What kind of profit-sharing/performance incentive structure should I push for?
June 6, 2011 8:49 PM   Subscribe

What kind of profit-sharing/performance incentive structure should I push for?

I'm an employee of a construction subcontractor (we design and install electronic systems for big fancy houses) and will be meeting with my boss in a few days to talk about introducing some kind of performance-based incentive system for the company. As an employee, I'd like to convince him that giving his workers a respectable stake in the success of our projects will be a good motivator, and can be implemented without creating major negative side effects.

We're a very small company (6 employees) and are looking for some way to reward the team (or maybe individual team members?) for completing projects in ways that save time and/or increase profitability. Each project is worked on (sometimes to varying degree) by every member of the crew, and we each have our specialties and are paid differing wages based on those specialties and our seniority/proficiency. We need some way of determining how to allocate bonuses when we exceed our labor estimates.

The most obvious metric for measuring this is the final labor tally vs. the project proposal; did we complete the job with labor hours to spare? Beyond that, though, I'm not sure how to structure the arrangement. We could multiply the total difference in hours by some percentage and divide the resulting figure equally between the employees that worked on the project, or we could divide it using some formula that took the employee's wage and share of the project into account. Alternatively we could try to break projects down into subprojects that are assigned to individual employees, and for which they are alotted a budget in hours and awarded a bonus for coming in under budget.

Have you worked for a company that did something like this? Did it work out well? I'm especially interested in methods to avoid fostering resentment between employees, to fairly determine performance metrics without introducing too much overhead, deal with extenuating circumstances that lead to unforeseen extra work, and ensure that customers don't suffer from reduced quality of work.

The more I write here, the more I convince myself that the only right way to do this is not to mess around with metrics and labor accounting but to just give everyone a direct stake in the total revenue of the company (something I think my boss would be very reluctant to do.) Is that a battle you've won? Is there a middle ground? Do you know of any good resources that outline details or give examples of systems that work?
posted by contraption to Work & Money (3 answers total)
As an employee, I'd like to convince him that giving his workers a respectable stake in the success of our projects will be a good motivator

The fact that you've decided you want to do this even though you don't quite know what you want to do, and even though you see a lot of problems with the idea, makes me think you should back up a few steps and look at your own motivations a little more closely. Do you currently feel unmotivated? Are you simply looking for a larger slice of the pie? Have you considered other ways to solve these problems?

As an industrial tradesman (patternmaker) I worked for two companies that tried such incentive systems, and both were very problematic for reasons you seem to anticipate.

The first company's scheme was to offer a bonus to everyone if the overall profit margin rose above a certain level during a given month. It was immediately obvious to everyone but management that we were in a Tragedy of the Commons sort of situation wherein any one employee's failure to exert himself would cancel out the special efforts of others. Furthermore, since employees couldn't peruse the company's books, we had to take management's word on whether that profit margin had been reached. It *never* was. We *never* got a bonus. The scheme may have generated some small, short-term benefit for the company, but in the long term it only created resentment and distrust on all sides. Some suspected that the target profit margin was unrealistic. Others suspected that management was lying about how much money had been earned. Employees who'd tried especially hard to earn the imaginary bonuses felt like chumps.

The second company had a profit sharing arrangement that benefited only employees who'd worked themselves into the unusual position of closely handling a particular customer account, i.e. quoting and billing the work as opposed to simply doing the work. Such employees (and I was one for a while) were in a position to see how very profitable their work was. The owners kept the peace by paying these employees a percentage of the amount they'd billed over a certain baseline hourly rate. This created some resentment between employees, most of whom were never in a position to earn such bonuses. Eventually the company fell on hard times and decided to stop paying those bonuses, which again led employees to resent both management and each other. I haven't worked there for several years, but my understanding is that management continued (in an unstructured, unacknowledged way) to apply extra grease to the palms of some of those especially valuable employees to keep them from leaving.

Obviously my experience is not comprehensive, but I do not have warm and fuzzy feelings about such programs.
posted by jon1270 at 3:00 AM on June 7, 2011

A friend of mine was a foreman, and that was how the incentives worked. Every house got X hours of budgeted time, and the foreman got to keep a cut of any extra hours at the end of some reporting period.

What he did for his workers was to use up some of those hours to pay guys for rain days and things like that. May not have been 100% kosher, but it kept people happy.

(The nice thing about that structure as well, was that it reduced the number of extra hours at the end of a project, which reduced the chances estimators would cut their bids on the next projects.)
posted by gjc at 5:56 AM on June 7, 2011

Are you simply looking for a larger slice of the pie? Have you considered other ways to solve these problems?

Well, this idea came up while I was negotiating for a raise. The boss expressed his uneasiness with comitting to higher payroll expenses in the face of more potential economic trouble, and I responded off the cuff with this idea, thinking it might be a fair way to get more compensation in good times without burdening the company in bad times.
posted by contraption at 8:01 AM on June 7, 2011

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