Reward Strategies

Profit Sharing

Profit sharing is key motivator in the market place. There are several schemes in use including:

1. Commissions on Revenues, which are simple to implement and ideal from the sales staff point of view, but take no responsibility  for whether the revenues generated actually create wealth, particularly when discounts offered by sales staff are utilised to increase sales ;
2. Share of gross profits which are better than revenue commissions but fail to recognises the in direct costs and overheads incurred;
3. Share of net profits before taxes. Ideally suited from the companies point of view but fail to motivate when not properly implemented as the risk is transferred directly from the company to the employee.

The key to successful profit sharing is to design a model that motivates the employees and shares the risk of growth. Successfully designed profits share models separate out those costs that are in the control of the employee from those that are in the direct control of management and setup the profit sharing scheme shares to account for both.

Senior Manager reward and remuneration

Reward strategies are usually based on their ability to create and maximise wealth for the shareholders. Techniques that are used include:

1. The use of overarching measures like EVA to measure the wealth created and to provide senior managers with a share of the incremental EVA or share of surplus EVA over the budget (MVA) given to managers.
2. The use of share options giving managers the right but not the obligation to buy shares at a specified price and /or presenting mangers with shares of the company based on targets achieved;
3. Capping these options mitigates the risk of the firm

Key benefits from designing an effective reward strategy for all classes of staff are:

1. They link reward and remuneration with the strategies of the firm and motivate staff to take ownership of and pursue what is important to the firm;
2. They minimise the risk of the firm by sharing both the risk and reward with their employees;
3. IF properly designed they take staff away from continually negotiating salary increases to negotiating for increases in their share of profit de-risking the company to a great extent;
4. They motivate managers shift from managing profits only to generating  wealth.

Allan Rodrigues of The Business Farm has considerable experience and success in designing and implementing performance management systems, and reward remuneration strategies. If you do have any questions please feel free to contact him  on allan.rodrigues@thebusinessfarm.com.au