As you build your fee-based business it's essential that you provide excellent service to your best clients. To do this you must add managers, not just assistants, who are accountable for their own results. But even once you assemble a team of competent managers, then what? How do you motivate them to do their best work? One proven technique is to have them share in your company's profits. If you want your employees to come up with revenue-generating ideas, look for ways to reduce expenses, or figure out how to get more work done without hiring additional employees, you must give them some incentives.
Tools for Motivating Your Team
Setting up an incentive profit-sharing plan requires a fairly sophisticated approach to your business. We'll start by briefly reviewing a list of documents you'll need, and then we'll discuss how the whole system and process works.
You will need:
1. Annual month-by-month budget
2. Annual business action plan
3. Organizational chart
4. Position descriptions
5. Employee compensation agreements
6. Performance review and development plans
7. Incentive compensation plan
The basic idea is to define specific goals at the beginning of each year, what needs to be done to accomplish these goals, and who the ideal person is to do it.
Annual Month-by-Month Budget. The first document you'll need is a detailed, annual, month-by-month budget both for income and expenses. This needs to be set up to exactly mirror your income statement from your accounting program. I like to call it a profit plan instead of a budget. I've found that while my employees may hate budgets, they love profit plans.
This becomes the foundational document that defines your financial goals for the year, one that will be used to determine how the company is doing throughout the year, and whether or not the targets for the incentive profit-sharing plan will be achieved.
An important consideration of the profit plan is to plug yourself in as an expense each month for the salary you draw from that company. I pay myself first and make sure that we have plenty of money to pay expenses also. By doing this, anything that is above and beyond my salary is truly profit to the company and is available for sharing with my teammates.
Annual Business Action Plan. The next document--and perhaps the most critical--is the business plan. This is the plan that puts in writing how you will execute and deliver on the profit plan. What will it take to generate the revenue and the types of business that you want to generate?
Be sure to enroll your teammates in the development of these first two important documents so they feel ownership. Otherwise they will not be committed and won't give their best.
Organizational Chart. This simple graphic tool illustrates the functions that need to be accomplished in order for your organization to deliver its product to its clients. Start by defining what your "deliverables" are and work backwards. Most companies will have a box for these following job functions: (1) the chairman or chief visionary, (2) the president or chief manager, (3) a marketing manager, (4) a products and service manager, (5) a customer service manager, and (6) a finance and administration manager.
These six areas of responsibility are common to all asset management businesses. You don't need six people, but you do need to have some who is responsible for each one of these functions.
Position Descriptions. Once you define the roles and functions, you need to define the specific responsibilities and accountabilities for each manager. Our position descriptions have four different sections. The first section defines the personality style of the ideal candidate for the position. The second section defines the specific responsibilities and accountability that this person has. Each responsibility is given a weight to indicate its relative importance. The total weightings add up to 100%. This is not the place for specific goals. Those are in the month-to-month annual budget and in the individual development plans.
The next section of the position description includes specific skills that are required to be effective in the position. Overall, this document tells them what their responsibilities are and what it will take to be successful.
Over a couple of years, these position descriptions will evolve. As you identify areas that aren't being taken care of, you can refine your position descriptions to make sure that nothing falls through the cracks.
Employee Compensation Agreements. The next document is a one-page compensation agreement that documents when and how each employee will be paid. Typically our compensation includes a base monthly salary and a monthly bonus for achieving specific benchmarks or goals. Profit sharing is above and beyond this basic compensation.
Performance Review and Development Plan. This is a two-part document. The performance review lists each one of the responsibilities documented in the position description and has a place for a rating and for comments. This is also where we document the profit sharing for each employee. Employees are rated on each of their areas of responsibility on a scale of one to five. Each score is then multiplied by the weighting of that specific responsibility. This encourages employees to prioritize, and do their best work on their most important responsibilities.
The next section of the performance review is key performance factors. Including things like business management, initiative, decision-making, commitment, leadership, adaptability, communication skills, these factors are more attitude- and personality-related than they are skill-related. Again, these have a point rating system and a weighting depending on the importance we've assigned each one.
The last part of the document, the development plan, documents the learning and personal improvement each employee needs to accomplish during the next 12 months. The final part of this section documents the actual individual profit-sharing incentive award amount. For our company, this amount is determined by two factors. The first one is overall profit of the company. The second is the individual performance of each employee.
The Incentive Profit Plan. Once you have all of your infrastructure documents in place, you're ready to put together your incentive compensation plan. This is the actual document that specifies how you'll share profits on a company-wide basis.
Each year we define a goal, which we call our Target Profit Goal for the Incentive Compensation Plan. Let's say our target goal is $100,000 of profit. Remember that's a $100,000 above and beyond the salaries I've paid myself and my team. If we reach the target, each employee will receive a specific percentage of his salary as a bonus. For instance, if we achieve $100,000 of profit at the end of the year, each employee would be eligible for somewhere between 10% and 25% of their salary as their share of the company profits. If we double our profits to $200,000, their bonus would double also.
If we only reach our Threshold Profit Goal, say, $50,000, then the employees would only get 20% of their target compensation. Here is an example: If an employee's salary is $40,000 and the Target Incentive percentage is 15%, that employee would be paid $6,000 if we achieve our Target Profit Goal of $100,000. If we only make our Threshold Profit Goal of $50,000, the employee would only get 20% of $6,000, or $1,200. If we don't achieve our Threshold goal, the employee doesn't get any profit-sharing.
It's critical to run the numbers once you develop your plan to make sure you'll have enough cash to pay yourself and your employees if you hit your target.
I like my plan to distribute roughly 33% of my net profits among my teammates. The balance is split many ways. Part of it goes to increase my working capital, investing in capital equipment, and inventory. I pay a bonus to myself because I am a key executive of the company. And finally, any remaining profits go to me and to my wife as owners of the company. Be sure not to shortchange yourself and your organization when you distribute profits.
Put it all together. How to make all of this happen? Well, usually during the last two weeks of every year, we evaluate our results for the previous year. Before December 31, we pay out 75% of the target profits to every employee, based on the company performance. In January, I go over performance reviews and development plans with each employee for the next year. The score each gets on the performance review then modifies the final number for the remainder of the bonus that they'll get paid early that year. By March 31, we've completed our books for the previous year, and we then distribute the balance of the incentive compensation for the previous year.
As your employees start to see that they can have an impact on their incomes, they start to make different business decisions. I've noticed a significant change in the attitudes and thinking of my employees. Rather than talking about adding an additional staffer to help them with their workload, they're now looking for ways to streamline their processes or acquire technology that will make us more efficient.
I believe strongly that by sharing your profits with your employees, you'll make substantially more money than if you try to keep it all yourself. Certainly, in today's tight job market, anything we can do to attract, keep, and motivate employees is only going to enhance the quality of our business and the quality of our lives. And isn't that what it's all about, anyway?