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Dear Workforce How Do We Handle The Fallout When Our Secret Profit-Sharing Plan Gets Exposed

For the past year, our company has had a secret profit-sharing program that includes 30 to 40 percent of the employees. The program was kept secret by order of the company president. Recently, some of the employees not receiving the bonus learned of the program and are threatening to quit and go to work for some of our competitors. We would really like to keep most of our employees. How should we handle this? What are the potential pitfalls of having this kind of program, and what can we do at this point for damage control?
February 12, 2004
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Related Topics: Variable Pay, Dear Workforce
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Dear Panicky:

The answer I give you may not be the one you are looking for. At this point, your president has severely damaged employee trust and management's credibility and it will be very difficult and time-consuming to recover both.
One of the pitfalls associated with any kind of discretionary bonus plan--secret or not--is that employees are always left guessing as to whether they will receive anything. Some companies try to alleviate this by paying all employees an equal amount (let's call this a "holiday bonus plan"), but it rarely settles the issues. Another pitfall is that these types of plans are notorious for having a minimal, if any, linkage to definable performance. Incentives that are passed out to employees because the president likes them are not bonuses; they are gifts. They rapidly become entitlements.
This leads me to provide some basic rules regarding incentive compensation that your president is obviously not aware of (don't feel too bad, few of them are savvy about this topic). First, never ever design a broad-based incentive plan to be a secret plan. It will always backfire. Second, do not design plans that use arbitrary or capricious criteria for excluding employees from participation. Employees rapidly learn who is "in" and who is "out." Many of the good ones--those you want to keep--get discouraged and quit at the first opportunity they get. Third, pay for actual, defined performance.
In your specific case, I have several basic recommendations for moving forward. First, put your cards on the table with employees. Be honest and explain that you have had this program in operation for a while. Tell them that the company has decided to examine and re-evaluate the program. Give them a timeframe for accomplishing this review.
Second, review and assess the program. What value has it had in the past? Are profits truly greater because of the plan? Is their a direct line of sight between an individual employee's performance and profit-sharing payouts? Third, determine how you will re-design the plan. You can trash the plan (it's done enough damage already), turn it into a profit-sharing based retirement savings program where everyone participates equally, or you can make it into a results-based plan that effectively links individual or team performance to payouts.
Finally, announce the new plan--in excruciating detail, complete with examples--to all participating employees. If you choose to put a true performance-based incentive plan in place, keep in mind that the variety of plans is tremendous. Do your homework in terms of design and testing. The plan should be designed with your specific business needs and operational characteristics in mind. By the way, keeping all of your employees happy is not a valid business reason. Achieving extraordinary levels of performance, teamwork, and profit is.
SOURCE: Robert Fulton, managing director,The Pathfinder's Group, Inc., an affiliate of The Chatfield Group, Chicago, Illinois, Feb. 24, 2003.
LEARN MORE: Read IncentiveDos and Don'ts.
The information contained in this article is intended to provide useful information on the topic covered, but should not be construed as legal advice or a legal opinion. Also remember that state laws may differ from the federal law.
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 The information contained in this article is intended to provide useful information on the topic covered, but should not be construed as legal advice or a legal opinion. Also remember that state laws may differ from the federal law.

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