team, where each employee is awarded the same share of “beyond target” Gross Profit.

This is a particularly good option for encouraging a team of employees to combine strengths in order to achieve the most favourable client-engagement outcomes possible…AND non-sales personnel are not disadvantaged by the fact that their focus and specialty is more orientated towards say administration/ inventory control/ marketing collateral preparation and similar non-selling type functions.

Using the above example, under this option each employee (A, B and C) would receive $1,333.

 

Option #3 – reward employees BOTH at an individual level and as a team (i.e. combination of Option #1 and Option #2).

This option provides recognition for contributions made by everyone in the employee team PLUS rewards those individual employees who the employer has assessed as being outstanding where their contributions are concerned.

To achieve this two-level Gross Profit distribution, the employer firstly earmarks a percentage of the total available “beyond target” Gross Profit for distribution among the whole team, versus the remaining percentage that is intended to reward specific individuals for outstanding contributions made.

For example: 70 % of the total “beyond target” Gross Profit achievement might be reserved for distribution on an equal share basis across the entire team (i.e. [$4,000 x 70 %]/ 3 employees = $933 paid to each employee.

And the remaining 30 % might be distributed to Employee A, B and C based on their relative contribution to the overall Gross Profit achievement. So for A = [$4,000 x 30 %] x 25 % = $300; for B = [$4,000 x 30 %] x 20 % = $240; and for C = [$4,000 x 30 %] x 55 % = $660.

 

Out of the above 3 x options, I favour Option 3. Why ? Because it fairly rewards both the whole team and those people who out-perform. As a past coach of junior sport I can tell you that the quickest way to discourage exceptional players in a team is to award “Player of the Day” to a “ho hum” (average) player only each weekend due to wanting to be “fair” to players that otherwise wouldn’t receive such a reward. High performing people must be duly recognised for their achievements…if employers want to hang on to them !

Providing a Gross Profit share arrangement also helps to build a sense of “inclusivity” in the work place environment – showing people in a highly tangible way that they’re very much a key part of the business. I’ve seen some very good examples of such arrangements within some large businesses in Hawke’s Bay. Such arrangements have proven to help in the formation and nurturing of a positive work place culture.