by Corey Rosen
[Editor’s note: The launch of an ESOP doesn’t magically transform how employees view their jobs. So how can companies get people thinking and acting like the owners they are? Corey Rosen’s new book (left) offers a wealth of information and examples showing ways to do just that. We present a short excerpt here, illustrating how three companies have developed custom tools to help people understand and use the numbers that drive the business. Get the book at this link–it’s $35 ($25 for NCEO members) and worth every nickel.]
Pacific Outdoor Living
Pacific Outdoor Living is a leading Southern California outdoor living and landscape design and construction firm. It set up its ESOP in 2017. That fit well in an existing open book, high involvement culture. As part of that, Terry Morrill, the CEO, developed a booklet called “Am I Making Money?” It is an easy to read, illustrated guide for all employees, with clever cartoon-like characters. The book walks employees through understanding how much projects are making and what the various components are.
That is the static part. The interactive part is a software system everyone can access. It is essentially a job status board that looks at each project, how it is progressing, who is responsible for each phase, etc. Employees can track material delays, labor hours, labor days, wages paid, gross product and gross product margins, commissions, and sales price. Estimating and scheduling software are also used. From these, employees can track whether projects are making money or not. The schedule board and job management system total the gross profit made at the end of each day, so there is no more waiting for monthly or quarterly reports. If the hours involved are more than what is needed to hit targets, teams can talk about ways to solve the problem. The system has worked so well that they now do coaching with other contractors wanting to see how it is done.
Barclay Water Management
This 100% ESOP-owned company…has more than half its employees in the field on any day selling Barclay’s products. Most of its contracts are for a fixed price and term.
For many years, Barclay paid its sales staff incentives based on total sales. But soon after its transition to an ESOP, it started to pay based on contributions to overhead and profit. Under the prior system, salespeople had an incentive to do whatever was needed to make the customer happy, such as delivering a resupply overnight or providing an additional service at no cost. Under the new system that would reduce incentive pay.
To make this work better, an engineer at Barclay developed an internal software system that every salesperson could use and update on a real-time basis. As any modification was made, the salesperson would immediately see the impact on overhead and profit—and so could all the other salespeople. Salespeople are competitive and started looking at just how well their peers were doing and, even better, trading ideas on what contract changes they could charge for or provide differently without losing customers.
This system operates within a larger structure of a long history of sharing financials with employees quarterly through a newsletter and president’s discussion, as well as a detailed discussion at the annual meeting.
Van Meter Inc. is a 100% ESOP-owned wholesale and electrical supplier in rural Iowa. After building a base level of ESOP understanding for its employee-owners, its ESOP committee saw the next step as finding ways for each employee to contribute to increasing the stock price. To do that, employee-owners need to understand something about valuation. The committee quickly realized that valuation analysis is long and complicated, so they looked for a way to translate the factors that drive value into easy-to-use terms. The result is the “your two cents worth” campaign, which the committee launched in 2005. Based on current numbers and some simplifying assumptions, the campaign is built on a simple formula: improving VMI’s bottom line by $5,000 creates an expected increase of $0.02 in the value of a VMI share. This equation doesn’t capture the complexity of the actual valuation process, but it does close the loop between each employee and the value of the company. It also makes for easy math to show what happens to the value of the stock if all employees do their own two cents worth, something that the ESOP committee emphasizes in monthly updates about operational improvements….
These quick takes provide a variety of more granular ideas on elements of an open-book system. In each company, they are part of a larger process. In your own company, enlist your ESOP committee to help come up with ideas, working with the CFO and team leaders to identify which numbers to share and what to do with them.
It’s Not Just the Money
Finally, companies should not frame sharing and using the numbers solely in terms of people’s monetary self-interest. It’s tempting to do that, but “WIIFM” is not a sufficient framework. People need to know that when employees have ideas that improve the bottom line, they are creating value for all of their coworkers too. Employee-owners are motivatedby the sense of community that employee ownership can provide. Making the lives of their colleagues better is a powerful motivator. In fact, in general, people are motivated less at work by calculations of rational economic return than by, as author Daniel Pink says in Drive, having a sense of purpose, autonomy, and mastery. Sharing and using the numbers can make that happen.