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 _____


Extra Cash = Cash Avail. - Cash Needs = _____


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."

Revenue Watching
"People are watching those sales numbers and pushing us to improve them all the time," Reuther notes. "They know a dip in orders can mean a cut in their hours. That's what happened last year when we had two bad months in a row. I heard it from John Sudar [a mold designer whose father had also been an employee]: 'Didn't management see this coming? Why didn't we do something sooner? Let's go out and sell Reuther Mold, not wait for orders.' "

"When you get a little bit more information, you start to question a little bit more," Sudar confesses. "We'll ask questions like, 'Hey, we took this job two years ago and lost $20,000 then, what the hell did we do it again for?' Everyone from the shop floor supervisor all the way up to Karl comes under scrutiny. People want to know how much we spent entertaining customers or why we quoted so low on that job."

Understanding Depreciation

" Depreciation is probably as hard a term as any to explain," says Reuther. "My accountant says I make it sound too much like a freebie -- an IRS giveaway -- but people here understand it. Our committee that buys equipment is insisting we buy equipment this year so we can keep our depreciation up. They know that it reduces taxes and that they get it back in Cash Available. Even if a new purchase might reduce bonuses this year, it will improve profits and fatten bonuses down the road. Without this explanation, the committee would have never understood how depreciation works on a P&L sheet."

Cash Versus Profits
"We came up with a bonus formula that was really simple," says Reuther. "You're eligible after 90 days. And you're going to share 20% of the after-tax profits. Sounded good. But we realized that if we are paying a regular bonus, we have to have the cash to cover it. So I've got to explain to people how cash is generated. If it gets too complicated, then what will happen? Nobody will believe it."

"To distinguish profits from cash," Jerry Biltz explains, "Karl often refers to your own monthly budget, your own family life. Though you have so much worth, you have expenses. You have some cash left over, but you buy things with that cash. People are starting to realize that you can say you made half a million dollars in profit, but there are still the expenses of paying for equipment, paying down loans, and repurchasing the stock."

"It's time that workers understand a balance sheet," says Reuther, "because that's where profits go. They see us make $500,000, $600,000, and they think, Gosh, where's the cash? Why aren't we getting bonuses? There may be no cash at all. We may have made a lot of money, but it's all in accounts receivable and payroll. I don't think people realize that we have $4 million tied up in work in process and accounts receivable."

The Surprising Cost of Doing Business
"What surprised me," recalls Krompass, "was the cost of materials. You never think when you're looking at a 30,000-pound piece of steel that it costs more than $1 a pound and there's $30,000 just sitting around the shop." And when you see the direct-labor dollars, "it's unbelievable," adds Jerry Biltz, a purchasing manager. "I had no idea that payroll and other operating expenses were that great."

The Power of Repetition
"The repetition helps," Reuther says. "Cash available minus cash needs leaves available extra cash -- our worker-owners have seen it and seen it and seen it. It is critical that they understand this. It's their business. So the format is repeated. The same financial statement that I give on the owner-share-bonus calculations is published monthly in my newsletter. I will do four-and eight-month statements in my newsletter, too. People see a statement and there's a confirmation that, yeah, this one is like the last one that Karl talked about. So our credibility is continually reinforced."

"You have to be willing to commit yourself to the educational process," Schlegel says. "You can't do it one time and expect everybody to understand it. Karl goes over the annual financial statement every year with all of the employees in a meeting that takes half the day. It costs $60,000 in downtime to hold all the meetings we have in the course of a year. People know that, and we've all become more aware of using meeting time in general for productive work."

Building Credibility and Participation
"When we first started coming out with this owner-share-bonus plan, there was a lot of cynicism," Sudar recalls. "But we've had three checks a year for two and a half years. Give out eight or nine profit-sharing checks and people start believing it." Says Jerry Biltz: "We used to have a dozen supervisors concerned about productivity and costs. We probably have 50 people thinking about it all the time now."

"You know what happened the other day?" Reuther asks. "A guy came in from the shop and said, 'These numbers don't add up.' He had crunched the numbers on his own and found a discrepancy. That shows me people are looking at the bonus report, analyzing it. They're checking everything. Some people are keeping my newsletter for the financial statement every month. So they have a better record of what the company's doing than I do."