Case study: rewarding loyal employees - Family Business

Nation's Business, March, 1996 by Mary Jane Rynd, Joe Paul

Mary Jo Kaplan, 46, beamed with pride as she accepted the Woman of the Year award at an annual conference for women business owners. She was proud of what she had accomplished in the 10 years since her divorce. As a single parent, she had raised her daughter, Darla, now 23, while growing a business-travel company, Kaplan Enterprises, from an initial investment of $10,000 to annual sales of more than $10 million.

As she was preparing her acceptance speech, she recalled the many employees who had helped her in her quest. Billie, her first secretary, worked long hours with little pay and is now vice president. Max, once a summer intern, is now lead travel consultant. Susan, an attorney, serves in multiple roles, from negotiator to human-resources director. Darla, who as a teenager resented the long hours her mother spent building the business, is now working in the company with the same exuberance as Mary Jo.

Now that the awards ceremony is over, Mary Jo has made a decision. "With the lean times in the past, I would like to do something to repay the 40 employees in some way for their hard work and continued confidence in me and in the business," she says.

She has given bonuses over the years to key managers, but she would like to put a more permanent plan in place. She would like the plan to provide increased benefits for all employees, not just management, and to give employees input into the design of the plan.

"How," she asks, "can I provide for employee participation in the development of a plan? And how can we increase benefits without unnecessarily mortgaging the future of Kaplan Enterprises?"

Response 1

Find Out What Workers Want

Mary Jo is wise to recognize that knowing what the employees want is critical so that time and money are not invested in plans that are unappreciated or even resented. A task force that includes men and women of various ages and races should be established to determine, first, the benefits that employees would utilize; second, whether employees would be willing to share in the cost of benefits; and, third, a plan of implementation.

Tax-favored benefit plans are the most desirable. They include:

* Educational-assistance plans under which each employee can receive up to $5,250 a year tax-free.

* Cafeteria plans, which provide a menu of options from which employees select benefits--such as medical expenses not covered by insurance, additional life insurance, additional vacation days, and dependent-care assistance programs.

* Retirement plans such as 401(k) plans, which allow money to be set aside and to earn income on which taxes are deferred until the employee retires and begins to withdraw the funds.

* Employee Stock Ownership Plans (ESOPs), which are qualified, defined-contribution retirement plans that invest primarily in the employer's stock. ESOPs motivate employees to work hard because much or all of their retirement benefit depends upon the success of the business.

These plans provide deductions for the employer without benefits being currently taxed to the employee. Because of the tax advantages, all of the plans are subject to rules requiring strict adherence.

Mary Jane Rynd, CPA, a partner in Rynd, Carneal & Ewing, a Phoenix accounting firm.

Response 2

Prepare For A New Management Style

Mary Jo's success makes her want to compensate her staff more generously. But even generosity can be destructive when poorly thought out and implemented. Mary Jo must choose her path wisely at this juncture, because her choice will redefine organizational relationships.

Mary Jo's desire to make a change in compensation faces several challenges.

First, the company is too small to have a menu of services to satisfy the various needs of employees at different stages of life (e.g., single mothers with small children, or grandparents near retirement).

Second, she needs to avoid creating a plan that would be taken away if the company became less prosperous.

Third, allowing employees to help design the benefits sounds like a different management style for Kaplan Enterprises. While participative management can be highly productive, making the transition to this mode still requires leadership. Mary Jo may need help from a consultant skilled in this kind of organizational change. The first step will be to create a process for Mary Jo and key managers to define a new philosophy of compensation that is linked to profits.

After management has articulated the philosophy and general characteristics of the new benefits package, the employees should select representatives for a task force to help management design the specifies of new benefits. If Darla is a potential successor and is suited for the task, she might represent owners in the deliberations.

Joe Paul, a family-business consultant in Portland, Ore., specializing in individual, family, and organizational development.