Profit Works

Unravel the Complexity of Incentive Plans to Increase Employee Productivity, Cultivate an Engaged Workforce, and Maximize Your Company's Potential

Alex Freytag, Tom Bouwer

• Publisher: Author Academy Elite
• Year: 2020
• ISBN:
  9781647464509
• Edition: 1
• Topic: Negocios y empresa
• Subtopic: Gestión

Profit Works will help you unravel complexity!

With Profit Works, discover how to create a simple and effective incentive plan with practical engagement tools to amplify your vision.The longer you delay, the longer you postpone profit. Simplicity and clarity attract talent and high performers.

It's time to start maximizing your company's potential!

Profit Works helps entrepreneurs design an incentive plan that teaches a No-Entitlement Attitude to your team. I strongly recommend this helpful guide for entrepreneurs who want their employees to think and act like owners!

- Dan Sullivan, Co-Founder and President of Strategic Coach®

EOS Implementers® Tom Bouwer and Alex Freytag are lifelong entrepreneurs who are passionate about helping business owners get what they want out of their organizations.

Each year, a Clarity Trip™ allows them not only to strengthen their business relationship, but also work ON their business, usually while hiking in a remote location. This helps them remove complexity and keep their lives simple-the key to success.

Chapter 1
Why Profit Works

Since 1996, when we first founded ProfitWorks, we have asked employees, “What percent of sales do you think profit is?” Their answers may surprise you; most employees think bottom line profit is 30-50% of sales! While those results would certainly be wonderful, they are not common for most businesses. Upon seeing their employees’ answers, one business owner exclaimed, “Are they out of their minds? Do they think I have a money tree in the backyard that I just shake when I want to make more money?”

If your experience is like ours, you know that profit percentages are usually in the single digits, and that profit is incredibly precious. Unfortunately, most employees don’t think about this fact as much as you do. They certainly don’t see profit numbers as often as you do, if at all. They don’t feel connected to profits, and they commonly believe profit is something only the owner or executives need to worry about. Profit is powerful, though, because it funds growth, provides investors and owners with a return, and creates opportunities for employees.

You may have heard profit referred to as the “score at the end of the game.” The comparison of business to a game makes it fun and accessible for everyone involved in a company. The game metaphor makes profit that first place trophy that stretches you and your team. The potential for profit can encourage a competitive spirit and the potential for everyone in a company to win (does anyone like to lose?). The fact that profit is typically small, hard to generate, and easy to lose creates what we call positive tension.

Positive tension is that level of anxiety where people are most productive and motivated. The objectives are not so overwhelmingly difficult or unachievable that no one tries. Conversely, they are not so easy that no one cares or puts in any effort. Think about if you tried out for an NFL team: making the team is probably not going to happen and as a result, you’re not going to be motivated. (Well, you might be motivated to avoid getting hurt.)

Alternatively, think about your state’s DMV: there is no motivation because there is no tension, pressure, or anxiety. Each of you will need to find that optimal level of positive tension in your company. Focusing everyone on profit is a great way to do that.

Profit Works for Everyone

Profit works for owners and investors. The potential for profit creates positive tension to generate a return on investment for investors, relative to the risk they have taken. If there is no profit potential, investors typically won’t take the risk to invest in the opportunity.

Profit works for your external relationships. It creates tension for you as it pulls against what it costs you to provide your products and services. It stretches you to make smart decisions related to your sourcing relationships as well as to the investments you make to grow your company through innovation, geographic expansion, and new product and/or service development.

Profit works for your employees. When focused on profit, you have the opportunity to create that right level of tension and to increase opportunities for all of your employees (e.g., advancement, learning new skills, increased compensation). When focused on profit, your entire workforce can benefit by understanding this tension. It can create an incredible culture of winning where everyone is focused on generating more profit.

In addition, we’ve found that companies win when their employees understand how they benefit from being part of a profitable company; they will see the source of new jobs, the opportunities for reinvestment in the business, and their own potential for growth. We’ve also found that employees are more motivated when they understand the consequences due to a lack of profit, from reductions in force (RIFs) to pay cuts to fewer opportunities for professional growth.

Successful companies understand the benefits of creating positive tension or pressure. Tension isn’t a bad thing. According to the Yerkes-Dodson Law, performance increases with tension, but only up to a point. When the level of stress becomes too high, performance decreases. So, a moderate amount of tension creates the most buy-in and effort and, therefore, the most productivity. Like a rubber band, you want to stretch your team to grow and reach for something more than mediocrity. Believe it or not, most people want this.

Instilling just enough tension in your culture encourages a higher level of performance. You and your team win when you implement simple and effective tools like weekly meetings full of intense debate and discussion on company issues, and when everyone is accountable. When there’s just enough tension in your company, no anchors hold you back from higher performance.

Creating tension in your culture is a blend of art and science. The art is in what tools you decide to teach and how you choose to use those tools. The science comes from using a simple and transparent formula when you design your incentive plan.

Over and over again in client sessions, we hear executives discussing budgeting for bonuses, creating profit-sharing programs, and trying to figure out how to pay employees more so they don’t leave for more pay elsewhere. In many cases, though, they’re just winging it. There’s no clear strategy or methodology for the design. It’s often too complicated, not transparent, and has a high degree of subjectivity to it. You may be afraid to draw a line in the sand. You’re often shooting from the hip. When incentives aren’t truly “earned” and clearly understood, you create an entitlement mentality in your workforce. Entitlement is the death knell for a thriving culture and higher organizational performance.

One of our clients didn’t want to follow a formula because she said it might “trap” her. She didn’t want to reward underperforming employees. Our question was: “Why are they still with your company?” In the following chapters, we’ll give you ideas on how to avoid feeling “trapped.”

We encourage you to embrace the intentional philosophies and formulas we share with you in this book. We’re capitalists with decades of experience working with hundreds of companies. We’ve seen what works and what doesn’t work. Like you, we want your employees to add more value, to be happy, to be productive and to earn more, and not to get a bigger paycheck for no real reason.

Before we go further, let’s provide an example of a simple incentive plan design that works:

• Imagine an annual profit trigger of $1,000,000. Above this amount, the employees can make more by participating in an incentive pool funded by their efforts. Below this, there’s no incentive payout.
• Let’s say 30% of every dollar above the $1,000,000 trigger goes into the incentive pool. If the company hits $1,500,000 in profits for the year, the incentive pool is $150,000 (30% x $500,000). It can be as simple as that. We’ll talk about some ideas for how that gets distributed later.

Key Takeaways

• Most employees think bottom line profit is 30-50% of sales.
• Profit is the score at the end of the game and when everyone is focused on profit, you can create positive tension.
• Profit works for everyone involved in a company including investors, external partners, and employees.
• Successful companies create just the right amount of positive tension in their cultures to create higher levels of performance.
• Successful companies commit to a simple formula when designing an incentive plan.

Thinking Questions

These are questions to help you slow down and reflect on what you read as well as to help you think about where your head is on the topics discussed in this chapter.

1. What do you think your employees would guess bottom line profit is as a percentage of sales in your company?
2. What are three examples of positive tension practices you’ve implemented in your personal life?
3. What changes in your own behavior and thinking have you seen as a result?

Chapter 2
Building a Foundation

Your Mindset

Mitch was one of three owners of a successful, 60-person advertising firm in Texas, and he wanted to put an incentive plan in place. Why? 1) His peers were doing it with great success and 2) it was the latest management trend—everyone was talking about it (even though most didn’t really know how to do it).

However, none of the three partners understood nor bought into the fundamental principles necessary for a great incentive plan. They didn’t grasp the concept of self-funding. They didn’t understand that incentives should change behavior. They didn’t have a standard philosophy around raises and instead just gave people what they thought would keep them from leaving the company. They didn’t understand the difference between extrinsic and intrinsic motivators. Finally, two of the three partners didn’t want to share any financial information with employees.

As you can guess, their plan failed miserably. They paid out a lot of money. Morale and productivity went down. Key people left. All because they didn’t go into it with the right mindset.

The foundation of a great incentive plan revolves around five key principles. In Appendix A, there is a short ...