How do you help your people help your business grow?

Business leaders often see people as the resources or the means to help the business achieve its goals. This is, regrettably, what the term HR (human resources) was coined for. But as we know well nowadays - people are not resources to be managed, but human beings that need to be inspired and led. Managers who see people as resources are the victims of their own limitations. Thankfully, enough modern-day leaders have shown the way - by seeing people as the human capital and potential that will help a business grow, and help create an ownership mindset among employees.

This requires a transformation in both mindset, and in the tools that you use as a leader. To help employees help the business grow, the key lies in aligning employees' motivations with the goals of the business, ensuring they have a clear understanding of how their efforts contribute to overall success, and circling back to reward them when the business does well.

How to install an ownership mentality

One of the most tangible ways to align employee efforts with business success is through a profit-sharing scheme. Imagine setting aside a small yet significant percentage of net profits annually as a reward for your employees. This not only incentivizes them but also instills a sense of ownership and responsibility towards the company's financial health. For such a scheme to be effective, it's crucial that the company achieves a healthy net profit margin, before activation. As the profit margin grows, the share of net profits allocated can also increase, further motivating employees to contribute to the business's success.

Transparency plays a vital role here. By regularly communicating the company's financials—revenues, costs, and net profit margins—and explaining the factors that influence these figures, employees can see the direct impact of their work and decisions on the company's success. This open approach demystifies the financial aspects of the business, making it easier for staff to relate their efforts to tangible outcomes that benefit them personally, and the business as a whole.

Implementing Profit Sharing: A Three-Step Approach

Jack Stack's The Great Game of Business book offers a comprehensive three-step method to establish a successful profit-sharing plan. Here’s a summary.

Create Financial Awareness: Begin by educating your team about the basics of financial health, both personal and professional. On the professional side, educate staff on how do $10 of sales translate into key cost areas and net profit. On the personal finance side, educate staff on how to save - e.g. when money comes in, first fill the savings (aka profit bucket), then the different expenses buckets. The book Profits-First has a thoughtful and detailed approach to both personal and business financial literacy.

Ensure Financial Visibility: Identify and track critical financial indicators that directly impact net profit. Identify these critical numbers, which are the leading, influenceable indicators that directly or indirectly impact net profit, for example number of new relationships, or amount of warehouse stock. Each critical number must directly affect net profit, must be a leading not a lagging indicator (ie be predictive of profit), and must be influenceable by staff decisions. Make sure each critical number has a single staff owner who tracks and reports back to the team. Track critical, influenceable numbers weekly or monthly in team calls.

Develop a Tiered Reward System: Create a tiered reward (profit sharing) system, that kicks in when sufficient profit is reached (e.g. 15%), scales with the profit margin (more profit, more % of profit paid into bonuses) and is proportional to staff salary. Pay profit share out in quarters in a way that scales through the quarters - ie 10% in Q1, 20% in Q2, 30% in Q3 and 40% in Q4. Only pay the quarterly profit share, if a minimum profit margin is reached and retroactively if not reached. For example, allocate 10% of the bonus in Q1 if the profit margin is reached. If the Q1 minimum profit is not reached, but Q2 is, don’t pay Q1 profit but pay 30% at the end of Q2. Make available a profit share calculator, showing staff how each salary tier stands to benefit from profit share, by different profit margins reached. If this sounds too complicated to you, are a lot of alternatives to a tiered reward system, explored in the book Profit Works by Alex Freytag and Tom Bouwer.

Beyond Profit Sharing: Equity Incentives

Another popular way of incentivising employees financially when the company does well is to award share options to employees. There is a lot to consider when setting up a share option scheme - restricted vs phantom stock, stock options vs stock appreciation rights, performance-driven or vs always-on, bad vs good leaver treatment, as well as payout, award and vesting terms - so make sure you understand exactly the terms and implications of the option scheme before committing to it. You should also crystalize your incentive philosophy, on what kind of behaviour you want to incentivise before you design your options plan. For a walkthrough of the options in a stock option plan see this tutorial from Petra Coach Byron McFarland.

Aligning employees' efforts with business growth is not just about financial incentives; it's about creating a culture where every team member feels valued and understands their role in the company's success. By implementing thoughtful profit-sharing schemes and equity incentives, businesses can create a sense of ownership and commitment among their employees. The success of your business is directly linked to the satisfaction and motivation of your people. Let’s help our people help the business grow.