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BUFFALO GROVE, Ill. (Profitable.com) With the economy struggling to regain its footing, most owners of small businesses are reluctant to increase employee compensation because they don’t have the money, or fear that raising their costs will reduce profits, if the growth of the economy in 2011 stalls.
“There are, however, creative ways to increase compensation without reducing profits,” said Tom Ryan, Marketing Director for ABS, a Chicago area management consulting company.
“We have developed proven solutions to help business owners grow their businesses, without requiring new investments of capital, by utilizing creative compensation plans to increase productivity. The implementation of a ‘productivity-based excess profit’ incentive plan allows a business owner to incentivize key employees to work harder to increase profits without having to pay out any additional compensation for their work until the extra profits have been realized,” Ryan said. It’s the proverbial “carrot” approach to increased production and compensation.
Under these dynamic compensation plans, employees are internally motivated to make more money which in turn drives profit-producing activities within the business. Moreover, the employees are rewarded only when their hard work pays off with increased profits. In other words, if the employee works harder, but the work doesn’t result in any increase in the profitability of the company, no additional compensation is paid.
The key to turning these compensation plans into win-win situations for both the owner and the employee is having a professional review of the relationship between activity and costs. Only then can the owner be sure that the plans are financially sound rather than being nothing more than well-intentioned guesswork where payouts are made without the certainty that profitability has been increased.
Ryan recommends a year-end review of the entire business operations to determine what areas are best suited for implementing a “productivity-based excess profit compensation plan” for 2011. In addition, Ryan said that these innovative compensation plans “pay for themselves.”
While many companies have year-end bonus plans to reward employees with cash bonuses when a company does well, those plans are not effective if the goal is to boost productivity.
“Nobody is going to work harder in January to get a ‘possible’ bonus next December,” Ryan said. “It’s just against human nature,” he said.
Ryan said the key to designing an incentive plan which will drive productivity increases involves two key components. First, the plan must be designed so that the payout is made close in time to the activity being rewarded. Second, for the plan to be cost-effective, the business owner must know his true costs and the margins involved when productivity is increased.
“Guessing what the incentives should be is a formula for financial disaster,” Ryan said. “We have seen businesses which were losing money on their incentives because they didn’t know their true costs and margins, and as a result, were paying out more in bonus money than they were making in profit from the extra production,” he added.
One ABS client who makes the plastic housing for mirror assemblies for Ford, General Motors and Chrysler said that the implementation of a productivity-based excess profit incentive plan boosted productivity and company profits by creating friendly competition between the company’s two shifts. The incentive plan created a win-win situation for both the owner and the employees, while adding some fun to the working environment at zero cost to the company.
Another ABS client who owns a tire store said that employees worked harder because they now had “some skin in the game.”
Ryan said, “At a time when small business owners can’t look to the rising tide of the economy to increase sales, innovative incentive plans are the best way to improve both productivity and profits for 2011.”
ABS was formed by a group of business professionals who collectively have provided business analytical and consulting services to thousands of clients and have been involved in building some of the fastest-growing analytical, management consulting and strategic tax planning companies in business today. In coming together to form ABS, these highly experienced and qualified individuals decided that they wanted to build the premier consulting company for the owners of small and medium-size businesses. In forming ABS, these professionals have committed themselves and ABS to a standard of quality in the delivery of business analytical and consulting services never before seen in this marketplace. The core group of ABS has been working together for over 11 years and many have been working in the consulting-related fields for over 20 years.
For more information, go to http://www.abs-us.net