An HR expert offers some tips on how to set up a profit-sharing incentive plan.
Dave Jones knew his people were "smart enough to get clients, keep them happy, and make a profit." He had a problem, however. "A $100,000 project could cost $200,000 to execute," says Jones, the CEO of HRStrategies. The reason, he realized, was that he wasn't paying his people to make a profit.
The $17-million company based in Grosse Pointe, Mich., does consulting work on human-resources issues. In 10 years of fast growth, its pretax-profit margins rarely dipped below 10%, but there wasn't enough money left for research and development and marketing.
So two years ago Jones stopped paying new-account bonuses. That system benefited only a handful of people. Instead, he inaugurated a profit-sharing plan that includes everyone -- even new salespeople. It took most of 1993 for the new plan to sink in. Toward the end of 1994, it looked as if Jones would be able to distribute about $500,000 among the 150 employees.
A profit-sharing incentive plan doesn't guarantee widespread satisfaction. Here's how HRStrategies addressed potential problems:
· Not everyone's job directly affects company profits. But everyone in a small office does have an effect. Each of HRStrategies' eight offices (six in the United States and two in Central Europe) is a profit center, rewarded on its own income statement.
In 1993 the company had five offices. "One earned a moderate bonus, three were quite profitable, and one got nothing," says Jones. "We said nothing to anyone about that office, but word gets around. That office stayed on target for '94."
· A year is a long time to wait for a bonus. HRStrategies pays a portion of the bonus throughout the year, as offices achieve interim pretax-profit goals. "We take snapshots every four months," Jones says.
· Some team members work harder than others. Each office director can use up to 30% of the profit pot to reward "special players." Plus, each individual's bonus is a percentage of salary. So the larger the bonus pool and the higher the salary, the bigger the bonus check.
· Salespeople will quit. A few of HRStrategies' 10 senior consultants -- industrial psychologists who doubled as salespeople -- favored the old volume-based sales bonuses and eventually left. But most, Jones says, were relieved to share responsibility for sales.
· The plan won't cover everything. More recently, Jones started a new bonus fund to reward team selling efforts across the offices.