The downside of "secret" profit sharing

Workforce, April, 2003

Dear Workforce: For the past year, our company has had a secret profit-sharing program that includes 30 to 40 percent of the employees. The program was kept secret by order of the company president. Recently, some of the employees not receiving the bonus learned of the program, and they are threatening to quit and go to work for some of our competitors. We would really like to keep most of our employees. How should we handle this? What are the potential pitfalls of having this kind of program, and what can we do at this point for damage control?

--Panicky HR Manager, services, Jupiter, Florida

Dear Panicky:

From Robert Fulton of The Pathfinder's Group:

The answer I give you may not be the one you are looking for. At this point, your president has severely damaged employee trust and management's credibility, and it will be very difficult and time-consuming to recover both.

One of the pitfalls associated with any kind of discretionary bonus plan--secret or not--is that employees are always left guessing as to whether they will receive anything. Some companies try to alleviate this by paying all employees an equal amount (let's call this a "holiday bonus plan"), but it rarely settles the issue. Another pitfall is that these types of plans are notorious for having minimal, if any, linkage to definable performance. Incentives that are passed out to employees because the president likes them are not bonuses; they are gifts. They rapidly become entitlements.

This leads me to provide some basic rules regarding incentive compensation that your president is obviously not aware of (don't feel too bad; few of them are savvy about this topic). First, never ever design a broad-based incentive plan to be a secret plan. It will always backfire. Second, do not design plans that use arbitrary or capricious criteria for excluding employees from participation. Employees rapidly learn who is "in" and who is "out." Many of the good ones--those you want to keep--get discouraged and quit at the first opportunity. Third, pay for actual, defined performance.

In your specific case, I have several basic recommendations for moving forward. First, put your cards on the table with employees. Be honest and explain that you have had this program in operation for awhile. Tell them that the company has decided to examine and re-evaluate the program. Give them a time frame for accomplishing this review

Second, review and assess the program. What value has it had in the past? Are profits truly greater because of the plan? Is there a direct line of sight between an individual employee's performance and profit-sharing payouts? Third, determine how you will redesign the plan. You can trash the plan (it's done enough damage already), turn it into a profit-sharing-based retirement savings program in which everyone participates equally, or make it into a results-based plan that effectively links individual or team performance to payouts. Finally, announce the new plan--in excruciating detail, complete with examples--to all participating employees. If you choose to put a true performance-based incentive plan in place, keep in mind that the variety of plans is tremendous. Do your homework in terms of design and testing. The plan should be designed with your specific business needs and operational characteristics in mind. By the way, keeping all of your employees happy is not a valid business reason. Achieving extrao rdinary levels of performance, teamwork, and profit is.

Standardized Comp and Rewards

Dear Workforce:

Our international group recently acquired certain companies and merged other smaller ones. How can we devise a standardized compensation/reward strategy that would be applied across this spectrum of companies, both locally and abroad?

-- Seeking Uniformity remuneration specialist, mining/oil/gas, Johannesburg, South Africa

Dear Uniformity:

David A. Hofrichter of Buck Consultants says that if by standardized you mean "identical," then you have set yourself an impossible task. The sheer differences in employment laws and market practices between countries prevent finding a "one-size fits all" solution that will work equally well in each locale. If, on the other hand, you define standardized as having a common philosophy, your task is both manageable and important.

Before talking about the compensation aspects of this problem, you need to think through a series of business-oriented issues, namely:

1) Are your businesses significantly similar, or are you trying to convey a "one company" mentality that makes such a common approach necessary? In businesses that are dissimilar, such a common philosophy may not be required.

2) Do people transfer between the various businesses so that some common approaches are necessary for the smooth transition of staff? If so, to what degree and in what kinds of jobs?

3) What is your current level of competitiveness in each country, and how does that relate to your cost of products or services? In other words, if you put a common program in place, could you afford to do it everywhere?