Share Your Profits Not Your Business
By Dr Paul E Adams | April 30, 2005
"Profits are the reward for doing a better job." Doc Blakely
When Ronnie started his metal fabricating company he vowed he would create a team of individuals anxious to build a new company. He wanted enterprising people, employees not afraid of shedding the security blanket for an adventure with opportunity without an eye on the time clock. Ronnie was no slouch, he read up on the latest in management theory and leadership. He believed in fostering an atmosphere of teamwork, optimism, and enthusiasm for his company's goals.
Ronnie hired well, he surrounded himself with his team- five intelligent and experienced folks. Vowing to make his company “their company,” he gave a piece of his business to each member of his team. Ronnie believed that if employees had a stake in the business, they would give a 110 percent effort. After all, he believed, the more successful the company became, the more he benefited
True to his personal management philosophy, he gave each of his five employees, a 5 percent share of the common stock- keeping 75 percent for himself. For the first few months it was a great team- everyone was excited about building “their company,” but then the problems began. The novelty of being an “owner'; was fading, The employees with their growing families to support, needed cash, not stock certificates.
When Peter Tompkins quit, the first of the original team to resign, Ronnie was surprised and hurt. After all, he made Peter an owner, now he was disloyal and ungrateful. To make matters worse, the gift of stock was a problem. Peter suggested Ronnie buy back his shares. To Ronnie, laying out cash for equity he willingly gave to key employees was a bitter pill. He felt betrayed. And as cash flow was a problem, buying back his own stock was a cash drain he did not need.
Ronnie demanded Peter return the stock, guess what? It was not long before two lawyers had two new clients. Ronnie was sorry. Sorry he had made his key employees owners. In the end Ronnie was forced to purchase the stock –he and Peter parted on bitter terms.
If like Ronnie, you think of yourself as enlightened entrepreneur, knowing the value of stimulating and holding on to key employees -share your profits, not your ownership. Rightly so, building a team and rewarding your employees can pay handsome dividends, but a better arrangement is profit sharing. If they quit, no problem, you never have to buy out a profit
How much of your bottom line you give is up to you, however, it may be worthwhile to ask your accountant for advice. Remember you need to grow your business with the cash from profits-I suggest you limit your total generosity to no more than 25% of the after tax net profit. Anything more may hurt your cash balances.
As your purpose is motivating the “team,” you will find that a yearly award is less effective than cutting a profit check every three months. After all, is not the purpose of dividing the spoils to push the troops to the edge of the envelope? If they have to wait a year to taste their share, it will be for them easy to lose interest. But when a profit sharing check arrives every three months-they and their families will get excited- and that is important. An old ploy with sales contests is to send the spouse announcements of possible awards and the employee's performance- nothing like a little pressure from the home front.
If you are looking to build a team of employees who feel a part of your organization a piece of the pie is a strong motivator. Lest you forget, you are neither Santa Claus nor being generous; you are seeking to push your worker bees to make you more money- it is an employee motivation tool, not good will, or a gift.