Encourage Employees to Think Like Owners
Incentives and bonuses can inspire employees to invest their energy in your business.
Q: I have some great retail store managers and want to retain them. I'd like to add an incentive program based on performance. Should it be as a percentage of net profit, or do you have a better suggestion? Also, two managers are really interested in ownership in the business. They have no capital to invest, but they do have time. Any suggestions on how to make them owners over time? What kind of performance measurements should this be based on?
A: Getting people to think like owners is tough. After all, if they really thought like owners, they wouldn't be working for you--they'd be starting their own businesses. So it's great that you have employees who want to move into partial ownership! Start by understanding what ownership is. Owners are paid differently from employees in that:
- Owners get a percentage of the value of their labor.
- Owners get a percentage of the overall business's results--which is essentially a percentage of the value of everyone else's labor.
- Owners have control and decision-making input that others don't have.
- On the downside, owners share the risk and responsibility of business failure.
If your managers want to become owners, find out what "ownership" means to them. Do they care about sharing the fruits of their labor? Do they care about building a large organization? Do they care about helping shape the direction of the company? If they don't want the full package, you might be able to create deals where they get just the form of participation they want.
To link a manager's pay to his own performance, ask yourself how you measure their performance. For example, in a retail store, you may care mainly about overall profitability. So you could base a manager's bonus on sharing a percentage of the store's profit. Of course, profit is just revenues less expenses. If you want to further motivate managers to emphasize one part of the profit equation, you could provide an additional bonus based on hitting just expense reduction or just revenue growth targets. So a manager may get X percent of the store's profit, plus a $Y,000 bonus for increasing revenues 10 percent.
To link incentives with overall business results, again, look at the overall business and start with the results you want. Profitability may be one result, but you may want to concentrate not just on overall profitability, but also on the measurements that drive profitability. Many retail stores have high employee turnover. You might want to connect a manager's bonus to reducing turnover. Or if your inventory carrying costs are substantial, you might attach a bonus to reducing inventory levels (with provisions about avoiding stockouts).
A common mistake in designing bonuses is basing a bonus on a measurement that the employees can't affect. If your bonuses are based on overall company performance, make sure your employees have the ability to affect overall company policies. Involve them in decision-making, strategy, cost-cutting and so on so they can have a real connection between their work and reward. Also, make sure they have the information and training to help the overall business. For example, if your managers understand basic finance and you give them the business's financial information, they will be able to be part of the overall business strategizing. Here are some other ways of giving people a piece of the pie:
- Give them stock that vests over time or vests when certain milestones are hit. (But if you're privately held, such stock may never be worth much.)
- Establish a phantom stock-tracking fund and issue "shares" in the fund tied to performance targets. The shares in the fund can later be used as the basis for distributing bonuses, can be converted to real stock and so on. Some companies have phantom stock that gives the employees all the benefits of real stock ownership, but they must remain employed to retain their phantom shares.
- Give them royalties tied to a specific product line or revenue stream. This is routinely done with creative types (such as recording artists and actors), and your ability to do it depends on whether that product line can support an ongoing expense to earnings. Be careful when setting royalty rates, though--if you're paying too much in royalties, you can hurt the business's ability to grow by paying out all your profits before any has come to the business for reinvestment.
No matter how much we pretend companies are participative, they are legally dictatorships. That means involving employees in higher-level decision-making requires you, the owner, to explicitly seek out their input, bring them to the table and listen to what they have to say.
The key is really making them part of the decision-making. Your actions send the loudest message to them when you disagree. If you go out on a limb and try an idea you disagree with, the message comes across loud and clear: You're willing to trust your team members and let them take ownership-like risks. If you consistently override ideas you disagree with, then even if you ask for input, people will eventually perceive that their input doesn't make much of a difference and they'll check out.
Of course, keep a balance. If you really believe an idea isn't workable, lead people through your thinking and invite them to address your concerns and come up with alternative plans. But getting the true buy-in requires giving them the chance to truly participate.
As an entrepreneur, technologist, advisor and coach, Stever Robbins seeks out and identifies high-potential start-ups to help them develop the skills, attitudes and capabilities they need to succeed. He has been involved with start-up companies since 1978 and is currently an investor or advisor to several technology and Internet companies including ZEFER Corp., University Access Inc., RenalTech, Crimson Soutions and PrimeSource. He has been using the Internet since 1977, was a co-founder of FTP Software in 1986, and worked on the design team of Harvard Business School's "Foundations" program. Stever holds an MBA from Harvard Business School and a computer science degree from MIT. His Web site is a http://www.venturecoach.com.
The opinions expressed in this column are those of the author, not of Entrepreneur.com. All answers are intended to be general in nature, without regard to specific geographical areas or circumstances, and should only be relied upon after consulting an appropriate expert, such as an attorney or accountant.
Stever Robbins is a venture coach, helping entrepreneurs and early-stage companies develop the attitudes, skills and capabilities needed to succeed. He brings to bear skills as an entrepreneur, teacher and technologist in helping others create successful ventures.