Equity sharing as a way to provide incentives for managers to reach goals.
Recently I have been working with an auto body repair shop. The problem is lack of profitability despite significant gross revenue. The manager appears capable but unwilling or perhaps unmotivated to increase productivity by better managing the flow of work product and the effort of his employees. Employee productivity is the issue, a very common problem for many businesses.
We believe he has the skills required to turn this business around by dramatically increasing the productivity but he lacked the authority and incentive to make the difficult decisions required and to be held responsible and accountable for the profitability of the shop.
The managers position requires many specific skills and replacing him would be a difficult and along term task. Thus we made the decision to solve the problem within and create an environment that would support the development of the full potential of the manager so he could develop the shops productivity more fully.
We decided an equity reward system would resolve all the issues in a classic win win situation as follows:
1. We determined the required monthly revenue and payroll ratio required to first break even and then expand into significant growth and profitability.
We created a ramp up scale, with year one starting at $100,000 per month with a 65% payroll to revenue ratio for year one.
Year two went to $125,000 same ratio, year three $150,000. per month, year 4 $175,000, the presumed maximum the facility can handle ( not including additional shifts or weekend production which is a possibility, or expanding the building and production capabilities).
Each year the manager reached the goal he would receive 10% ownership in the business until he acquired a maximum of 40% four years out. He earned additionally with dividend distributions the same way the owner extracted cash out of the business. If the business is ever sold both would appropriately share in the gain. More likely the manager will end up buying out the owner.
The profitability of such a ramp up is very good and the owner is delighted to share equity in exchange for significantly increased gross revenue and increased profitability.
The manager is being given management control over the shop including hiring and firing men. We will monitor his success by installing a key indicator reporting system which we will together meet weekly to review and discuss.
If he fails to meet the goals we can fire him and he does not get the unearned increased equity, thus the bet is in his shoulders to earn his equity at no cost to the owner until well down the line and if he is successful in developing the business and delivering the objectives.
Its a great solution to a difficult situation, as this frees the owner to focus on other programs and business interests and yet keep a close handle on the results of this experiment. The manager and the owner both win if he is successful in implementing a growth plan with profitability standards. He has control over the system as he can make the changes he wants and needs to without interference from the owner.
Our lawyer wrote up a simple clear agreement, and we will kick this program off May 1. He will begin firing, hiring and training new employees and holding his men to standards he considers effective and appropriate.
Incentives with little out of pocket costs, flatter management, accountability, key indicators to track and monitor success, its a winning equation. Lets see how well it works. Call me for help 413-549-2966.
