How to get your staff thinking like business owners
Ask any owner of a small or medium-sized business what their greatest challenge, yet most valuable asset is and they’ll all agree – it’s their staff. What would it mean to your business if you could recruit high-calibre employees that were as committed and engaged as you are? You can achieve this by developing an innovative employee incentive scheme that gets your staff thinking and behaving less like employees and more like business owners.
A regular pay packet is not enough
Recent surveys by Bentleys MRI and the Sensis SME Business Index, confirm what most owners of small and medium-sized businesses already know only too well – their number one concern, above even cash flow problems or a lack of sales, is finding the best people. What business owners know is that recruiting staff is an expensive, time consuming and haphazard process.
And in a competitive job market, where the best candidates are often interviewing you – rather than the other way around – businesses need to find ways of differentiating themselves with innovative terms of employment.
One very effective way of achieving this is with a strategically planned remuneration system. Far from just paying people and providing the additional benefits required by law (such as company funded superannuation and basic leave entitlements), your remuneration system should help you to attract the best people, to get the best performance from them once they’re on the job, and to encourage them to stay with your company. It can be a powerful tool for engaging your employees in the achievements of your business, and rewarding them for their results and commitment.
Your remuneration system should be comprised of a number of elements, all of which will deliver increased levels of productivity and morale:
- Base pay – this must be industry competitive. If you pay less than the rest of the market, you will attract a lower quality of employee, which your operating results will reflect.
- Performance-based pay – this should include both short and long-term incentives.
- Compulsory employer benefits – such as superannuation, sick leave, annual leave and so on.
- Discretionary benefits – these can be financial, such as employee share schemes, employer-funded health insurance and study leave, or non-financial, such as flexible working hours, gifts, special company events and so on.
One of the most powerful outcomes of a strategically planned remuneration system is that it helps to align your employees’ personal goals with your business goals; in other words, it encourages employees to begin thinking like stakeholders in your business. In Australia, financial incentives have been shown to improve employee performance as well as the company’s bottom line. A recent study looked at reward and incentive schemes in 663 companies, about one third of which were small firms, and it found that companies that have performance-based incentive programs gained a 134 per cent productivity return over what they paid out to employees.
What are you telling your employees by the way you pay them?
What many small and medium-sized businesses don’t fully appreciate is how their remuneration practices influence the thinking, behaviour and performance of their staff. The way companies choose to pay their employees communicates their values and contributes enormously to the organisation’s culture, the type of people it attracts and the results they deliver.
Consider the example of a business that only pays its people a standard wage, for a standard working day – what does that communicate? It says that nine-to-five thinking is all that is required, and that anything outside of that comes at an additional cost in the form of overtime. Do you think these staff are staying back to get the job done, thinking about work outside of their standard day or delivering any more than a standard performance? Probably not. What about a company that pays bonuses or commissions to individuals for monthly or quarterly results? This system communicates the message that it’s everyone for him or herself and that people’s focus need only be on the next bonus or commission timeframe.
Transforming employees into committed stakeholders means developing a remuneration system that both reflects and expresses the organisation’s objectives, philosophy and values.
So, how do you do it?
An effective remuneration system is one that:
- offers a real incentive to employees to achieve targets
- enables people to share in the value they create for the organisation, and
- allows them to achieve their own financial and lifestyle objectives.
It will be comprised of a competitive base remuneration as well as performance-based short and long-term incentives, some of which may be non-financial.
There is a global trend toward increasing the percentage of remuneration that is linked to both short and long-term incentives, and bonuses that reward team performance.
Short-term incentives are designed to influence immediate behaviour to achieve specific short-term company goals. The incentive might take the form of cash bonuses, commissions, fringe benefits, income protection insurance, or anything that is meaningful to the employee, which does not cost the company unnecessarily in terms of margin.
If the incentive is based on sales, employees’ behaviour will sales-focused, sometimes at the expense of margin – so in this case it is better to focus employees on maximising gross margin dollars, rather than just gross revenue. Ideally, there should be no upper limit to bonuses or commissions because this can create ‘ceiling’ behaviour – where an employee will do enough to earn the maximum commission, but no more. Also watch out for sales-bulking which can occur when commissions or bonuses are based on the achievement of monthly or quarterly targets. In this case, staff can hold and rollover sales into the next bonus period, rather than do more than is necessary within the current period.
Long-term incentives provide employees with a vested interest in increasing the value of the organisation. In the US and UK, long-term incentives make up between 50 and 60 per cent of executives’ annual remuneration. With high-performing staff, linking greater remuneration to results is a win-win for both the business and the employee – the sky is literally the limit! Many remuneration schemes will also include a vesting period, often of up to five years, which means that staff are retained for a longer period of time until they enjoy the full benefits of the scheme. Long-term incentives might take the form of a retained bonus, equity, shadow share plan or equity replicator plan.
Employee share ownership plans can be used in any business, even those that are not listed on the Australian Stock Exchange. Equity replicator plans can be used to replicate the operations of share plans, without the use of shares. These plans create units, which represent notional equity, and awards are calculated by using a formula that measures business value.
Employee share ownership plans are very common in the US and throughout the EU, while only around six per cent of Australians own a share of the company they work for. In 2003, the federal government launched its employee share ownership policy with the goal of assisting businesses (through the provision of services) to increase their employees’ participation in share ownership plans. The government recognises that such plans benefit both employers and employees by aligning their interests and goals, as well as by enabling employees to directly benefit when their business does well, and businesses to benefit from a more committed workforce.
Non-financial incentives are about recognising and rewarding performance, as well as demonstrating a commitment to employees by enabling them to achieve some of their lifestyle objectives. Short-term non-financial incentives might include tickets to the theatre, a sporting event, dinner at a restaurant, a weekend away or even just a pat on the back or public acknowledgement of a job well done. They can be awarded to individuals or to teams to enjoy together. Long-term non-financial incentives might include flexible working hours, the option to work from home, the provision of childcare facilities, job sharing and so on.
Tips and traps
As much as they can offer great benefits to employers and employees alike, remuneration systems that are not properly developed or implemented can also cause harm. At their most ineffective, such systems can cause a loss of trust, engagement and faith in the organisation. Avoid making a mess of your system by following these simple tips and avoiding the traps.
The most effective remuneration systems are:
- Simple – the system must be easy for staff to understand so that they know how the system applies to them.
- Applicable to all employees – while the levels of remuneration and reward may differ, the process should be consistently applied to all employees.
- Reliable – once the system is established and has been communicated to staff, don’t make unnecessary or frequent changes to it.
- Transparent – disclose relevant information, on a regular basis, in a form that is easily understood by all staff.
Ineffective remuneration systems are:
- Poorly thought-out.
- Not supported by the company owners and managers.
- Poorly communicated.
- Overly complicated.
- Frequently changed.
Creating and sharing wealth with your employees
When it comes to your company’s remuneration system, remember, there are many more interesting and creative options other than just paying incentives and bonuses. And properly designed schemes can provide some generous tax advantages to both employers and employees, while at the same time offering a protected vehicle (linked to the company’s value) within which individuals can grow their wealth. Let me give you an example.
The funded savings plan – this is a scheme that I have established for a number of clients, with excellent financial and ‘human’ results. In brief, the employer creates an investment trust into which it makes contributions on behalf of, and for the benefit of, employees. One of my clients used such a trust to enable its employees to buy the building its business operates out of. Every time the team achieved sales of $1 million, the employer would transfer $100,000 into the trust. A Board of Trustees was appointed to manage the trust and to make decisions about how to invest and distribute the income. The board comprised myself as the independent expert, a legal expert, a staff-elected representative and the owner of the company. When the trust decided to buy the building, all of the employees became landlords of the business. The business now pays rent to the trust, from which all employees receive a dividend.
Staff turnover in this organisation has dropped to an all-time low, and an unexpected bonus has been that the staff now take an extra degree of pride and care in their facilities! Ten or twenty years from now, the value of that asset will have increased dramatically, and staff will continue to receive benefits from the income and assets of the trust.
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