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The Eight Rules of Management
by Gregory Blencoe

 
   
 
   

Rule #8: Implement a Profit-Sharing Program

Mention profit-sharing to a group of managers and they will inevitably raise both of their hands up in a defensive position and say “Whoa!!!”.  Even the thought of profit-sharing seems to make managers cringe as if they were a claustrophobic and you had just asked them to enter a crowded elevator.  This typical programmed response from managers is unfortunate because profit-sharing could be their best friend and most managers treat it like their worst enemy.

Who are the most productive workers on the planet?  Entrepreneurs.  They are far more productive than any other class of people.  Knowing this, why don’t we try to figure out what makes them efficient and then use this knowledge to improve the productivity of all employees.  The answer to this question does not lie in the head of a rocket scientist down at NASA.  It is ridiculously simple.  Entrepreneurs are so productive because their paychecks are always on the line.  Their compensation is directly related to the performance of their businesses.  If entrepreneurs do not make money at their companies, they do not eat, make the car payment, or pay the mortgage.  How is that for pressure?

Contrast that with employees who get paid a fixed wage.  If the business makes ten dollars, they get paid the same.  If the business makes ten thousand dollars, they get paid the same.  If the business makes ten million dollars, they get paid the same.  Therefore, these employees could care less how much money the business makes because their compensation is not affected.

On the other hand, just think of how employees’ attitudes would change if they were to receive a portion of the profits that the company makes.  Employees would view customers as opportunities to make money instead of as nuisances.  They would look for ways to do their jobs more efficiently and where to cut costs.  Employees would turn into quasi-entrepreneurs with the mentality that they are in business for themselves.  For the first time, entrepreneurs and employees would be on the same page. 

In addition, managers would not have to play the childish game of constantly keeping an eye on employees to make sure their work is getting done.  It is common knowledge that employees usually act much differently when their manager is not around.  Productivity typically goes down at this time.  When the cats are away, the mice will play, right?  Not when a profit-sharing program is in place.  Employees have the same motivation to do well whether or not the manager is there.  However, if an employee is still not performing up to par, then other employees will help straighten them out because poor performance will be costing them money.  This peer pressure will raise everyone’s standards.

So how would a profit-sharing program work?  When trying to figure this out, managers must make sure that profit-sharing does not make up too much or too little of employees’ overall compensation.  A profit-sharing program where 65% or 70% of employees’ paychecks are based on the company’s profits would be too risky for employees.  On the other hand, how motivated would employees be if only 1% of their compensation were profit-based?  There would be a minimal, if any, effect.

A good general plan would be to pay all employees an average market wage and then contribute 15% of company profits to a pool that all employees would split based on their individual percentage of total labor dollars.  The beauty for the business owner is that employees only make more money when the company makes more money.  Based on the profits they help create, employees determine how much additional compensation they will receive above their average fixed wage.  However, the business will keep 85% of all profits so the amount distributed to employees is just like giving a salesperson commission.

To illustrate how wonderful a profit-sharing program can be to a business, look no further than Southwest Airlines.  They invest 15% of their pretax operating income in a profit-sharing plan.  The result?

  • Southwest is the only airline that has made money every year since 1973. 
     
  • This past year, Fortune magazine ranked Southwest Airlines the 2nd best company to work for in America.
  • The Department of Transportation’s Air Travel Consumer Report has ranked Southwest number one in fewest Customer complaints for the last nine consecutive years and number one in on-time performance for seven out of the last eight years.

Quite impressive, huh?  Southwest Airlines makes all three participants in the business process happy: the owners, employees, and customers.  What more could you ask for?
 
The proof is in the pudding.  Profit-sharing works.  Do it and fly high.

The Art of Management


       
   
 
       
   

The Author

The Art of Management

Gregory J. Blencoe is a management consultant and author of The Art of Management.  He has written articles for numerous magazines including Success, Human Resources Executive, Business Credit, and Canadian Business Franchise.  Please feel free to contact him with any questions at gblencoe@aol.com.

 
       
   
 
       
   
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Copyright 2001 by Gregory J. Blencoe. All rights reserved.

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