Profit Share for Increased Performance

Profit Share for Increased Performance

SHARE

In the early 1990s I came across the book Maverick by Ricardo Sembler, and although the whole book was a revelation, one quote stood out: “It is impossible to obtain a spirit of solidarity and commitment among employees when times are tough if you are not prepared to share in the spoils when times are good.”

This resulted in the development of one of the first inclusive profit sharing schemes in South Africa, adopted in the early 1990s by the company I was working for.

No sooner had I read Sembler’s book than I was in a round of negotiations with one of the senior officials within COSATU who commented that he found it particularly strange that companies always approached the annual round of wage negotiations with the story that the company was experiencing difficult times and needed to cut back on labour costs. This might have been true, but the converse is also applicable.

As a result we developed a profit share scheme that included all employees using the same performance targets that were set for the management and executive schemes. More importantly, we developed an ‘Infopak’ in which we provided full financial disclosure on the company’s monthly performance.

Tracking progress

The Infopak feedback sessions were scheduled monthly and presented by a director or senior manager. This way all employees knew at the end of each month what the company’s performance was, where it had exceeded or under-achieved its targets and they could track the progress towards the annual profit share scheme as well as their potential payouts.

Here are some of the critical components of the profit share scheme and the communication sessions to support it:

  • Clear objectives were set

One of the objectives was to provide all employees with the opportunity to share in the success of the company.

  • Commitment from the executive team

No scheme of this nature will ever succeed without absolute and demonstrated support from the entire executive and senior management teams. Members of the executive team presented the monthly financial results at all the briefing sessions.

  • Cost versus benefit analysis

In schemes of this nature, management can be caught in the trap of believing that the costs outstrip the benefits.  Therefore, it is important to conduct a full costing analysis which should include the minimum expected return measured against the cost of the full potential payout. This is where the value of developing divisional key performance indices becomes clear.

If you calculate the minimum expected return or improvement from any of the key performance indicators and measure this against the cost of a full profit share payout at the end of the year, the direct benefits will far outweigh the direct costs.

  • Qualifiers and disqualifiers

There must be clarity on the key measures against which the scheme will pay out a profit share at the end of the year. Keep it simple by focusing on the two best qualifying factors – net sales growth and profit before tax.

Equally important is the need to identify and communicate upfront the various disqualifiers that will be applied in the scheme. Absenteeism as well as days lost due to strike action, legal or otherwise, resulted in employees not qualifying for profit share at the end of the year. The principle was if you were not at work to contribute to the achievement of company targets, you were not able to participate in the rewards.

  • Applicable profit targets

Contracted profit targets will always be net of the payment of all profit share schemes as these profit targets have already been ‘negotiated’ with the company‘s shareholders who, it must be remembered, are entitled to rewards for the level of risk they have placed on their investment in the company.

  • Effective communication

As the communication sessions are designed to reach a wide audience, from shop floor to mid-management, information should be presented in a format that all audiences are able to understand. If financial information is restricted due to JSE listing requirements, make use of indicators that provide the audience with a clear understanding of where the company has met its targets or under-achieved.

  • What financial information should be presented?

Break down the income statement into its component parts to provide an understanding of the key drivers affecting company performance. That is gross sales, cost of sales, cost of manufacturing, net sales, marketing – fixed and variable costs and profit before tax.

Compare actual performance versus budgeted performance for the given period and include information on the progress towards cumulative profit target payouts at the end of each month. The fact that some businesses run at a loss for a given period in the year addresses the mindset that the company is always
doing well.

  • Financial literacy

Providing basic financial literacy education for all employees gives them an understanding on how the company operates and the role every employee plays in contributing to the success of the company. This is a long journey and one cannot expect it to be a once-off exercise. Each communication session should provide education on a part of the business or income statement.

  • Honesty builds trust

Identify successes and over-achievement while pointing out areas that still require attention. Employees will quickly be able to see when information is being withheld and will begin to query the relevance of the information being presented.

Don’t be afraid to invite union officials into regular feedback sessions or alternatively arrange dedicated sessions with union officials and present the same information to them.

An effective and honest communication strategy plays a significant role in driving commitment to an effective profit share scheme.  Done correctly, it builds trust over time, which strengthens the employment relationship.  This, in turn, builds commitment during good and bad times. Only then can a company begin to expect a spirit of solidarity from its employees.

Efficient-Employees-Increasing Productivity-Staff

Pieter Scholtz
Pieter Scholtz is the Master Licensee for ActionCOACH South Africa. ActionCOACH is the world’s largest executive and business coaching company with operations in 41 countries. It is also on the list of the top 100 franchises globally. As a highly successful Business and Executive coach, Pieter is a master of teaching business owners how to turn their businesses around and accelerate their growth. Email him at pieterscholtz@actioncoach.com or phone 082 8813729.