Entrepreneurs know only too well that there is no greater motivator in business than having skin in the game. For the vast majority of employees, however, the only thing on the line is a steady paycheque, so they work only as hard as the job description requires. To overcome this tendency, employees need to feel they have a bigger stake in the success of the business. One way to do that is through profit-sharing.
Canada’s most famous and enduring proponent of profit-sharing is Frank Stronach, founder of auto parts giant Magna International. Stronach figured his Aurora, Ont.-based firm would grow faster if his workforce benefited more directly from that growth, so Magna started paying a predetermined percentage of pre-tax profits to rank-and-file employees. That was 41 years ago—and the policy is still in force. Stronach credits profit-sharing with creating a culture of ownership that has maximized worker engagement and kept labour problems to a minimum.
But profit-sharing is not just an effective tool for large, public companies. Total Debt Freedom instituted a profit-sharing plan with its 20 staff just over a year ago. Employees at the Markham, Ont.-based debt-settlement firm earn quarterly payouts based on profits as well as improvements in the company’s Net Promoter Score. (See Tactic 11.) “Everybody loves it,” says Paul Heenan, vice-president of operations. “Everyone chips in to do whatever they can to reduce operating costs. And because it’s tied in to customer service, when employees create raving customers, they know that will come back to them [as] a piece of the profits.”
A few words of caution, however: profit-sharing can be counterproductive if it’s not tied to open-book management, whereby you share detailed financial and operational metrics with employees to show how their personal performance affects company performance. If your profit-sharing plan entails nothing more than distributing year-end cheques for surprise amounts, you risk reducing the profits available to share.