A Business Owner cares about increasing the company’s net profit. Employees care about increasing their personal income. The ability to realign that focus and make the employee’s increase a byproduct of the company increase will pay dividends. This will be the overarching theme guiding the content discussed within this article.
Key impact areas
Business Owners recognize the importance of building an effective company infrastructure. Inclusive elements within this infrastructure may include:
- Organizational alignment
- Ability to scale
- Working capital
- Talent acquisition/retention
- Overhead expense
- Market share
- Process efficiency
These critical areas, when working harmoniously, will drive engaging customer experience, positive branding, increased market share and improved business efficiency. There is a common thread that impacts all of the above mentioned areas of focus. A simple open ended question will bring this common thread to light. Is there any aspect of business that is not directly or indirectly affected by people?
People make the difference
Bottom line, without people, business doesn’t move, let alone move forward. When it is agreed upon that people have a substantial impact on business, and that all of the aforementioned bullet points are essential to business improvement, then the area of workforce optimization may gain traction on the prioritization chart of an organization.
This article will focus on a suggested framework that will help guide the process of improvement by prioritizing mutual gain. Most businesses believe that they haven’t tapped the full potential of their workforce. Many businesses try to remedy this issue with a focus on leadership efforts geared towards creating clear vision along with providing a motivating and inspiring work environment. While these areas are important, and should be part of developing the workforce, this article will focus on another factor; compensation.
The motivation of compensation
While money is not the only compelling element in achieving a thriving successful workforce, it is a substantial component. For arguments sake, let’s explore this for a moment. Employees have weathered tough times during recessions, economic downturns, industry volatility, etc. While no employee will be excited about a reduction in hours/pay, health benefit expense increases, or a stagnant promotion cycle, history has taught us that many will weather the storm in hope of brighter days. However, the day a company stops paying its employees is the day it loses its workforce. Money is not a bad thing, though I would suggest that greed is harmful. Compensation is fundamental for a worker to provide for themselves and their family. Positional wage scales within a company are driven by the value an organization determines the work is worth. Therefore, employees naturally feel that their wage and future potential for gain is aligned with how the company views their value to the organization.
It is reasonable to conclude that employees require money to live, organizational wage scales are commensurate with work value and that employees view wages as a reflection of their value to the company. When these factors are acknowledged, a process can be discussed to tap into this psyche in order to increase the ROI from the company’s highest overhead component; wages.
Tap into the motivation
In economic times, where many businesses strive to maintain profit margins, most business owners aren’t ecstatic about the idea of an across the board wage increase. It’s not that the ownership doesn’t want their workforce to succeed, on the contrary. This is more so about how they view the wage increase impacting the company bottom-line. An owner will generally look at the net profit of a company and immediately begin to detract the wage increase from the current bottom-line. However, with a program where the wage increase is only in affect when the company net profit increases, the proposition gains merit.
A company must first establish a current net profit benchmark. The company may then design a workforce stimulation program that will allocate a bonus percentage to be applied to the company net gain, above and beyond the benchmark, towards its workforce. While some business owners may scoff at the idea and view it as simply diminishing the gain, perhaps we take a look at this scenario from another vantage point.
For this example, we will use a 20% workforce bonus structure.
Imagine a business that is currently yielding an annual net profit of $1MM. Hypothetically let’s assume that the ownership wanted to increase the net profit by 80%. Using the 20% workforce stimulation model, apply the following logic and ask ownership/yourself this question:
“If you could grow your organization by 80% with a backend investment of $200K, without the requirement of putting up any upfront capital, and be guaranteed a 400% return on your investment, would you do it?”
A sound business professional would agree that this arrangement is a solid proposition. This is exactly what would take place if a company grew the net profit from $1MM to $2MM and then reinvested $200K back into the workforce. That reinvestment of workforce bonuses would drop the total gain to $1.8MM (80% gain) and yield an $800K increase on the $200K in workforce bonuses (400% return).
The follow up question to the above example may ask how bonuses will help achieve the company objectives of: organizational alignment, production, ability to scale, working capital, talent acquisition and retention, overhead expense, market share and process efficiency.
Let’s take them one by one and give some brief examples of potential impact.
- Organizational Alignment: when a workforce’s bonus structure is derived from the company’s net profit increase, organizational alignment and departmental peer accountability begin to form. Any sports team will tell you that a positive outcome is reliant on all members of the team operating at optimal levels and working cohesively towards mutual gain. A company is no different and utilizing this process may uncover unforeseen areas that require attention in order to bring the corporation into fluid efficiency.
- Production: Increase in production generally equates to increase in profit. A workforce that has clear goals with outlined benefits often drive better results.
- Ability to Scale: an efficient workforce is a scalable workforce. An aligned company runs more efficiently as a whole and as a result, has increased capacity to flex scale during peak opportunistic times. This can increase net profit and by extension, working capital, thus providing an organization with increased options.
- Working Capital: it is a derivative of net profit. When the workforce’s income elevation is dependent on net profit increase, the motivation is clear and the end result is increased capital.
- Talent Acquisition/Retention: compensation should be in line with the value to the organization. When talent is given opportunity and not impeded by over restriction and capped income, talent sores. When an employee can write their own financial future based on contribution and results driven within the organization, a company can tap into unused effort and potential.
- Overhead Expense: it could be argued that overhead as a percentage may slightly increase with this model. However, a workforce whose efforts are focused on increased net profit unequivocally will find ways to streamline overhead process and expense. However, for the sake of argument, most business owners would take a slightly higher overhead ratio to increase capital by 80%.
- Market Share: Increased sales are a result of an organization’s capacity to deliver, coupled with an effective go-to-market strategy. The benefits of sustainable increased capital driven by sales hinges on a company’s ability to meet its client’s needs. An organization that is aligned in process, vision and execution will provide the sales force with more opportunity to close deals based on corporate effectiveness, positive branding and consistency delivering superior results.
- Process Efficiency: processes are honed with the end result in mind and then working backward to reverse engineer into effective solutions and improvement objectives. If the end result is increased net profit and the workforce motivation is increased income, process efficiency will be a focal point of the improvement strategy.
It is recommended that a company schedule a management strategy session to identify the additional benefits and variables within an organization if this type of model were to be applied. If the general consensus is that this type of program would benefit the organization, introduce the concept to the workforce to gauge their reception of the company’s program design. Without workforce buy in, the program will never achieve its full potential.
Consider this previously mentioned statement when reviewing whether or not a profit sharing incentive program is appropriate for your organization:
“Business Owners care about increasing their company’s net profit. Employee’s care about increasing their personal income. Realign that focus and make the employee’s increase a byproduct of the company increase, thus achieving positive outcomes for all responsible in the growth of an organization. “
Since a company only incurs an expense as a percentage of the gain, this is a no risk proposition to the organization, yet it sets both the employer and employee on a pathway to mutual success. This methodology creates “buy in” and “ownership” mentalities comparable to an ESOP or ESPP without ownership having to give away positions within the organization.
For more information on workforce bonus strategy, visit www.biz-rc.com.