Original Date: 04/24/2006
Revision Date: / /
Best Practice : Profit Sharing
Midwest Metal Products has implemented a successful profit sharing program based on the concept of Open Book Management. Profitability has been significantly improved by sharing the company’s financial information with employees, providing them with the knowledge and empowerment to impact efficiency. With profit sharing, employees have a vested interest in the efficient operation of the company.
In the second quarter of 2000, Midwest Metal Products (MMP) was busy producing products, but the company was not hitting financial targets. The productivity of the workforce and the utilization of equipment were inadequate for profitable operations. New equipment was being purchased to enhance production without the proper analysis to justify the purchases. Regardless of profits, employees were receiving a bonus three times a year, which became viewed as an entitlement.
To help reverse this negative financial trend, MMP hired a major CPA firm and replaced its bonus system with a profit-sharing program using “Open Book Management” – a concept that teaches employees how to interpret financial information and how to help make decisions by thinking and acting like company owners. “Open Book Management” is based on the premise that to be competitive, a company needs eager and willing employees who have a reason to care about the success of the company and who know how to help it succeed.
The four guiding principles of “Open Book Management” include: get the financial information out; teach people business literacy, including how to understand and use the information; develop a system of responsibility and accountability that will empower employees to act like business people (or owners); and, give everyone a stake in the organization’s success (i.e., profit sharing).
Management first had to determine what financial information to share. Three basic measures of success were established and included profits, on-time delivery percentage, and customer quality acceptance-rate percentage. Other measures such as productivity were established to create accountability. A profit sharing scorecard was developed to keep employees apprised of the current company status. The scorecard includes sales, cost of sales, pretax profit, and the projected profit sharing percentage of wages. Additional metrics are tracked and posted including on-time delivery and quality acceptance rate. Profit sharing is paid quarterly in April, July, October, and January. Since profits fluctuate and the payout is based on a full 12-month, pretax profit, the payout is advanced at 60% for the first quarter; 70% for the first two quarters minus what was paid out for the first quarter; and 80% for the first three quarters minus what was paid out for the first two quarters. The final payment is 100% minus what was previously paid out.
By 2005 sales had increased, profits had improved, and employees received their largest profit sharing payout to date – 14% of their wages for the year. That same year, the quality acceptance rate was 98.64% and the on-time delivery rate was 99.34%. By sharing the financial information with employees and giving them the ability to use the information constructively, major improvements in MMP’s financial performance have been realized. The culture has evolved to one where the company and its employees have increased job security and stability, with employees feeling more responsible for ensuring an efficient plant operation. Increased profits have also had a positive impact on employees’ take-home pay, which has enhanced employee job satisfaction.
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