– Create a win-win situation for employees and the company
The best way to invest corporate profits is to give them to the employees.
In a Nutshell
Companies offering a share of their profits to employees is old news. Many organizations pool a percentage of their profits and divide them between employees as year-end incentives. However, there is a lack of clarity on why certain employees receive certain levels of incentives. Nothing about the incentive received through the profit-sharing model is personal. And when it isn’t personal, people find it difficult to feel motivated to go over and beyond their routine responsibilities.
On the flip side, when companies choose to help employees align their self-interests with that of the company; when managers regularly follow-up with their team members and help them achieve the goals they set for themselves; and when the leadership recognizes and rewards people for achieving those goals, it makes employees feel personally connected with the success of the company.
When employees understand company financial data and figure out ways in which they can individually impact the bottom line, it creates a win-win situation for everybody involved. And, of course, the strategic benefits for the company cannot be ignored either: When employees feel confident enough to place their bets on their employer succeeding, the management can negotiate to minimize its expenses on fixed salary payments by offering bigger bonuses.
Also, companies can retain their agility during crises; avoid having to lay off people to lose some of the financial burden during downtimes; and keep the churn rate to a minimum. Simply put, rewarding people for their results is the best way to create a consistently successful company.
Reward employees with bonuses when they achieve the goals they set for themselves.
When companies expect employees to join their efforts to overcome crises, they should also be willing to share their profit abundance when times are good. Doing so makes it possible to sustain the motivation of employees to perform their roles to the best of their abilities – irrespective of the business context. It helps them feel more connected and engaged with the company by enhancing their sense of ownership. It drives people to go over and beyond their routine responsibilities and act in ways that positively impact their bonuses as well as the organization’s performance.
It’s also a strategic decision that can benefit the company: Raising the variable salaries automatically minimizes the burden caused by fixed salaries, which have a great impact on company expenses within the profit and loss structure. When a company is hit by crisis, very often the first move is to lay off people to reduce the financial burden. Since it’s very complicated to reduce fixed salaries most companies choose to lose well-developed talent to overcome the crisis at hand. However, by increasing variable pay instead of fixed pay, companies can remain agile and flexible in times of crises because the impact on expenses isn’t very high. Also, a lot of money and time can be saved in the future as there won’t be any need to recruit and train new people when the situation improves.
Educate employees on company numbers: The first step towards helping employees set goals that align with the company’s success is to share the financial numbers with them. When employees understand how to read the most important indicators of growth, it helps them adjust their individual contributions to improve the overall performance of the company. And when every person actively performs their part, the chances of achieving the company’s goals are much higher and that in turn leads to bigger bonuses. So, creating awareness about how the business is performing is crucial to developing a sense of ownership among employees.
Set distinct levels of goals to achieve: The bonuses that employees receive every year should depend on the extent to which they attain various goals. It helps to classify these goals under distinct heads – for instance, the company’s overall financial goals, the overall strategic goals and the individual goals of every employee. Each goal should have a definite impact on the incentive given every year. The incentive should depend on how far the company and the individual attained all levels of goals. At Semco, bonuses are given in terms of extra salaries: An employee can receive anywhere between one to seven extra salaries as their bonus.
Set S.M.A.R.T. goals via one-on-one meetings: Managers should have specific one-on-one sessions with all employees to help them set and align their goals with those of the company. It’s a good idea to have these sessions at the end of the year so that you can plan for the upcoming year. Though the manager can make some suggestions, the individual goals and indicators need to be finalized by the employees themselves. There should be an open discussion to come up with about 1-3 relevant indicators for the employee to take into consideration. The goals and indicators should be specific, measurable, achievable, realistic and timely (S.M.A.R.T.) and they can’t be related to the regular responsibilities of the employee. For instance, a person may be generally responsible for factory operations but his goal should be to reduce the cost of raw materials by 50 percent. Or, to improve the onboarding process and help new factory recruits learn about all machinery – not just the ones they will be working upon – by organizing external visits or interactions with clients.
Show how individual contributions affect the bottom line: The individual goals people set for themselves should go beyond their regular duties and span everyday things they can do to develop the business, work environment, people and so on. The goals need to reflect the individual’s commitment towards the company’s success and managers must help employees understand how even simple, invisible things make a big difference to company profits. For instance, the kind of savings the company can make if everyone committed to reducing the number of pages they print; the energy savings when people ensure lights and fans are switched off when not in use; or, the money that can be saved when people cut down on telephonic conversations and so on. The goal of this practice is not just to create an attractive remuneration package for employees but to also increase their sense of ownership. So, show people how their individual acts of saving can lead to tremendous overall savings that eventually come back to them as bigger bonuses.
Follow up on a monthly or quarterly basis: It won’t work if managers and employees set goals and forget all about them until it’s time for the year-end review. So managers should follow-up on the goals and indicators on a monthly or quarterly basis, depending upon the complexity of the goals. These periodic evaluations of the extent to which the goals have been achieved also provide opportunities to adjust and modify things. Simply put, managers should regularly check-in with employees about their goals and help them achieve them by the end of the year.
Promote variable increases in pay over fixed increases: From a strategic point of view, it makes a lot of financial sense for a company to offer bigger bonuses than bigger fixed salaries. For instance, if a person is up for a 15 percent raise in their fixed salary, the company could negotiate increasing their bonus to 30 percent instead. Doing so creates a greater potential return for the employee but it’s contingent upon them and the company performing well. If, for some reason, either the individual or the company fails to achieve their goals, the bonus amount will be affected. Although the employee should be allowed to choose either option, the increase in variable pay creates a win-win situation for both parties. It’s a strategic move from the company side to reduce the financial burden caused by increases in fixed salary, which also provides employees the opportunity of getting a fat bonus when the company does well.
Level to implement
Educate people about the company’s financial numbers and performance indicators
Help people set realistic goals that align with the company’s financial and strategic goals
Show how individual actions can amount to large savings and bigger bonus checks
Do regular follow-ups with employees and adjust strategies if needed
Encourage people to opt for raises in variable pay over fixed pay
Use a top-down approach and set goals for employees
Set goals that are too closely related to regular responsibilities
Let people change or modify their goals unless it’s justified
Improves sense of ownership and employee engagement
Provides greater impetus for people to actively contribute to company’s success
Minimizes financial burden on company by reducing fixed salary increases
Improves employee morale and trust in company
Helps people gain deeper understanding of company’s financial goals and performance
During crises, people may get lower bonuses which can be demotivating
Setting concrete and measurable individual goals that align with overall company goals may be tough
Measuring individual goals that aren’t business related may be difficult because it’s open to interpretation
Paulo Rogerio Ogeia, who works in the Costs Department at Semco, is someone who regularly placed his bets on the company’s performance and received massive incentives as a result. Of course, there were a few years, here and there, when the bonus he received was smaller because the business was going through tough times. However, he knew that the smaller bonus check wasn’t a reflection of his performance or that of his colleagues. Instead, it was a result of market-induced crises the company faced. Most of the years he opted for a hike in variable pay over a hike in fixed pay, Paulo says he took home massive bonus checks. They were amazing surprises that came at the end of the year and were always greater than what he expected. His bonuses were like unexpected savings that he was able to realize because he believed in the company’s performance and placed his bets on it. He also adds that the bonuses were always bigger than any increases he might have gained through a bigger fixed salary. So, although there were some downtimes, he feels he made much more by trusting in Semco’s capacity to do well.