TO enhance wealth, a business can pursue two broad strategies, either growth (of revenues through price increase or increased sales volumes) or productivity.
Human Capital Telescope with Brett Chulu
This article illustrates through a practical example how a small business can simultaneously increase value for its owner(s) and employees by rewarding planned productivity gains.
For the purpose of communicating as simply as possible the concepts of reward and productivity, we will consider productivity as achieving any or a combination of the following three: improving the cost structure, doing similar work with fewer resources (efficiency) without impairing the quality of products and services, and reducing wastage or losses.
To illustrate how productivity can be enhanced through carefully crafted rewards we will employ a case study.
Productivity challenge case study
A gifted entrepreneur, whom we will call Panashe, recently expanded her African cuisine restaurant business to five locations scattered around Zimbabwe.
When Panashe was running her first restaurant, she was deeply involved in virtually every critical aspect of operations, from purchasing to supervising the menu preparation. With a chain of five restaurants, it is now impossible for Panashe to have a close eye on every aspect of operations in all outlets.
In terms of profit-to-revenue performance, the new restaurants were returning margins significantly lower than the flagship unit. This surprised Panashe in that fixed costs such as rentals were significantly lower for the new shops.
Knowing the ins and outs of the restaurant business, Panashe suspects that employees were diverting some of the food meant for preparing menus to personal use.
She also suspected that the chefs, far from her watchful eye, were a little wasteful and perhaps were serving slightly larger portions to customers than the set standards. She also suspects that the employees could be wasting electricity by failing to follow equipment usage procedures.
Being far away to monitor these equipment usage standards, Panashe fears that if not corrected, these challenges can ultimately sink her business as she has to pay back a loan she took to expand her business. She needs every cent to bolster her cashflows towards meeting operating expenses and servicing her loan.
Even with her business using enterprise resourcing planning (ERP) software, it would appear productivity is not improving as expected. Panashe thinks of firing employees, but the thought of facing the arduous labour processes and the risk of losing labour cases complicate her situation.
What should Panashe do to improve lift the profit margins of the other four restaurants to the chain’s benchmark profit margins, without raising prices and/or increasing customer volumes?
Before settling for a team-based incentive scheme, Panashe must audit the company’s current human capital, information systems and production environments.
She could benchmark the new restaurants against the standards of her flagship restaurant in all critical aspects such as quality of talent, leadership, culture, quality of information systems, quality of production systems, and so on.
Gaps in any of these areas could be contributing to productivity losses.
For instance, she must establish whether she hired employees with the right skills and attitudes. If the challenge is lack of skill, then Panashe needs to institute special training to upskill the new employees.
Apart from training and systems improvement, Panashe can institute a restaurant-based productivity improvement incentive.
Let’s illustrate the mechanics of a scheme she can institute in one of her restaurants. We will call this restaurant Branch B.
Branch B is returning gross profit margins six percentage points below the accepted level as benchmarked against the flagship restaurant. In other words, Branch B is ‘throwing away’ six cents for every dollar of sales made.
Panashe can decide to convince her employees that if Branch B manages to save these six cents per dollar of revenue for the company, the employees can share the six cents per dollar of revenue savings with the company.
Panashe can say to the employee ‘let’s go 35-65’; you share two cents among yourselves and you give me four cents.
This arrangement, if successful will lift the the gross profit margin of Branch B to within 2 percentage points of benchmark gross margins. To incentivise Branch B to reach the benchmark gross margin, Panashe may say “If you save at least a further three cents per dollar of revenue, we will go 50-50”. This means that for an additional saving of at least three cents per dollar or revenue, employees will share at least 1.5 cents for every dollar of sales.
To appreciate the size of monetary rewards that will flow to employees as a result of sharing productivity gains, we will look at the following representative scenario. If Branch B is grossing revenues of US$50 000 per month, saving six cents per dollar of revenue as per the productivity incentive scheme, employees of Branch B will have a pool of US$1 000 every month to share.
If the restaurant is employing, say, 5 people, each employee will get US$200 incentive every month. If employees in Branch B meet their stretch target of at least nine cents savings for every dollar of revenue, with a US$50 000 per month revenue, each employee can get an incentive of at least US$350 per month.
But should every employee get the same reward? That’s for employees to decide. If they want to recognise those employees who are contributing more than others in improving productivity, Panashe will just tell them “Your incentive pool this month is X US dollars, tell me how you want to share among yourselves and give your sharing plan”. The team members will evaluate themselves and agree on who gets more and who gets less.
The thinking behind this incentive scheme is that team members are likely to work together, monitor one another, disincentivise petty stealing (planned shrinkage), focus on following production standards to minimise unnecessary losses and wastage, and so on.
The reader needs to be cautioned that this is a highly simplified example capturing high level principles. There are several nuances that were not captured.
Reflect on it
As an entrepreneur you would rather share productivity gains with your employees than putting up with productivity losses. Zimbabwean entrepreneurs should warm to the idea that sharing wealth co-created with employees is a smart way of growing wealth.
Chulu is a strategic HR consultant who is pioneering innovative strategic HR practices in both listed and unlisted companies. — firstname.lastname@example.org.