I’m thinking about a long term plan and trying to look at it from the owner’s (me) point of view along with the management team and all the way down to the tradesmen’s point of view.
Anyone had any experience in a company that has one?
Bob’s next test date: 12/10/07
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Replies
No, but if you pay enough I'm willing to find out!<G>
We've got an awesome system at our place. Totally different business, so your mileage may vary- but it works amazingly well here. It generates labour harmony and teamwork, and creative thinking/innovation to find better ways to do the same old job, because people see the benefit PERSONALLY from working together and trying new things.
Here are a couple ways to think about it:
One is a simple fraction of the before-tax profit of the company, put in a pile and divvied up by the management on whatever basis they think is fair: in proportion to salary, or on the basis of salary and performance etc.
Another is a sliding scale, where profit beyond a certain level necessary to sustain the business is divvied up in a way that's weighted to benefit the employees increasingly as the percentage profit goes up. The more beyond this minimum necessary profit level they make for the business, the larger fraction of the excess profit they receive personally. This system gives a stronger feedback for good performance than the former one, while recognizing that the business can't really survive long if it merely breaks even and everybody gets paid. Our own system works more like this one than like the former.
Either system should be matched with some ability for the employees to participate in actual, real ownership in the business (by buying shares etc.) AND a somewhat sub-standard salary. Shared pain, shared benefit works far better for the right people than a top-up on an already good salary. The latter generates a sense of entitlement rather than motivation right quick in some folks.
Whatever system you choose, make it as transparent as possible. No playing favourites with employees, paying yourself a variable salary to keep the bonus pool low etc., and no funny business with how the profit is calculated, or else the whole thing can turn ugly right quickly.
"Either system should be matched with some ability for the employees to participate in actual, real ownership in the business (by buying shares etc.) AND a somewhat sub-standard salary."That can work in a large estatbished company with large number of employees.But I don't see how that would work in a small, new construction company with only a handfull of employees.Here is a large company, Lincoln Electric (welders) system."Incentive Performance - A Cornerstone of Our Culture
The Incentive Performance System primarily attributed to James F. Lincoln has been in place at Lincoln Electric since the early twentieth century. It has resulted in one of the oldest "pay-for-performance" systems in the country, and is frequently used for benchmarking by other businesses and studied by academics around the world.The Incentive Performance System in place in the U.S. Lincoln operations features: * An elected Advisory Board for direct and open communication with senior management since 1914.
* Piecework incentive rewards for all production work.
* A profit-sharing Bonus Plan for employees paid annually at the discretion of the Board of Directors since 1934.
* Guaranteed Employment after three years of service. The company has not exercised its layoff options in the U.S. operations since post war 1948.
* A 401K plan offering the employee a variety of pre-tax investment options.
* Competitive compensation and other benefits.
* A Financial Security Program which includes company contributions based on years of service from 4 - 10%.
* An attractive vacation package based on comparable years of service.Through this well-defined group of incentives, Lincoln encourages and compensates individual initiative and responsibility. Employees work together to reduce costs and improve quality. These individual and cooperative efforts create a more profitable company, the success of which each person shares according to his or her own contribution."http://www.lincolnelectric.com/corporate/career/Some of that can be adapted, but a lot can't. http://www.allbusiness.com/company-activities-management/company-structures-ownership/5506008-1.html
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A-holes. Hey every group has to have one. And I have been elected to be the one. I should make that my tagline.
"It generates labour harmony and teamwork, and creative thinking/innovation to find better ways to do the same old job, because people see the benefit PERSONALLY from working together and trying new things."Thats the motivation I'm seeking to create. I understand the principle of "don't play games with a variable salary" etc. I was thinking I'd take a salary no greater than my highest paid manager, paying the bills, creating the necessary reserve accounts and retaining a certain percentage of the net profit to build the capital base. Then, splitting up everything left over amongst the management teams and employees. Bob's next test date: 12/10/07
The last construction Co I worked for was a family owned Co. One of the issues I see is that "IF" the employee is supposed to risk or give to the Co then where does he get it back in the end?
Let's say everyone is working hard trying to get the job done and there is friction/or mistakes made that you have to put up with in any Co. But it is much harder in a small CO.
In the end the owner has a Co to sell or pass on to his kid. The Co is being built and is appreciating in value.
In the end I have my old worn out tools to sell and some stories.
I'm not saying the owner has every right to do what he wants with HIS Co.
But I think you have to put that into the equation if you want it to be equatable.
"One of the issues I see is that "IF" the employee is supposed to risk "I don't envision the employee risking anything other than their paid for time.Of course, the other risk is what I've already stated earlier in the thread: they risk working for our company instead of another. The other company might be a better situation. Bob's next test date: 12/10/07
Edited 7/5/2008 11:22 am by Jim_Allen
Jim
Since you are sharing profits
if you lose money are the employees expected to chip in?
I've done bonus. After about 6-7 years it was expected. Even though we went over the ground rules at the beg of the year. So I quit doing it. Just bumped everyones pay.
Profit is for risk. What has the employee risked?
i couldn't agree more, profit is for risk. makes me sick when some non deserving individual or company profits from taking no risk.
You mean like stock brokers, future traders, heads of large corporations and investment firms? Does the owner of a multi million dollar company who risks "all" (meaning his job, house cars ,$ etc. actually risk a single thing different than a minimum wage employee who takes a job and has the exact same things at risk if the job disappears after a year or so ? I don't think so , I see it only as a matter of scale. Both can end up homeless . broke and walking if things don't work out. the difference is it is much more likely to happen to the employee than the the boss.
They can't get your Goat if you don't tell them where it is hidden.
dovetail--- it pains me to dis-agree with you--- but I think you are quite wrong about this.20 some years ago--- I quit a steady job( with one baby at home and one on the way----and a stay at home wife)
cashed in my retirement accounts
and started my little businessspent the next 20 years developing what I have.
i also hired an un-employed guy this spring( several in fact)
if my business goes belly up on monday---have we really taken the same risk????
I think HARDLY.
I also note---- I am up at least by 5:00 every day---working at my desk---then I am working rooftop along with the guys during the production day----and once the production guys go home for the day-- I typically have at least 2-3 MORE hours of work ahead of me where as some of my workers can (and do)
roll out of bed at 6:30--show up to work at 7:00---head home before 3:00 without a care in the world
our risks and effort--are not anything remotely resembling equal.
stephen
stephen, My answer was very simplistic. Having been an owner and an employee over the years I just see the risks I have taken in each.
Quite clearly there is a different scale of risk such as you pointed out, along with scrapr and others.
I even tried risk sharing when I owned a company and had employees. No one among the employees was willing to share the losses if they occurred so that idea didn't get far off the ground. I really see it as a blindness though that I object to when I hear owners say that the employee has NO risk involved in a company. Most employees I have known had real expectations of the company staying afloat, they planned their lives on that fact. I will give you an example:
My daughter moved from Or. to Boston to take a job with a company, worked her tail off for them , amid promise of greater things and good financial package in the future if she stayed with them . 3yrs. later they fold, no financial package, lost all the "stock incentive in lieu of $" package promised, she was stuck , was unable to find work there so moved to SF to work for another company , that major corp downsized so once again to find work that she was capable of , desired and offered money worth doing so she moved to Seattle to find employment. This has all occured with a span of 9 years. She did not quit a single one of those jobs. 3 cross country moves, underpaid for her time as a result of companies making promises and telling the employees they would profit as the company grew , and then, promises of long term employment being removed at the whim of managment and market forces.
Each time she lost considerable money , time , and possessions.
Sure one can say "Well, heck she could and did find another job", but how rarely does one hear "Hey, the owner can always start another company".
Maybe all I am objecting to is what I perceive to be a failure of owners to place themselves in the workers shoes for a mile or so and see what risks the worker is taking by placing faith in the company.
It is the "All mine nothing Theirs" attitude that I am pointing out and commenting on. Both parties risk.
When I folded my company I lost everything, cars, home etc. 7 employees did as well.Mine were just a little more expensive. This was partly due to economic times, partly they took a risk and put faith in someone who failed them which is them something I won't easily forget. Yes the owner is the one that the business creditors will come after, BTDT, but for each employee there are creditors also standing in line to get theirs.
I am starting a job that is far larger in $ terms then anything I have done under my own business, do I have risk , absolutely, It has been keeping me up at nights with worry. But IMO each sub-contractor, each supplier and ALL their employees are also risking a share of the deal.
They can't get your Goat if you don't tell them where it is hidden.
dovetail----you are comparing apples with oranges---sure they are both fruit---but other than that????????
like it or not-----we ALL take certain risks--just getting out of bed each day like blue says---the employee takes the risk that working for HIM they miss working for another company that is a better fit.
It's not reasonable to expect blue---to compensate said employee for that risk after all----said employee---doesn't compensate blue for the risk that blue could have hired another employee that was a better fit( or better value)
stephen
Hey blue,
that book i mentioned--- i think technically it was about an ESOP---not a profit sharing plan,
stephen
I'm okay exploring an esop. I'm in the final chapter of building/creating a business in the construction industry. I want something that will not need me to be involved in the day to day operations and allow me to retire in five or ten years. My thoughts is that if I can get the management team invested heavily, then I might be able to accomplish my longer term goal. I think there are three main teams to assemble: sales and marketing, production, the office (business managment). Right now, I have managers at each level and we are building our teams. I'm just trying to think about what would have satisfied me if I was asked to be the production manager when I was at the peak of my production career. Bob's next test date: 12/10/07
It takes incentive for a qualified person to leave a "sure thing" and jump on board a start-up.The start-up usually can't afford large salaries, so moderate salaries combined with commissions on sales, or with vested/unvested percentages of the company to a small number of key employees, are often the way to go. With my non-construction company, I had an idea, but to bring that idea to fruition I had to eventually give away about 45% of the company to folks who could make it a reality. There were things I could do, things I could learn, things I could be taught, but in technology-related issues, and in bringing them to market, often times time is of the essence. Plus I had no track record. Getting people to work with me was, to them, a risk, and they wanted to be rewarded at a higher rate then they would have been entitled had I had years of tech experience behind me.Were I to do another start-up, I have more experience which makes me less of a risk in the eyes of others. When we did eventually get bought out, my 55% of a large chunk of change was worth more than 100% of nothing. And nothing is what I would have gotten had I held on to the whole pie.With a start-up you need to be lean, and you need to hold your cards as close to your vest as you can. You have an advantage in that you're familiar with construction, you've delved into MLM businesses in the past, you've managed crews, etc.So you got skillz.Don't be afraid to use legal advise, and depending on the scope of your business, either complete or territorial non-compete clauses when bringing in partners and structuring your incentive packages.Mongo
"I'm okay exploring an esop.
I'm in the final chapter of building/creating a business"
These are conflicting goals.
The ESOP is a way to cash out fo a business with tax benefits.
A Profit Sharing Plan is a qualified retirement plan requird to follow federal rules in order to acheive and maintain tax advantages on retirement savings - which may involve both employer and/or employee contributions. Due to the regulatory involvement, most should be aware of what happens.
A profit sharing plan is a smoke blowing up the arse arrangement designed to motivate an employee, but usually disappoints all involved. Meaning no formal argeement, no accountability, no tax advantages, not likely to be adhered to.
I don't see how exploring an esop option is a conflicting goal of building/creating a business. If I don't explore it as an option, I won't have any knowledge of whether it will satisfy my desires or intent. Bob's next test date: 12/10/07
An ESOP is a way for the business owner to cash out by selling the company to his employees. The funding provided by the involved bank, becomes tax free to the bank.
It's the best way for he owner to liquidate short of going public.
Now, putting all that together so it is a profitable business, large enuff for the banks to get involved, satifactory to the IRS, as well as having the interested employees, is far, far beyond the startup business plan.
But it's a very noble method for all involved. Those actually doing so deserve a big pat on the back in addition to the benefits received.
But note: once the ESOP is actually in place and the business is subsequently sold by the ESOP to anopther party, the resultant cash distributions are treated similar to cash distributions from an IRA. Meaning they are subject to taxation, the 10% penalty,etc. Rolling over the money to an IRA or retirement plan escapes these taxes.
I now know five paragraphs about what an esop is. Thanks. Bob's next test date: 12/10/07
There is no requirement that a bank be involved. The owner can 'lend' then money to the ESOP by being paid over time. Or current profits can be used.And if a loan is involved, there are two ways to do it. One is loan the money to the ESOP, the other is loan the money to the company.A very important, but overlooked aspect, is that there are TWO legal entities, the company and the ESOP. The ESOP is a retirement plan, and subject to the IRS rules about such. The company is, well, a company.
I feel I am not adequately communicating my feelings and thoughts on the subject. I will just stop here.
They can't get your Goat if you don't tell them where it is hidden.
DT
I get where you are going. Just that you are WRONG!!!!
just kidding. I wouldn't say that online if I hadn't met you last week. ;-)
My philosophy in biz is that the owner gets paid last. Employees first. Subs, vendors. Anything left? That is the beans and rice for the owner. But different owners run things differently. Some pay owners first. Some pay vendors first then owners, then employees.
And I do worry about employees and all that they have invested in me and our company. i try to pass along skills and knowledge so that when (?) they move on they are better prepared.
Ex: we just laid off our superintendent. When he came 4 years ago he had experience running crews but no dispatching, no office and no client relation work. By the end he is ready to run his own company. He has office work down. He can sell. And he can handle difficult client problems.
He is starting a drywall patch and small job business. Now do I feel bad about laying him off? Of course. I held on as long as I could. Hoping the market would improve. But ultimately he will be better off in one year than staying stagnant with us.
Which company is better off? The one that distributes all availible cash to the employees? Or the business that has a rainy day fund and is well capiltalized?
The well capitalized one. I am planning for a healty capitalization factor in order to expand. Bob's next test date: 12/10/07
Well I believe I am never wrong, it is that Others just haven't explained themselves adequately enough to educate me as to their thought process and conclusions. ;-) As I said when I posted to Hazlett, I feel I am not communicating my feeling adequately here. I still feel that way but will try just once more time.
I too paid myself last. Profit IMO comes after everybody , including the owner of the business is paid and not before that point. I paid bonuses, paid a % of a job gross if an employee was instrumental in bringing the job to my company though some effort of theirs , raised wages inline with company profits, overpaying for the local market in doing so. Adequate capitalization is necessary but has nothing to do with profit sharing as that issue is a part of the costs of doing business that need to be dealt with before profits are figured.
Hazlett says I am comparing apples and oranges, I say I am talking about scales of risk. So lets use the fruit analogy of Haslett's, IMO the owner may have the watermelon size risk , but the employee still has fruit of some kind and size in the salad depending on the individual employee. My post noted my objection is ONLY to the concept an employee has NO risk , I simply believe the employee does. I feel that adopting the thought and mental stance that employees have NO risk and it is ALL mine is a serious flaw in a business model. For starters I believe it can lead to an attitude of arrogance on the part of the owner.
Acknowledging that risk I believe empowers an employee and allows them to see that their interests and risks are being taken into account which I believe leads to a better employee.
They can't get your Goat if you don't tell them where it is hidden.
dovetail,
you are explaining yourself fine
however, part of the problem is--that we are all using one word-----"risk"---- to describe several things.
yes they are all risks---but not the same thingsand "profit" is one of the POTENTIAL rewards for some types of risk---but not others.
to me--it has always been pretty simpleas you well know--as a business owner there are endless headaches and hassles( Mr. T referrs to the excrement sammich an employee must eat----but I think business owners belley up to a 9 course excrement thanksgiving spread!!!!)----------MANY people really aren't interested in a life with those hassles and are able to eliminate most of them by seeking a position as an employeeTHAT right there is the deal--less headaches and hassles---and wages or salaryWant more money????--it,in my experience invariably comes with more headhaches and hassles( reponsibilities)want more money???--start your own business.MAYBE more money will come--or MAYBE you will find yourself making less than you did as an employee "naw" you say-- i am not interested in THAT--but i want more money anyway.-- "Fine" I say--negotiate more money as part of your wage/salary package.but-- i don't see how an employee can feel that they have earned a share of profits--- they haven't--they have earned their wage/salary/benefit package----that's the deal they made. I don't get a wage/salary/benfit package--and that's the deal I made. after 30 some years-- my dad was forced out of a good job he held with a fortune 500 company.-- I don't think he EVER felt that he was owed a share of the profits by virtue of his 30 some years servicehe knew he had been compensated for his work for 30 years with free hospitalization, free dental, 5-6 paid weeks vacation plus every other typical holiday etc.
he knew what actually entitled him to a share of the profits---were the SHARES in the company he also owned-----ah ha!!! miniscule part ownership---and the value of the shares fluctuated--RISK!!!!!!!so-------my suggestion to blue would be "profit sharing"???-- absolutely not. " ESOP???"--- quite possibly. "Bonuses???" quite possibly---but nothing remotely seen as an entitlement like a Xmas bonusESOP is the way to go if you want to pursue this line of thought---because it makes the employee ALSO a part owner and has him share the actual risks along with the rewards.
stephen
scrapr,
of course employees get paid first---or at least they get paid before the owner earns a profit.employee wages are an expense that must be covered before a profit is earnedin fact often employee wages are an expense that must be covered while the owner is generating a LOSS! , LOL.but that's got very little to do with wether they get a share of the profits before the owner. after all---they ALREADY got paid wages/salary.
how do I rank my obligations?????
1) customers needs
2) my family finacial needs
3) employee finacial needs i listed them as 1,2,3---but in reality they are soooooclosley related it's more like1a,1b,1c.1) customers needs come first because without the customers I have no shot at taking care of me or the employees
2) I come next because after all--that's why i went into business-to better provide for me and mine
3) unfortuneately employees come a close third----like it or not, I am a seasonal employer----i have no expectation that someone who worked with me last year will neccissarily be working with me this year--in fact i have no expectation that someone who works with me in the spring will neccisarily be around in the fall. i will pay you above market rates for the work you did this week----but that does not entitle you to a share of profits I may or may not have earned last week.-- it's an exchage of money for work( and unpleasant work at that!!!)
Best wishes,
going for a run
stephenedit--- I wanted to ad--- if i could take care of 2)--without1) and 3) I certainlkey would--- think of the headaches and hassles eliminated THEN!!!!!!
Edited 7/6/2008 7:29 am ET by Hazlett
"What has the employee risked?" A year with me LOL! Okay, lets agree that profit rewards risk. How much profit does one person need? Doesn't it benefit the company to spread the wealth by creating long term stability, if done right? Bob's next test date: 12/10/07
How much is enough profit?
How high is up? How much per SF to build a house?
depends
Company can do anything it see fit. Including paying out all the cash in the checking account ea month to employees. It's only fair! (j/k)
It does benefit the company to have long term employee. But different business are built different ways. I'd say walmart does not believe in this philosophy. (I've never been in a Walmart so I might be talking out my *ss)
dovetail made a comment about employees and owners both risking all. I don't think that is quite right. Employee is out of a job he goes to McDonalds or BK or Costco for a job. Owner might be there alongside his ex employee but the creditors only go after one of them.
I'm also toying with the idea of starting a profit sharing program at our company. I believe my reasons are similar to yours. Those that are arguing the employee doesn't deserve anything etc. are probably the same people that will bitch and moan they can't find good help.
I do think the poster who said people will come to expect it over time is dead on and I'm not sure how to deal with that.
The reason I want to start a profit sharing program is to encourage employees to take more ownership of the projects, once they realize a portion of their pay is based on the financial performance of the company I believe they will start to look a little closer at how money is spent and particularly what they can do to either cut or reduce production cost. The better they perform on job-cost the more they stand to gain. It will also help us retain the most qualified employees and it is one more benefit our "competition" will not be providing. I have a great team of people at the moment and would like to reward them at the same time I am further stemming my risk of losing them. I also see a gain as they will start holding each other more accountable.
One potential risk I see is an employee who decides to start cutting corners in order to reduce cost. I do not believe any of my current employees think that way though. In the end, I get the final say on what passes and what doesn't so they could potentially end up running up higher cost due to re-work. Someone that started doing that would not be around for very long though.
I've bounced around a few ideas and do not have any definite plans as of yet. The ideas I have thought of are:
Put up a yet to be determined percentage of company post tax profit to be divided by the lead carpenters and divide that portion equally among them. I've pulled a range of between 10-15% out but have nothing to really base that on. We have two laborers or apprentice, they would be given a smaller portion depending on performance and/or possibly just a year end bonus. To be fair, if one of the laborers make a big impact on something they could be given an on the spot one time bonus.
The other idea would be to look at the job's each of the leads performed and base their share of the profit sharing on the performance of their jobs. This could potentially be more "fair" however it would make the system difficult to manage, something I don't need. Also, could raise a valid point that certain individuals are given the tougher jobs with greater risk and is it fair that since they get those jobs they might get screwed in the end.
I thought about doing a per-job bonus system for better then expected performance but I do not believe that will work because it does not provide a balance against the lesser performing projects. I think the system needs to be based on company wide performance.
We also have a full time painter, I need to work him into the equation as well. He is one of my best employees and actually provides far more then just painting. He will either get tossed into the lead carpenter category or we will break out the painting portion of projects and base his chunk on our performance of the painting and finish work portion of the projects. I'm tinkering with the idea of starting a painting division he would head up, if that happens it would be easier to break his portion out.
I wanted to add employees will be eligible for the plan only after they have been here 1 year.
All in all, the system has to be fair and easy to manage, the last thing I want to do is start arguments or have to explain it multiple times nor do I want a system that is going to require a huge amount of office time.
Edited 7/8/2008 3:03 pm ET by CAGIV
" to encourage employees to take more ownership of the projects" well-- if you ask me( and you didn't ,LOL) nothing says ownership---like actual ownership---------which is part of why i think something akin to ESOP is the way to go.
Ask most business owners-- i bet they all say something like " I never would have worked this hard as an employee" what we are really talking about---is how to best divide a pie
in most families--who gets the biggest piece of pie???( Reminds me of a bit Chris Rock does----- when he talks about all he wants is the biiiiig piece of chicken. he will take any amount of hooey in his life, as long as he knows his family saves him the biiiiig piece of chicken for dinner. Best wishes, stephen
Stephen,
I like that Chris Rock skit and it holds a lot of truth.
I'm not saying that they need to act like an owner and have all the responsibility. The way I look at, The profit is not necessary something the owner get's to take out of the business at the end of the year. Sure they can get a decent share or bonus or what ever you want to call it as a reward for their work and risk. However I believe most of their pay should come from a fair salary as a cost of doing business.
The lions share of the true net profit should remain in the company and be divided to build a reserve for those rainy days as well as used to invest back into company growth. I'm looking at a sense of a business that has value and can live past or without the owner. Sure most remodeling companies do not fall into that category, I believe ours does, in fact I know it does as the owner has been absent for the better part of a year and a half now.
It's now my responsibility to take care of the business and I am working on the possibly of purchasing the business in the near future. If I do so, my goal is to grow the business and that can not be done if all the profit leaves the company. I have a fairly good starting point, my goal is develop the company further. I'm not looking to buy a job, I want a business that can sustain itself beyond me. I'm not saying profit sharing is a means to that end though.
I still believe a profit sharing plan of some nature will promote the RIGHT employees to look at things a little differently. 99/100 employees probably wouldn't get it. I am fortunate to have found a handful that I believe will. I'm also not suggesting they are going to get a lions share of the profit either, it will more then likely be 10-15% split amongst them, maybe 20 but that would be pushing it. I feel it needs to be enough money to get their attention and at the same time allow the company to protect it self and reinvest.
CAGIV,
an interesting thing is---that you are projecting a lot of what YOU believe onto what you think the owner should do with HIS business.If you do eventually buy the business----it will be interesting to see if your beliefs changeafter all--YOU believe something apparently different than the current owner doeshow will you react if YOU are the owner--have things formulated YOUR way---and the employees feel YOU should be doing something diffently. You DO know that it MAY make extremley poor sense,TAX wise---for the owner to take most of his compensation as salary??????nice thing about owning your own business----is that YOU can attempt to arrange things your way---the way that suits YOU.That is the biggest thing I like about my own little operation----every day I have to step up and put my money where my mouth is---and live with the consequences------there is a rush there that i can't imagine any pay packet ever providing---the chance to formulate a plan--put it into action and then live by the results. It's( for me) being fully alive--or perhaps a better analogy is---in the world of sports---it's the difference between being a player---and a spectator.BTW--as an aside--- I think earlier Bill mentioned Lincoln Electric( I think they make welding equipment) this is a fairly local company----years ago I read a in depth article about this company. they have an extrodinary profit sharing system----BUT-- the employees share the risk. the employees wages were quite modest----below market really---but if the company did well the profit sharing packets were tremendous. It's been years-- but i seem to remember the figures cited for guys on the floor------base pay might have been something like $17,000/year( article was probably in the '80's)---but the profit sharing for floor workers might have been$30,000----or nothing the way I handle it---is that basicly i am a seasonal employer---guys here in april---probably won't be here in oct.----I view each and every project as an individual investment---and each project is readily quantifyableso--in exchange for the temporary nature of their employment--there wages are higher than the market rate for their skill level. A guy who might have been THRILLED to start somewhere at $9/hourx40 hours instead gets paid$12 . guys who would have been happy to start at $16----get $20 and so on
additionally our projects are readily quantifyable------say that today we want to do THIS side of a customers roof? If we get THIS side done in 5 hours-- I am THRILLED to pay for 8 hours and everyone goes home early. If THIS side takes 10 hours---- I STILL pay for 10 hours
so--our guys this spring were being paid above market rate per hourAND they were being paid 8 hours for what was averaging out to 5-1/2 to 6 hour days
that's the best I can do---and it is MY responsibility to make sure that corners are not cut by the workers to speed up the process.typically i point out" hey--we are gonna be done today by 1:00---we HAVE the time ----we might as well do this RIGHT"
the guys,on the whole respond to that-----AND they put pressure on anyone who doesn't pull his weight Best wishes,
stephen
Stephen,
My views do not differ as much as you might think from the current owner, I'm not sure where you read into that. There is a good reason I have been given control of the company and the ability to arrange things the way I see fit. When I say I have been running the company I mean it, he has simply not been involved. I doubt my views will change much if/once I own the business.
As for tax advantages I will say I am not knowledgeable in that area though I am smart enough to work out the details with the advice of an accountant. Either way, the bottom line I believe in is that the COMPANIES profit can not be doled out in full or large part to the owner IF the goal is to build a company that can stand on its own. To sustain and grow the business a good portion of that profit needs to remain within the company. The owner's total compensation needs to be proportionate to the size of the business no matter how the details of that package are configured.
Your business sounds very different then ours and what I am trying to sustain and build. When you retire who takes over your company, can your company go on past you or are you the company? If I understand correctly from what I have read in the past in your posts, your business relies heavily on your presence and your work. I'm not saying there is anything wrong with that and it's certainly been able to give you what you want and need, however it differs greatly from what I have here and what I am going for.
If I do end up purchasing this company I won't have a problem with my employees making suggestions as to how things are done around here. Frequently my guys come to me with suggestions as to how we should do things and what might improve the business. I'm always willing to listen to ideas and get another perspective on what ever the issue is. I frequently solicit the opinion of my guys from everything ranging from business to production matters if I think the individual will have something to add. That said they know that at the end of the day the final decision is mine and they respect that. Not all of them have in the past and we have had people that liked to push their own agenda to far, they don't stick around very long.
I beleve you mentioned that you believe that most of an owners salary should come from a salary as a cost of doing business if your owner has been absent for a year and a half or whatever-- how is he earning that salary---you can't have it both waysand---you better investigate the financial end of this in some more detail because i believe your stated belief-may collide with reality pick a number out of the hat--any number--10,000-------50,000, 100,000 let's say $10,000 for the sake of discussionsay your business could generate $10,000 in compensation to the owner
in 5 minutes an accountant can show you how your hypothetitcal owner is MUCH worse off taking $10,000 in salary----as opposed to taking $5,000 in salary and $5,000 in some form of dividend
so---what you say you believe--if you enact is going to directly penalize you and most likely affect your ability to achieve what you say you want to achievealso--- you need to have a firm idea of WHAT form---sole Prop., LLC or corp. you are gonna structure this business AS because "retainig earnings" in the business just isn't as simple and easy as you would seem to indicate---in at least 2 of those three forms---once those earnings are generated--they are probably a directly taxable event to the ownerin all seriousness??? possibly the best thing you can do is do some concrete research on exactly how and why you are gonna structure things a certain way--because currently you may well be forming opinions on how you believe things should be done that are gonna collide hard with actualityin my case I have absolutely ZERO interest in forming my operation as a seperate entity that will have a life beyond me---zero interest--quite the opposite in fact.
i maintain it as a seperate entity for some liability issues---but basically I concentrate on net worth i am not terribly interested in income--or on structing a business that may pay me an income in the future---I am interested in an operation that most favorably builds my net worth in the here and nowhow would i prefer to spend an hour of my time---generating $100 of income( which is taxable) or increasing my net worth $100 ?increasing my net worth wins almost every timeI track my hours worked each year-- i spend roughly the same amount of time in a typical year arranging THAT as I do actually working on a roof let's say you need $x per year in income---and 500 hours of your work will generate that---what are you going to do with the other 1500-2000 working hours per year??? how are you going to BEST invest those 1500 hours or so of other effort???? that business you say you want to buy----can quickly end up owning you if you haven't thought this through ahead of time Very best wishes,
stephen
I agree with what your saying to a large extent and fully admit I do not understand the tax implications of different methods of removing money from the company.
The main point I am trying to make is that what ever he owner's pay may be in total must be proportionate to what the company can sustain and still provide the company with a profit that can be re-invested as well as build a cash reserve. That is IF your goal is to build and grow a company.
I never said the current owner is earning his salary however he does draw one as the ceo.
The company is currently a C-corp and if I purchase "the company" I would set up my own C-corp to purchase certain aspects of the business, however I wouldn't be purchasing the company in whole perse. Reason being I am not about to purchase the liability for everything this company has done in the past, this is on the advice of a layer and an accountant, both of whom I trust and believe to be fairly well versed. As I understand with a C-corp I pay tax on my income and the corporation pays it's own tax on it's profit. With a Sole prop or S-corp the profit or income of the business flows through to my own personal return.
I will not pretend to fully understand everything in regard to buying the business or how to structure the owner's compensation right now. As I said I will consult with a lawyer and an accountant further when the time is right. I think the difference we have is that your business is set up to directly and fully provide the most it can for you, and I see nothing wrong that, what I am wanting to is something a little different.
I agree with you that I need further research, I am currently only at the very start of looking into purchasing his business along with a few other oppurtunites that have presented themselves.
I am gonna send you some information that you might find helpfull that i just don't want to plaster all over the internet hope it helps you,
stephen
stephen, I got it, thanks, I read it but don't have time to respond just yet.
Neil
yeah Carpentry is such a low risk occupation...
that is why workers comp and liability insyurance are so low...WTFRYS??.
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"After the laws of Physics, everything else is opinion" -Neil deGrasse Tyson
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If Pasta and Antipasta meet is it the end of the Universe???
>>>Profit is for risk. What has the employee risked?Their job. And if you add shares in the company (as in an ESOP), the employee has put all their eggs in one basket. And let the fox guard the hen house.In my opinion, any bonus should be based on ONLY what the employee has control over. Profit sharing is really just a form of a pension plan.
Bryan----- just thinking about risking "their" job whose job is it, really?
it's not an asset---possesion of "it" is illusionary---when a plant scales back from 600 employees to 220 about 380 people find out who owns what ? ( ask my Dad, LOL) as far as all your eggs in one basket
nothing says workers involved in an ESOP--------can't have assets in other areas as well.
Best wishes--Stephen
Granted, a different business, but I've worked for a small (12 employee) industrial equipment business where the owners established what they wanted as ROIC, and any profit after that was divided up - 1/2 to the owners, the other 1/2 equally shared by all employees.
I worked for a similar outfit where the employee portion was done as a percentage of wages, ie, higher paid employees got more of the bonus money.
It encourages employees to maximize gross profits, and minimize expenses, because they know that they'll get another piece of the profit, so they want to help make the profit as big as they can.
I'm getting some input from other industries. It appears that no one in the construction industry has ever been involved in a profit sharing plan. I do agree with an earlier post that lobbied against bonuses. I don't want a plan that looks like a bonus plan. Bob's next test date: 12/10/07
Lets talk profit sharing.
If I understand correctly "profit sharing" has to be federally mandated.
Therefore, lets say companys profit is 100k and you want to give your best employee 10% for his/her great work throughtout the year. Under federal regulations you cant give the employee a check for 10k and send him on his way. The way I was told it had to be the employer had to decide where that money was to go.
What ??????????????????That makes no sense at all..
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A-holes. Hey every group has to have one. And I have been elected to be the one. I should make that my tagline.
bill,
Lincoln electric is a fairly local company here.
i actually gave an estimate( but did not get the job0 to one of their employees this spring he tells me that there have been times when the "bonus" has been 2-3 times their annual salary/wages.
needless to say---he is VERY enthusiastic about working there!
stephen
Maybe if you just worked in a "bonus plan" that would give the money directly to the employee. But all that is going t do is have employees talk to eachother about how much bonus each got and create dissention among those that got "less than they deserved".
I worked for a guy that gave christmas bonuses and it was nothing but negative on the receiving end. "how come he got more than me?" or "all I got was $400, last year I got $300 what the f is that?"
Never will I give a year end bonus.
blue,
i read a book within the last year or so----- I believe it is called
" the company we keep"
i will try to remember the authoractually we had a short discussion of the book here---possibly with shelternerd????? It described how one small company implemented what you seem to be wanting------it WAS a small construction company--- I think on Martha's vinyard---Cape cod---something like that.
stephen
blue,
i looked the book up
"The company we keep:reinventing small business for people,community and place" by John Abrams(2005)
Stephen
I highly recommend the book. I worked in a "building cooperative" back in the late '80s. It had its problems. Today we are striving to find ways for members of the company to be able to improve their incomes and not have to always leave the company to do it. Profit sharing in construction is not as uncommon as you might think.arthurhttp://www.thesmallbuildingcompany.com
Jim
You might look up Jack stack and Springfield Manufacturing. He is published regularly in Inc magazine. That is more Open Book management. Not sure on the profit sharing and how that might work.
Jack Stack is pretty well known.
I gotta go to work or I would get you a link
I'll look for a copy of that book too Srapr. Thanks. Bob's next test date: 12/10/07
Yes, Stephen, I think that book might be the answer. I'm heading to the bookstore today. Bob's next test date: 12/10/07
I worked in a kitchen dealership as an installer for a while and they had a profit sharing program. At first I was pretty excited but the money was directly deposited into a 401k. It never actually amounted to much and after a while I never really thought about it much on a day to day basis. On the other hand, I worked for a GC when I first started and he have small bonuses at the end of the year and while that was actually less money than the profit sharing it seemed to make me feel better. I was thinking along the lines myself of giving out a small bonus (equal amount to everyone) when we do well on a job. Even if it is a small job. It might only be $50 or $100 each time but if we do well 10 times a year to merit a bonus a person could get some real extra cash in his / her pocket. I am by no means experienced at this, it's just some radom thoughts I had about starting a bonus program myself.Jason"it aint the work I mind,
It's the feeling of falling further behind."Bozini Latinihttp://www.ingrainedwoodworking.com
You've got it totally.
If you want employees who are happy to dog it when you're not looking, run up the clock, d*ck around waiting for you to solve every little problem for them, waste your materials and treat your tools like sh*t? Then pay them whatever hourly pittance you can get them for and take all the gravy, if there is any, for yourself. You deserve it totally in that case, because you're taking all the risk.
You want folks who treat the company's money like it's their own? Find smarter ways to use the materials? Stay late to deal with a problem rather than burying it, or to meet the schedule? Anticipate problems and avoid them next time? Then give them a piece that shows them, in the only terms that a business can truly express its gratitude (ie. money), that it's in THEIR interest to treat the business as if it's their own business. But don't expect this performance from mere hourly employees!
Yes there are ingrates who take anything given to them for granted. Yes, there are folks who will try to have their cake and eat it too (high salary AND high profit sharing expectation etc.). But there are plenty more folks who realize, right quick, that when a business treats them fairly, and shares its profit fairly, it's in their own personal interest to make the business a success.
Our place had a profit sharing scheme in place from the day it was founded (seven employees). We're about 130 now, and about 100 of them are shareholders- thirty are new hires. You wouldn't believe the innovation, calculated risk-taking, hard and smart work and collaboration that goes on in this place simply because respect and participation in the profits of the company are engrained in the company's culture.
The folks who work salary get more bonus than the ones who work hourly and are paid overtime when the company requires it of them. And both overtime AND productivity during work hours are figured into the bonus calcs.
Interestingly enough, some of what you're mentioning is discussed in the book, 'The Speed of Trust', by Stephen R Covey. He discusses the idea that, if we always structure our business dealings assuming the worst of our employees (and customers, I might add), then we're shortchanging ourselves. Stop making all the rules aimed at the bottom of the barrel - aim high, and accept that you'll be wrong occasionally. But in the end, you're better off FINANCIALLY.
Sure, you'll have a few slackers. But if YOU hire well, then the good people will be more motivated, and that will more than make up for the few slackers. And you can still weed out the slackers.
"aim high, and accept that you'll be wrong occasionally."I agree with that philosophy wholeheartily! Bob's next test date: 12/10/07
Low expectations generate low performance. And lots of companies say that their chief asset is their people, but greed gets in the way of actually treating them as such.
Not surprisingly, what we've also found is that the performance and morale of the key staff- the ones that get it- is improved every time you fire one of the slackers or dolts. Nothing shows good employees how little they're really appreciated than continued retention of people who can't or won't do the work. We don't automatically cut the lowest performing 10% like some firms do, but we've learned that it's best to part ways with a bad hire as soon as possible for the benefit of the group, not just for the benefit of the company.
Our company is also unflinchingly loyal to its staff once it's decided they're keepers. If the shareholders and the employees divided all the retained earnings between them and left nothing for the business, there'd be no war chest to weather slow periods- and no company shortly thereafter.
What you should notice from this is that it's VERY tough to accomplish this in a public company- which is why I'm done working for them. Public company = idiots for shareholders. Private companies are not immune but at least have a hope.
I think with a small business a cookie-cutter plan may not work well. With a large company the workers can be made to fit the plan. With a smaller company, the plan might best work if the plan is tweaked to match the employees.
My profit sharing plan was tailored to the number, the make-up, and the quality of employees that I had.
My first two to three years in construction I had a horrible time finding qualified, driven, and dependable guys that I could partner with. I eventually found four. Two were pretty smart, the other two not as smart as they thought they were. All were fairly hard workers and dependable.
We'd do 3-4 custom homes per year. I needed to be able to depend on these guys to act properly when I wasn't around, so financial incentives were in place. Three of the guys were married, their wives were brought in during the discussions on profit-sharing too. With the wives knowing the potential, and especially after getting their first distribution checks, they were pretty amenable to their husbands doing well at work.
Some financial aspects of each project were broken down and discussed with the guys up front. Not all, but some. If all went well, there would be a certain profit margin threshold for the business itself, anything above that threshold would be divvied up between the four guys. Any shortcuts they took, or bone-headed moves that cost me money? They were not allowed and remediation would obviously undercut the numbers. I had to financially spank two of the guys over one issue just once, it was significant enough where it was the only major problem I ever had.
By having the wives on board, they were behind things running smoothly at work for their husbands.
I could have made more money for myself, but with how many headaches, how much additional babysitting, and for how long? The incentive to these guys was to be at work when they were supposed to be at work, and when at work, to work efficiently, and very importantly to me, when problems arose, for them to learn to solve problems and not ignore or bury them.
By having more than one project going at a time, if one job was stalled, efforts could be put towards another jobsite.
One guy left after a couple of years, we brought in another to replace him. A couple of years ago I sold the business to them, they almost immediately changed the business model (as much of one as I had) and all eventually fell apart for them. They simply got greedy.
I had another non-construction company that, with the exception of a handful of people, all pay was solely based on commission. For that business model, it had to be.
With the construction business, one of the things that irked two of the guys was the fact that I had a profit threshold in place at all. Why did I get to keep the first X%, and they "only" got to split everything above X%.
It's just like the other guys in this thread have replied. The business was mine. The risk was mine. If the chit hit the fan, I was the one who ate chit. So the first chunk of profit was mine so I could afford floss to clean out all the chit between my teeth.
The fact that they got any profit sharing at all, that was for the increased responsibility that they took on at each jobsite. I recognized their efforts and that's how they were rewarded. They got paid to work regardless of how well they worked with a weekly paycheck. They were then rewarded with profit sharing if they worked smart.
And as they found out after they bought me out and failed, it ain't as easy as it looks.
I miss it. But really? I don't miss it. Maybe just a little.<g>
I didn't read the whole thread. But I once worked for a company that paid profit sharing, so I thought I'd tell ya what I thought.
The company I worked for gave 18% of the pre tax profit to the employees.
You had to work there for 3 years before you got into the profit sharing plan.
The profit was divided up by points. You got one point for every $1,000 of your total pay for that year, plus one point for every year that you had worked for the company.
I think the program made a lot of difference in the attitude of the workers. Then when something got screwed up, they realized that part of it was coming out of THEIR pocket to.
I think that the program also increased longevity - It made good employees think twice about leaving.
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In a way it made it easier for me to save money. Had the company spread my pay out over the whole year, all the money would have likely just dribbled away a bit at a time. But when I got a big check at the end of the year, I used it for projects, such as building a garage or doing other remodeling.
I hope you can find a way to make it work for ya.
Thanks Boss, I'm grateful for the theoretical suggestions by others and I'm grateful for the real life experiences too. Bob's next test date: 12/10/07
There is one thing I forgot to add - There was a certain amount of suspicion built into the profit sharing. The employees would sometimes speculate that the owner was "cooking the books" to make the profit sharing look as good or bad as he wanted it to. There was also some grumbling when something new was bought. Like if a new forklift showed up, there would be guys that said: "He just bought that so he didn't have to pay as much profit sharing".I guess it was probably unavoidable - You have suspicious people and jerks no matter where ya work.
The only reason some people get lost in thought is because it's unfamiliar territory.
I think that is the key fundamental problem with creating any type of profit sharing program. Everyone becomes a Monday Morning QB. Bob's next test date: 12/10/07
If only you could depreciate an asset like a forklift in one year...!
You'd be surprised what meaningful ownership and profit sharing does around here. Yep, it generates some armchair QBing about the management's decisions, but believe me that's better than NO QBing of their decisions other than from the shareholders at the AGM or from the board once per quarter! Mind, we've got employees on the board too.
As an engineer I've had to justify my design decisions to tradesmen on the shop floor (some of whom have 50x the shares that I do)- and I LOVE that because it makes me a better engineer. Take the piss and vinegar out of it and you come away with helpful suggestions for how to do the job better next time. Some animosity between engineers and the people who implement their designs is inevitable because hindsight is 20/20, but because of employee ownership and profit sharing at our place, the guys know why understanding and following my design intent is critical to the project's success: they've all been in the field and seen what mistakes not caught on our shop floor can cost us in terms of reputation AND dollars. Since it's both their dollars and their company's reputation at stake, they are as anxious as I am to control the quality of the product we make. Our business model also permits me to innovate and to take higher calculated risks in my designs with a great deal more sleep-at-night factor- because not only can I check critical items of my design while it's being built, I also know there's a crew of guys who've got my back if something should go wrong.
I also like the "forced savings" part of it. We take a below-average salary so it's shared pain for shared gain, and to keep our "fixed" costs low. You can't borrow on the basis of a bonus you can't count on, so that's some discipline right there. It forces you to live below your means. If you're disciplined about squirreling it away when it does come in, you can pile up a nice nest-egg for yourself.
Could you tell me more about having employees on the board? Like how many, what level of employee, how big the board is, how you got them there?
It's a private company so we can do what we want, within the confines of our shareholders agreement. Credit to our founders, the joint was set up properly in the first place.
The profit sharing policy is board policy- the management can't monkey with it too much to line their own pockets.
The share-holders agreement stipulates that two employees elected by the employee shareholders sit on the board for fixed terms. It's a bit of an "old boys club" because the employee shareholders get one vote per share. The founding employees have the most shares and they generally, but not always, make sure that one of their own takes these seats. Two senior managers (employees but also major share-holders) also sit on the board. The remaining six including the chair are major investor shareholders or experienced businesspeople hired for guidance (usually with some share ownership as part of the compensation).
The company is on its way to employee control, at which point the employees will ensure they have more board seats than the non-employee investors.
Jim, the company I work for (different industry) uses the Economic Value Added (EVA) plan. It was developed and I believe sold by Stern Stewart.
There is tons of info if you Google it but as an overview the company sets specific goals and measures them. If most exceed plan, profit is enhanced. Based on this bonuses are awarded.