Leverage openness and honesty to increase profitability.
How closely does your employee compensation map to business performance? If you want a team that’s as excited about achieving your company goals as you are, you need the right culture, to be sure. But you also need the right compensation model that incentivizes them to give you their best.
What is Aligned Compensation?
The best compensation models are the ones where everybody wins. Aligned compensation is the idea that when the company performs well, employees receive an additional benefit. When your team sees the direct link between their annual bonus and the company’s bottom line (or gross profit line, in many cases), they’ll feel a sense of ownership for helping the business reach its goals.
Many companies offer bonuses to their team members, but the rationale behind them isn’t always apparent. If your bonus structure is opaque, unclear, or seems to be “a given,” then you won’t have the right incentives to get the most out of your team.
Aligned compensation can clarify why a bonus is given, when it should be offered, and how much it should be for. Not only do you create a healthier culture, but you can significantly reduce stress and anxiety, for both you and your employees, when end of the year “bonus time” rolls around.
The Open Book Management (OBM) Methodology
Open Book Management (OBM) is one popular model for aligned compensation. Matt Gramer, a Crews Consulting Group client and CEO of Natureworks Landscape, has been using OBM since 2018.
We spoke with Matt to get his insights on his company’s version of an aligned compensation model:
What is Open Book Management (OBM)?
OBM is a compensation philosophy and methodology developed by Jack Stack and originally laid out in the book The Great Game of Business™. OBM is technically defined as “the business practice of creating transparency by sharing financial information with employees. This includes financial education for your employees and showing them how their production influences the finances. It’s really about connecting the dots for everyone in your organization showing them how their individual contribution impacts the business and giving them some skin in the game.
Why did you move to a profit-sharing model for your company?
I believed our company would perform better if we invested in teaching how the business makes money and our employees were incentivized collectively, and that’s proven to be true. I also wanted to bring in more of their ideas for improvement: often the best ideas for improvement or innovation come from the people closest to the work. And finally, I really liked the idea of offering financial education. That’s an important part of OBM, and I find that fiscal education empowering for my team members.
What numbers did you choose to track for your company?
We focus on gross profit, and every team member has their own number that ties back into GP. Most of our team can’t influence overhead (costs like rent, fuel, marketing, executive salaries, etc.), so we try to incentivize and reward based on what our employees can control.
What does OBM look like in practice?
It’s a game that we all play as a team in real-time. Our numbers are posted publicly for everyone to see. We keep score together: we celebrate when we win and “study the tape” when we lose. We review our numbers in a weekly meeting and send out a weekly email to keep communication open and give everyone a clear line of sight.
For 2020, the incentive was that if we achieved our target GP dollars, everyone received 100 hours of pay, which translates to 2.5 weeks. That amount can be scaled up or down depending on performance.
Did you run into any challenges implementing OBM?
We had several failed attempts to implement this model before getting it right. We fortunately made a good decision to hire an outside resource to help us develop the program in a comprehensive way that ultimately set us up well for success. It took some trial and error to find the right numbers to track, but we got there. If we’re down to the wire to meet our targets, the end of the year can be more stressful than I’d like it to be.
How can an entrepreneur interested in this model set themselves up to be successful?
Make sure you’ve got a culture of honesty and transparency in your company. And be mentally prepared to give some of your profits away. We’ve given back 20% or more of net income annually, but OBM has really helped us progress and grow our business toward our next revenue goal of $15 million. It’s an investment in our people, our business, and our future success.
A big thank you to Matt for sharing his experience with a profit-sharing business model. OBM is one of many ways to set up aligned compensation for your team. On a high level, here’s what makes an aligned comp plan successful:
–Honesty and transparency around your numbers
–Targets that have a direct correlation to your team members’ activities
–Clarity on your employees’ efforts contribute to the targets
–A “win-win” mindset for you and your team
If you need help aligning your compensation model with your business strategy, let’s talk. Contact us to speak with one of our small business consultants today.
Founder & President
Crews Consulting Group
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