You've depended on profits to compensate and motivate employees. So what do you do when profits begin to evaporate?

Successful growing companies often find a number of ways to share their success with employees. But what happens when a once-bustling business hits a downturn? How do you reward and motivate employees when you can no longer afford even slight increases in pay? And what's the best role for the CEO?

Certainly, that isn't an easy shift for either employees or managers. But in the view of Warren Blaisdell, the secret to keeping people motivated during lean times is plenty of communication. Blaisdell, 54, spent more than 20 years at the Norton Co., a manufacturer of abrasives and engineering materials based in Worcester, Mass., where he designed a variety of innovative systems for improving productivity in highly competitive businesses. For the past decade he has worked as an organizational consultant specializing in devising performance-based compensation packages; he's currently a senior consultant with William M. Mercer Inc., an international employee benefits and compensation firm with head quarters in New York City. Late last summer executive editor Nancy J. Lyons and senior writer Bruce G. Posner spoke with Blaisdell.

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INC.: Many of the companies we know build the lion's share of their nonsalaried compensation around profit sharing. The funding pool for those plans is profits, but in a slowdown that source is threatened. What sorts of problems does that create?

BLAISDELL: Well, it certainly presents some major disappointments to those who have grown accustomed to profit-sharing benefits. But if you stop to think about it, profit sharing by its very nature isn't guaranteed. It's built on risk, and inherent in that risk is the possibility that in some periods there won't be enough profit to enable a payout.

INC.: That may be, but do you think most people understand it that way? If the business has been growing and making money for five or six years, don't most employees expect those payouts to continue through thick and thin?

BLAISDELL: They do, and the first time the payouts are cut or eliminated, there's a lot of disappointment and concern. To a degree, though, the reaction is going to be a function of how well the plan and the conditions for payout have been explained. If the plan has been well communicated, it won't be a total surprise when you're not able to pay. As the business runs into harder times, it will be obvious to employees that this period is different. Ideally, they're hearing about problems along the way.

INC.: Are you talking about posting financials on the bulletin board?

BLAISDELL: That's one way to do it, but it's not the only way. You can structure your goals according to how much detail you want to provide. In some cases, we've been able to set up targets and then measure performance in relation to them. You can say, "If we meet 80% of our target, then we will pay out X."

INC.: But why should employees believe they haven't reached the 80% level if they don't see the actual numbers?

BLAISDELL: Well, you need to establish credibility. Without a level of trust, you're going to have problems under any system. Successful plans, whether you share detailed financial results or not, are built on continual feedback. You can't wait until the end of the year to say, "Sorry folks, we didn't make it." One way or another, you need to find a way to give people regular information about how the business is doing, why it's doing well or not so well, what they can do to change or reinforce the outcome in the future. You want to find a vehicle for getting people more focused on the business.

INC.: Sounds as if you're advocating a lot of regular meetings. But most company owners aren't really inclined to talk much when the business is having trouble. And where would they find the time?

BLAISDELL: You really have to make time, even when other demands may seem greater. The most important time to communicate, to spend an hour or so with your employees, is when you're having problems. Memos don't do it. There's no substitute for hearing directly from the chief executive officer.

INC.: When profits are squeezed, companies look for all sorts of ways to cut back. They eliminate positions and freeze salaries. But how do you keep people from getting demoralized by these actions? Does it make sense to say, for instance, "We can't give you the raise now, but maybe in six months"? Or do you tell your employees to forget about it until next year?
BLAISDELL: I think you want to hold out the opportunity. If you've frozen employee salaries, you should be able to say, "Your performance warrants an increase, but because of our circumstances we can't pay it." There's nothing wrong with telling people you plan to review things in six months or whenever the situation changes.

INC.: Say you find you can't afford raises and you can't contribute to profit sharing. What do you do about performance reviews? Do you skip them or go ahead with them?

BLAISDELL: In difficult times I think performance feedback for individuals becomes more critical than it is in good times. When people are concerned about the business and about the future, the more you can tell them about how they're doing and how they can improve, the better they feel.

INC.: You've talked about the need for information, updates, and explaining the business and what needs to happen. What things should managers avoid doing in downturns?

BLAISDELL: What they shouldn't do is hunker down or clam up. People sense problems anyway, especially in small companies. They know what's going on, and the more you try to hide, the more susceptible the environment will be to rumors and misleading information. Without information, people will assume things are worse than they are. You don't create or remodel executive offices or buy expensive company cars. If pay cuts are occurring, make sure managers are feeling the impact, too. Certainly, you don't want to create a situation in which managers are benefiting from cutbacks. I've seen instances in which management bonuses were paid on the basis of work-force reductions. Let me tell you, it sends a pretty negative message.

INC.: Should managers be wary of investing in new products or new businesses when employees are being asked to suffer?

BLAISDELL: Quite the contrary. I think such actions can be viewed very positively as an attempt to turn the business around, that is, if they're adequately explained. Again, it goes back to communication. People want to know what you're doing, why you're doing it, where it might lead, and what it means to them. If the new ventures are intended, at least in part, to provide opportunities for your present employees, then they will want to hear that.

INC.: Say you can't justify any profit-sharing distributions based on your current performance but intend to reward people when performance improves. Can you create incentive plans that are driven by factors other than profit? How do you go about it?

BLAISDELL: Many companies design incentives that focus on specific operating areas where they think improvements are possible. Maybe capacity is constrained, and unless you find a way to increase productivity, you'll have to add more equipment or add on to the facility. Or maybe the amount of material you use is excessive; lowering waste would result in very tangible cost savings. If you focus on those choke points and make improvements, you can reward people accordingly.

INC.: There are obvious opportunities in manufacturing settings, but how might that apply to other kinds of businesses?

BLAISDELL: The approach lends itself to any business in which people work together to produce a tangible output. For example, in a financial-services organization or in the accounting department of any company, you may have thousands of transactions. Productivity, therefore, is critical. Incentives based on the volume of work or the quality of data entry would be an obvious thing to explore. You need to identify what's critical to the success of the business. I know of some younger companies that reward executives for meeting cash-flow goals. For them, that's the most important thing.

INC.: How quickly should you pull the plug when you find an incentive is having undesirable side effects?

BLAISDELL: My attitude is that you need to be willing to review, modify, and update anytime the business and the way you operate change. You might have new equipment, or you might have new products. If there's one thing we can say with certainty these days, it's that changes will continue to occur and will ultimately have an impact on your incentive plans. Even if you aren't aware of problems, every incentive plan should be reviewed annually. In fact, you may want to have sunset provisions in which plans automatically expire at the end of a year. Then you can see what you want to do for the coming period.

Remember, the whole idea here is to motivate people to change behavior and improve performance. If people aren't responding, you've got a problem. You need to figure out what's going on.

INC.: OK, say we're getting people to focus. Waste is down, results are looking better, but we're still losing money. Where do we find the money to pay the bonuses?

BLAISDELL: Well, payouts from some plans are driven by cost improvements -- gains in productivity, quality, or whatever. You share the gains with the people who achieve it.

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INC.: CEOs should dip into their pockets? Remember, this business is still in the red.

BLAISDELL: Yes, but you're still in operation, and you're spending less than you otherwise would. The incentive funds come from the reduced or avoided costs.

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INC.: We see what you're saying. But don't CEOs have problems with that?

BLAISDELL: If the goal is to operate more efficiently and employees have worked hard and achieved that, a lot of managers I've worked with are happy to pay out the money.

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INC.: Couldn't you create a threshold of profitability and say, "We won't pay out a dime until we earn X"?

BLAISDELL: Certainly. Cash profit-sharing incentive plans tie the organization and its employees together in shared success.

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INC.: What's the downside?

BLAISDELL: The downside is that employees may not see a direct relationship between their efforts and the financial success of the organization. They could do everything right, meet all the productivity goals you set, and receive nothing. That's a hard message for a manager to deliver. An alternative is to design a system in which the incentive opportunity is tempered by profitability but not totally eliminated.

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INC.: Say your business is slowing down or has already slowed down. Is this the time to think about some new incentives?

BLAISDELL: Depending on the circumstances, it could be an ideal time.

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INC.: How do you get started? What's the best way to pitch a new incentive system?

BLAISDELL: I'd start by not even focusing on pay and incentives. I'd start by communicating what the business needs are, what the challenges are, how you'll be organizing the business as a whole and the role of each work group, what types of performance you'll be looking for, how you'll measure it, and what steps people will need to take to bring this improvement about. After I'd gone through all that, I'd decide whether these changes are so critical to the success of the company that I'd be willing to tie pay to them. But I wouldn't talk about pay until I'd established what it is we're trying to accomplish and how best to make it happen.

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INC.: We've talked about company-wide incentives and incentives for smaller groups. When you're in the midst of a downturn, what kinds of things can you do for the managers you don't want to lose?

BLAISDELL: Some private companies set up long-term cash bonuses when they know they're not going to be paying an annual bonus. They tell managers they'll get X% of this year's pay later on -- assuming the company meets its performance goals over the next two or three years.

Beyond this, there's phantom stock. Usually, it means giving a manager appreciation rights on, for example, hypothetical stock shares based on book value or actual stock value over a period of time. In private companies, phantom stock has some real advantages over other kinds of equity arrangements, although it can create a significant cash obligation down the line. In general, my feeling is that these incentives will help to retain your key people only if they believe in what you are doing and feel committed to the business.

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INC.: So the CEO has to sell them on the future? How do you convince people that it will be worth their while to stick around?

BLAISDELL: The best way I know of is to infect them with your enthusiasm and conviction about the potential and future of the business. You need to reach out to your people and communicate your optimism and enlist their support. Motivated people are the strongest vehicle for improving performance that a manager has. You've got to be able to make the business tangible, to show people there really are customers out there who buy this product and who are the source of all revenue and potential for future growth.

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INC.: It's fine if you're feeling that way, but CEOs are people, too. What if they're feeling battered?

BLAISDELL: Mostly, I'm arguing for candor, for sharing the reality of the situation as they see it with the rest of the organization and talking about their ideas for improving things. People want to hear what the person at the top is thinking. Sharing concerns and ideas can be a very positive force.

If I were running a company, I'd also look around the organization for the people who are most positive about the future. Maybe the sales manager or a young engineer working on a new product line. I'd get them in front of employees and have them share what they see. Every organization has people who are feeling up about the future, who are making important inroads. When CEOs are feeling down, they should tap into those people.

The strongest investment a business owner can make is to tap the potential of the organization's people by communicating a vision of the future, enlisting everyone's support, and sharing in the success. *