A fascinating question to ask an employee is if they’ve ever considered starting their own business. I have found that you usually get one of two answers (both which are instructive) and gain a starting point on transforming their thinking into that of becoming a business owner inside the business that employs them.
The first answer is helpful because it tells you that maybe they are not passionate about their job. When I ask if they have ever considered starting their own business and they respond affirmatively with an enterprise completely unrelated to their current position, their current company, or their current industry, I wonder if they feel trapped in their current career. That, however, is a topic for another day.
The second common answer is that they say that it would be too scary to start their own company or to run their own business. This response gives you a tremendous opportunity to begin changing their perspective on what being a business owner requires and in the process maybe make them into a better employee.
Early in my career, I took the attitude that my employer was not my employer but instead my largest client. I was “self-employed” within the organization. I focused on doing everything I could to keep my biggest customer happy. My job was to manage the given resources efficiently and to deliver the desired results. By doing so, I was able to grow “my business” by taking on more tasks for my client (employer), and as a result of my business growing, I made more money as the client relationship grew (promotions and salary increases).
A revenue share incentive plan is an effective way to create an owner mentality by rewarding employees in the same manner that owners are rewarded, namely, the performance of the business. This can help even those employees who are not naturally “intrapreneurs” develop an owner mentality within the company.
To do this, you need to help employees set up their internal “business” and provide them with the same kind of tools to manage that you have as an owner. You need to give them the same type of information and autonomy that an owner of the business would have, including information typically not provided to employees and decision-making power that may be out of your comfort zone. It will help them start treating their role as a little business within the company. Here is what your “owners” need:
- Transparency: Make sure they have the numbers. Share revenue. Share costs. The more detail, the better. If you measure it, they will manage it. Transparency also creates trust between the team and management, which will manifest itself in many positive ways.
- Autonomy: Your team members are capable of making the right decisions. Trust them. Accountability is critical. Everyone must know who makes which decisions and everyone must know who will be responsible for those decisions whether the outcome is positive or negative. Autonomy is the antidote to apathy.
- Budgeting: Businesses have revenue and expenses. A budget is merely allocating a percentage of income to each category of cost. Budgets are not negotiable. Budgets are not a suggestion. Budgets do not change from week to week. They are a finite set of resources the company has available to conduct business for a set period of time.
Every business should have an idea of what they want their gross profit to be. As an example, the goal could be to have a 25% gross profit. That means our total expenses cannot be more than 75 cents of every dollar in revenue. We can slice up that 75% into subcategories like direct labor, raw materials, sales costs, administrative costs, etc.
We use the budget model to foster the owner mentality by allocating a percentage of all revenue to the expenses that we allow the team to control. For example, 30% of every dollar that comes through the door is what is allocated for them to accomplish their responsibilities. I like to refer to this allocation as a “revenue bucket.” I tell them that their wages and other expenses they influence come out of that bucket.
At the end of each month, we total up all of the expenses allocated to that bucket and start taking money out of that bucket to pay for those expenses. The idea is to let the employees influence everything that comes out of that bucket with the goal that they will have money left over in the bucket and they will get to keep that money. They keep it because they “own” a little business that provides the services to the company, and if the team can do that more efficiently, they get to earn more money. The following scenario provides an example of how a budget based revenue share works.
Chez Baie de Truite is a food truck. The owner has determined that she wants 25% profit; therefore, 75% of revenue is available to cover expenses. 75% of revenue is allocated toward expenses as follows:
- Food: 35%
- Labor: 30%
- Truck Costs:10%
The employees’ compensation consists of an hourly wage and a revenue share program. The revenue share is that whatever remains in the “bucket” at the end of the month is divided up equally between the team members. The owner decides what food is purchased and what maintenance the truck receives, but the team “pays” for these costs each month.
This sets up a situation where if the team wastes materials or is rough on the equipment, they “pay” for it. On the other hand, if they can figure out ways to reduce waste and lower maintenance costs they get “paid” to do so because they (not the owner) get to keep the savings from running the business more efficiently.
The other beautiful thing that happens is when the team realizes that if they can grow revenue faster than expenses they have more money in their bucket to work with each month. Employees learn very quickly that there are variable and fixed costs in their bucket and that every additional dollar of revenue leaves more in their bucket than the previous dollar.
At the end of the month, Chez Baie de Truite did $10,000 in revenue. The owner takes her money first, so $2,500 (25%). Food came in at $3,600, labor came in at $3,000, and truck costs came in at $400 for a total of $7,000 in expenses. Since the expense budget was $7,500 for the month, the $500 is divided up between three part-time employees who each worked 120 hours during the month. That is a $1.39 per hour raise for the month ($167/120 hours).
Many owners will ask, “Why wouldn’t I just keep that $500 for myself?” The answer is no because the owner already decided that they were happy with (set a budget of) 25% of revenue. Imagine the benefits the owner gets for that $500 revenue share:
- Employees who view the cost of waste as coming out of their pockets.
- Employees who take care of the equipment because they don’t want to pay for repairs.
- Employees who want to sell more because they make more.
- Employees who don’t constantly want more people added to the team (because it shrinks their revenue share).
- Less employee turnover.
Another huge benefit is that the conversation about calendar-based wage increases goes away. Aon’s 2018 U.S. Salary Increase Survey of 1,026 U.S. companies projects base pay budgets to increase to 3.1 percent in 2019, the highest increase since the 2008 recession. The revenue share in the example provided would be a 13.9 percent raise and is only limited by what the team can accomplish.
Last but certainly not least, employees start to set profit goals just like the owner does. If they have 30% of revenue in their bucket, they may decide that they want 5% left at the end of the month to divide as revenue share.
Aren’t all of those benefits worth the $500 the owner is sharing with the team?
Budget based revenue share incentive programs are not theoretical. Troutberry LLC has created customized plans for a variety of business types and sizes. If you would like help setting up a revenue share program to reward and retain your best employees while simultaneously eliminating some of the common stresses related to employee compensation and productivity, please use the “Contact Us” form or e-mail us at firstname.lastname@example.org.