“Our immediate concern should be investing in human capital, the capital of the 21st century. Never has a people-centric approach to business and capitalism been so important.”
-Mathilde Lemoine, economist
Virtually every company I know claims that “people are our most important asset” while paying only lip service to this lofty goal. Most companies treat their workers by the old Taylorist belief that people “can’t work and think at the same time”. The C-Suite leaders seem to believe that it’s their job to do all of the thinking; and everyone else’s job to execute whatever strategies they devise. In effect they see their employees as mere tools to achieve profits, or in other words as…human robots.
The trouble with this way of thinking is that people are not robots, but that they are flesh and blood, thinking beings. And managers who ask them to check their brains at the time-clock, and pick them up on the way out, completely remove any desire, any incentive, any willingness to improve their work. Many people do show initiative when as young idealists they are first hired; but after having their suggestions ignored by their bosses and being instructed to “just do what you are told to do”, they became beaten down. They start to check their brains at the time-clock. They become disengaged and work as if in a robotic trance.
I’m not making this argument solely out of good intentions; I’ve seen this borne out over a career as a C-level executive. I worked as CFO at The Wiremold Company, which acquired twenty-one companies during the 1990’s. In most of these companies we could see the effect of years of this type of C-Suite thinking and behavior at our acquisitions. One of these was a division of a public company. The first time the people at that division saw the CEO of the parent company was when he came to tell them that the division was being sold.
At this company we learned from employee records that many people had more than 20 years of “elapsed time” from their date of hire to the current date; but their formal experience counted several years less of paid employment time due to the companies policy of “re-sizing” the workforce through layoffs to match current demand. In addition, the company had a union, and over the years management had negotiated “tiered” pay levels for jobs based on the date of employment. And so people who were working side by side, doing the same job, were being paid up to three different pay rates depending on which contract they were hired under. They were referred to as “variable costs” in order to dehumanize them, which somehow make this approach justifiable. All in the name of more profit.
You might infer from that last statement that I think profit is unimportant. On the contrary. I believe that a profitable enterprise is the best way to provide jobs and have a strong economy. In its 100-year history before it was sold in 2000, Wiremold made a profit in all but four of those years (during the Depression) and provided thousands of good paying jobs. But there is a right way, and a wrong way, to make a profit. And the right way is to put real meaning into “people are our most important asset”. If Toyota has taught us only one thing, it is that the people doing the work are the people who best understand the problems and as a result, are best able to find solutions to those problems. Thus, Toyota’s principle of “Respect for People”.
In 1916, D. Hayes Murphy, founder of The Wiremold Company, recognized the interdependence between financial capital (himself) and human capital (the people doing the work). Contradicting the idea that only the financial capital would benefit from increased productivity at the expense of human capital, he said: “I believe that this company should pay the same wages that other companies…are paying for the same kind of work. But I also believe that any man or any woman who will really take an interest in the business of this company, and who helps to make profits for the company, should receive a share of those profits. Therefore, I have worked out a plan whereby the more profit the company makes, the more money each one of you will make.”*
Mr. Murphy’s approach was simple: a certain percentage of profit was set aside to be shared with each employee in proportion to that employee’s wages. If the size of the profit sharing pool was 8 percent of total straight-time wages, then each person received a check for 8 percent of his or her individual straight-time wages. And it was paid quarterly…in cash.
Having administered that plan for my entire tenure as Wiremold’s CFO, I came to understand the power of seeing human capital as integral to the company’s success. Years of running this plan helped me recognize the following ten elements of a successful profit-sharing plan. I found that any plans that violate these principles run the risk of becoming entitlement programs at best, or at the worst, de-motivators that generate the opposite effects that they are designed for.
- Integrity. A good plan grows out of the conviction that people count: it should capture a sincere desire to have employees share in the company’s success. Any management that states an intent to share profits but does things that foster mistrust will lose its credibility with employees. To do so management should set stretch goals and provide the support and tools to achieve those goals; doing so in an atmosphere of trust between management and workers, one in which workers know that fair play will prevail.
- Include Everyone. Some companies have profit-sharing plans for select groups of employees (e.g., salaried employees). This creates a divide between the select group and those left out, fosters a “we-they” attitude, and belies the concept of team. At Wiremold every employee—from the CEO to the janitor—was included, and every one of the 21 acquisitions we made was included from the first day it became a member of the Wiremold family.
- Simplicity. Some profit-sharing plans can become very complex, with features like hurdle rates and sliding scales based on levels of profitability. Any plan that the employees cannot understand risks breeding mistrust and failing to achieve the desired results.
- Unlimited Payout Potential. A limit on the amount of profit sharing an employee can earn sends a clear message that employees really cannot share in all of the increased value they create. This is indicative of a management perspective—an incorrect one—that profit sharing is an added cost. To the contrary, true profit sharing is fully self-funding: If there are no profits, there is no sharing.
- Not a Substitute for Fair Wages. Profit sharing should not be used as a tactic for paying a lower wage than the prevailing market rate and relying on profit-sharing payments to bring total pay up to a competitive level. That is not profit sharing but merely a mechanism for putting a portion of the market-based wage at risk.
- Predetermined Sharing Method. The profit-sharing payout formula must be established, and explained, in advance if the plan is to have credibility and operate in an atmosphere of trust. Management that waits until after the results are known to decide how much to share will be viewed as manipulating the plan to limit the payout.
- Economically Meaningful. The plan must be capable of producing significant payments to employees at reasonable levels of profitability. A plan that awards employees an additional one or two percent in compensation will not motivate them. Wiremold’s “stretch goal” was to generate profit-sharing payments that equaled 20 percent of employees’ base wages, and we did achieve or exceed this in some quarters.
- Pay It Currently. Some profit-sharing plans defer payment by depositing the money in an account that is distributed to the employee at retirement. These types of plans do not give employees immediate benefit for their success and, in reality, are often a substitute for other types of retirement plans. Wiremold paid the profit sharing in cash each quarter so there was immediate linkage between the company’s success, or lack of it, and the payment.
- Base the Plan on Profits. Plans that base payouts on criteria other than profits (e.g., gain sharing plans) generally sub-optimize results because they pay for results in one area without considering the impact on other interdependent parts of the business. The concept of tying profit sharing to the economic health of the company as a whole should not be violated; it reinforces the necessary notion that employees’ economic welfare is tied to the economic welfare of the business.
- Communicate, Communicate, Communicate. Without effective and repeated communications, a profit-sharing plan will fail to achieve the desired results. Employees must understand why there is a plan (they are valued) and know its status on a regular basis. The original explanation of the plan was printed in seven languages to accommodate the diverse immigrant workforce. In its later years, even though Wiremold’s plan paid quarterly, it posted the results monthly. In addition, the President of each division held quarterly profit-sharing meetings to distribute the payments, but more importantly to discuss the results, what was required to improve them, and to solicit questions and comments from employees. It was not unusual for hourly factory employees to question why certain expenditures were being made and whether they were made wisely. This precipitated more personal involvement in the elimination of waste.
Wiremold’s profit sharing plan put 15% of world-wide pretax income into the profit sharing pool each quarter. Interestingly, this amount in dollars was about the same amount that was paid to shareholders in the form of dividends. Coincidence? D. Hayes Murphy died before I joined the company, so I didn’t have a chance to ask him. However, based on his writings, I believe that equality in payments was the embodiment of his belief that financial capital and human capital were equally important to the success of the company. When a company chooses to follow a Lean Strategy that embodies the “Respect for People” principle, what better way to put teeth into it than making everyone a partner in the business? Profit is good when everyone has a stake in improving it and an opportunity to share in it.
*The Wiremold Company: A Century of Solutions; Jim Smith, Greenwich Publishing Group, Inc., May, 2000.