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The Illustrated PL

One company's illustrated guide to their bonus system and their PL statement for employees.

Karl Reuther's homespun system for explaining to employeeshow their business makes money

Karl A. A. Reuther is unashamed to admit it: he wanted the crowd to cheer. "When I took our statement to the bank or when I sat in front of our board of directors, I wanted applause," recalls the 58-year-old chief executive of Reuther Mold & Manufacturing Co., based in Cuyahoga Falls, Ohio. But with profits uneven and output down, his performance was usually panned instead. "We might make a bunch of money one year and break even the next. It was erratic at best." Certainly, nobody applauded.

Reuther's father had founded and grown the family's mold-making business in a traditional autocratic manner. But by the time Karl took over, times had changed. Workers were producing less and the foundation on which Reuther Mold had been built was beginning to crack. "There was no glue to hold it together," he says.

Then in 1986, after his father died, Karl Reuther liquidated some of his father's stock -- about 20% of the company -- by granting it to an employee stock ownership plan. With the workers turned owners, he expected enthusiasm and productivity to soar. But for many, holding equity in the company meant little.

"What the hell does $50,000 mean to someone 35 years from now, when he needs a new car this year? Reuther says. "Or maybe he wants to buy a house, but he's got nothing to show except this huge account, which he can't even pledge, that means nothing until he quits or retires. There had to be some short-term reward for everyone."

Reuther's remedy was utterly ordinary: he established a bonus system. All employees would share in a pool of up to 20% of after-tax profits, if cash flow permitted. Nothing revolutionary in that. Except Reuther decided to explain the bonus by disclosing the company's most private parts: its financials.

Secrecy is the hallmark of most family businesses. But Reuther knew that if he simply awarded a bonus with no explanation, it could backfire. "People would never understand it. They'd wonder, How did you come up with that number? They would have no trust in it," he says.

"So we decided to describe what we do in this company. Make people understand what direct labor is and what material and services are all about. Lay out all those expenses, then talk about extra cash because if there's no extra cash, there's no bonus."

Reuther's first step was to review his accounting system. "We had a financial statement that our salespeople and our manufacturing people couldn't understand," recalls accountant Pam Schlegel. Adds Reuther: "There's no way I could explain a capital lease to somebody in this shop. So we started changing things. We simplified our accounting and reporting methods. We made it more relative to the real world."

Reuther then wrote a six-page anatomy of his bonus plan. Complete with hand-drawn illustrations and homespun examples, his guide to the owner-share-bonus system reveals the inner workings of a profit-and-loss statement for readers with no business education.

"I have a moral obligation to make sure workers not only have this information but understand it. I'm an owner and I understand it; if you are an owner, then you have the same rights that I do. Why should you be treated that much differently?"

On the following pages Reuther and his employees tell how the bonus guide works, why it works, and what they learned because of it.

(sample section)

6. Owner Share Bonus Work Sheet

Period:_____ Thru _____

Net Sales: _____

Less Material & Services

Labor (Worked on jobs)

Manufacturing Support Expense

Sales & Administration Expense

Interest Expense to Bank

Depreciation Allowance

Federal & State Taxes _____

Total Cost of Doing Business < _____ >

PROFIT _____

Cash Available: Cash Needs:

Sale of Equip. Our Debts

Dividends Equipment

Rent Dividends

Windfall Buying Back

Depreciation ESOP Stock

PROFIT _____ _____

Total Total

Cash Avail. _____ Cash Needs _____

Available

Extra Cash = Cash Avail. - Cash Needs = _____

Owner

Share Bonus: 1. Extra Cash * Yes * No

2. 20% of PROFITS = _____

* Own Share Bonus is Equal to Extra Cash Avail. up to 20% of Profits . . . So the Owner Share Bonus for this Period Will Be _____ .

The Presentation Style
"I wanted to make it simple and interesting to read," says Reuther. "So I handwrote it and illustrated it. If it were just a typewritten piece, it would be boring as hell and, like most company announcements, never get beyond the employees' toolboxes. People don't read a lot. They watch television and have information told to them. So I read this aloud to make sure it can be spoken. If it can be spoken, then it can be understood. And it's simple, but I don't think it's patronizing."

"When I first looked at it," worker-owner Fred Krompass recalls, "I thought it was funny -- with his little pictures and everything. But I'd never seen a financial statement before, and even if it seemed silly, it explained a lot."

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