If you depend on repeat customers and referrals, you've got to keep employees focused on the top line, not the bottom
So you want to increase your profits. Well, who doesn't? The trick is to get your employees to cooperate. Many business owners try to accomplish that by tying compensation to profitability -- and wind up being disappointed with the results. But Andy Plata, who is as concerned about profits as any CEO, tried something different. He tied the compensation of every employee at Computer Output Printing Inc. (COPI) to company sales. And a funny thing has happened, he says: profits more or less take care of themselves.
COPI, located in Houston, is one of the most successful electronic printing businesses in the country. With its powerful laser printers and other state-of-the-art machines, it cranks out hundreds of thousands of personalized letters and documents every day -- from corporations to shareholders, from banks to customers, even from politicians to supporters. To be sure, there are hundreds of other companies that do pretty much the same thing, but COPI is different, particularly when it comes to compensation. At most electronic printers, production employees are paid on an hourly or salaried basis, and salespeople are on commission. COPI, by contrast, does not even have salespeople. Instead, it generates sales by making everyone responsible for selling. To back up that mandate, all 23 employees -- from secretaries and machine operators to Plata himself -- receive a chunk of their income from gross revenues. Here's how the system works:
Every employee earns a base salary that runs 10% to 20% below what he or she might receive in a similar position elsewhere. (The reason, says Plata, is that "we want people who are willing to make a real commitment.") The employee is also eligible for semiannual bonuses based on the company's profits and cash position, as well as individual merit. But the major incentive is the monthly revenue slice each employee receives. It is based on gross billings for the month, including all work performed at COPI, plus the profit on outside services the company has provided -- consulting, say, or training. Individual revenue shares generally range from 0.1% to 0.5%, depending on the employee's level of responsibility. When gross billings exceed certain threshold levels, however, top managers become eligible for additional revenue-sharing money, in which case their shares may run as high as 2%. Plata's own share can go as high as 5% -- but he doesn't get any revenue-sharing money at all below the $100,000 mark. (Overall, the company puts about 10% of its gross billings into revenue sharing.)
Thus, for example, a relatively new operator of electronic printers might, in a typical month, earn $1,500 in salary and $180 in revenue sharing. Over time, the salary portion is not going to change much, unless the person is promoted. The revenue sharing portion, however, can grow considerably. For one thing, an employee who turns out to be a star is eligible to receive a bigger share. For another, all employees benefit by working together to increase sales.
Therein lies the logic of the system. The secret to COPI's growth, Plata believes, is outstanding customer service. Happy customers come back with new orders and provide referrals, and employees are the only ones who can make customers happy. So he's given them a strong reason to do so. It's that simple.
Plata began experimenting with revenue sharing back in 1983, out of dire necessity. After a period of rapid growth, COPI was losing money and struggling to meet payroll. Not even Plata, who had just bought the business from his former boss, was convinced that it could be saved. The problem, Plata says, had much to do with the company's organization. "Everything was geared to volume, and nobody seemed to care much about the quality." Salespeople earned commissions for bringing in new business, even if it wasn't profitable. Production people earned extra money for cranking out more pages, even if work had to be redone.
Plata cast about for a different system that would help him turn COPI around. "We needed to change people's attitudes," he says, "but it wasn't clear how." He and his associates didn't think profit sharing was sufficient. "Most employees don't have the ability to control what happens on the bottom line," Plata explains. He also knew it was difficult for the average worker to verify profits. And because of seasonal variations in the business, it was impractical to share profits more than once or twice a year, which Plata felt wasn't enough. By a process of elimination, he came up with revenue sharing.
And it's worked. In the five and a half years since the program was started, COPI's annual revenues have soared from $1.2 million to around $5 million -- growth that has paid off handsomely for employees. During the first quarter of 1988, for example, an employee with a 0.1% share received average monthly revenue payments of $233, versus $160 in the first quarter of '87, and $113 in '84. And there's no limit to how high the payments can go. Plata refuses to put a cap on them, because he wants employees to have a long-term perspective. With a cap, he fears, employees might be tempted to push for quick sales at the expense of customer service. Without a cap, they know that they will eventually do best by keeping customers satisfied.
Indeed, the system has proven to be a powerful motivator. "Everybody here is looking at what they can do to make the pool bigger," says Angela Armstrong-Shook, a veteran employee who is now a vice-president. Take Lillian Ramirez who designs electronic forms for documents. Not long ago, she spent part of a weekend preparing a $230 printed logo for a large preparing a $230 printed logo for a large New York City investment firm. The standard turnaround time on such jobs is five working days, but Ramirez promised to get it done in two because, she explains, "the client was in a real crunch." The effort paid off. A few weeks later, the customer placed an order for about $5,000 of new business.
You might wonder, of course, whether the push for revenues has hurt profits. Plata says no. He protects the company's profitability by promoting specialized services, in which margins tend to be higher, and by trying to avoid low-margin activities. "Fortunately, we don't have commissioned salespeople pushing us to drop our prices," he says, adding that he aims for gross margins of 30% and won't compromise "unless we think a job is going to lead to desirable work in the future."
Meanwhile, revenue-sharing has had a significant effect on other aspects of the business -- for example, the say COPI looks at its hiring needs. "We've found that, if people are motivated, we can double the business without coming close to doubling the number of employees," says Plata. Indeed, the company has added only four people to the payroll since 1983. Now, says Plata, "before we hire somebody, we ask ourselves, 'How much revenue will this person drive?"
Nor does COPI have to look far for recruits when it needs them. In the past five years, it has only once had to advertise a position (secretarial). Instead, the company finds people through its extensive grapevine, and the revenue-sharing program is a definite draw. "It showed how much they valued people," says Tom Traylor, a former manager with Zytron Corp., a subsidiary of The Dun & Bradstreet Corp., who joined COPI in 1986. "It was a revealing statement about what COPI was prepared to do."
The system has even turned out to be a marketing tool. "People will ask, 'How can you guarantee we'll be taken care of?" Plata says. "And I tell them the real reason is revenue sharing." When customers and prospective customers learn about revenue sharing, adds vice-president Dennis Baker, "they get excited. They feel like they're part of our story."
But can COPI keep the current program going indefinitely, or will it have to be revamped? That question was asked recently by the company's new accountants. If COPI keeps growing, they noted, it could someday have machine operators making $60,000 a year. "That's the way its supposed to work," Plata responds. "Many of our people have been investing their time and effort for years. So it they wind up making a lot of money, they deserve it."