Darren Bourke Business Coach to SME owners on effective ways to incentivise employees and improve business performance.

[00:00:00] Hi, it's Michael Kerr here presenting Small Business Banter.

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[00:01:21] Welcome into another edition of Small Business Banter Community Radio and Podcast.

[00:01:26] Darren Burke is back with me today.

[00:01:29] Darren is a small and medium business coach.

[00:01:34] He was on about four weeks ago.

[00:01:37] Darren, I think something like that.

[00:01:39] Quite recently.

[00:01:40] We had a ripping conversation about the shift in power between employers and employees.

[00:01:47] We spoke at length about how it's changed in the last three or four years.

[00:01:53] What we hinted at in that conversation was given this shift in power

[00:02:00] and how are employees going about incenting staff now that this shift has occurred.

[00:02:09] Welcome in again, firstly Darren.

[00:02:11] It's great to have you back.

[00:02:12] Thanks, Michael. Thanks for having me.

[00:02:14] For those, if you just happened to be tuning into this one

[00:02:18] and you didn't catch Darren in our last discussion about a month ago,

[00:02:23] you can check it out on the Small Business Banter podcast,

[00:02:28] which you can find on Google, Spotify, etc., Apple.

[00:02:33] Darren, let's rip into it today because where we got to was

[00:02:37] it's been incredibly challenging for employers

[00:02:41] and you were spending a big part of your time with your clients

[00:02:47] chatting about HR issues.

[00:02:49] It led on to us thinking about a further discussion on how do you use incentives,

[00:02:55] what kinds of incentives you can use with employees.

[00:02:59] If we have time, we want to talk about both of those relative to a sale of a business,

[00:03:05] which will come back to that if we have time.

[00:03:08] Over to you Darren, if you just want to kick us off with a bit of background

[00:03:15] on our incentive still powerful, relevant,

[00:03:19] what kinds of incentives are you using and recommending with your clients?

[00:03:24] Absolutely Michael.

[00:03:26] Where we got to last time was the whole piece around the quantitative

[00:03:31] and the qualitative aspects of looking to engage, empower, motivate

[00:03:36] and most importantly retain our existing labour

[00:03:39] but also to attract new talent into our businesses when it's never been more competitive.

[00:03:45] I guess the launching pad for that was talking about those areas

[00:03:49] and on the quantitative side I was suggesting that we need to at least make sure

[00:03:54] we're paying at or above market salaries

[00:03:57] but where you and I got to that conversation where these what I call at risk opportunities

[00:04:03] to incentivise come about is that it's very important

[00:04:07] and SME owners I'm sure will appreciate this.

[00:04:10] If we continue to increase our base salary package

[00:04:15] in these inflationary times when we've got these, you know,

[00:04:18] currently 7-8% inflation rates, it becomes very problematic

[00:04:23] because there is a point where I keep on adding to Michael's base salary each year

[00:04:27] and within three to five years Michael's base has just run away

[00:04:31] and so as my ongoing input costs of running my business around employee wages

[00:04:37] and rent goes up becomes harder and harder to keep pace with Michael's wage growth.

[00:04:42] So the reason why these incentives, what I call at risk incentives

[00:04:47] is the whole angle of the Michael is to create a win-win scenario

[00:04:51] whereby if the business wins by achieving our targets and our objectives

[00:04:55] well there's more profit to share with their employee team members

[00:04:59] and of course in years in certain industries with seasonality

[00:05:02] and various other economical market factors where we may not have a breakout year

[00:05:07] well you get paid to do your job.

[00:05:09] So that's why we pay the base salary package.

[00:05:12] So that's just an important part of the psychology of shifting gears

[00:05:16] in building just a one-trick pony with wages considering these other elements.

[00:05:21] So I think it's important to get the baseline framework of what we're talking about first.

[00:05:26] Yeah and does that necessitate then call it cultural, call it whatever you want

[00:05:33] that employees do need to understand how to vex discussion as well

[00:05:40] because they understand how powerful they are, they demand more

[00:05:43] I mean every day you come in as an employee you can and do impact the viability of the business.

[00:05:49] So if you come with your A game, you help the business

[00:05:53] but also if you don't come with your A game the business suffers

[00:05:56] and so there's less profit to share as in four incentives.

[00:06:01] So having that cultural or that one-on-one discussion with your key employees must be vital.

[00:06:08] No it is vital and that's I guess the first step on the journey beyond the baseline of wages.

[00:06:13] So interestingly over the 25, 30 odd years I've always found it quite interesting that

[00:06:19] I don't know whether it's a particularly Australian phenomena or not

[00:06:24] but some of the pushback and the objections both from employers and employees

[00:06:29] is often around what will people think and I'm scared to share my data

[00:06:35] or my information with them or whatever and I always get a little bit bemused by that

[00:06:40] and even some of the questions that employees ask when we do have a bit of a town hall meeting around it

[00:06:45] often they ask the wrong questions. So my starting point is let's not default to worrying about

[00:06:51] the most challenging employee or a particular problem team

[00:06:56] we're actually doing this for our broadest and our best and our loyal ongoing team members

[00:07:02] so the first thing is the mindset has to be this isn't all things to all people

[00:07:07] it's a model and because of these objections and these fears

[00:07:12] and the fears are very deep set with some people particularly the owners

[00:07:16] and I always there is actually a hierarchy of how I introduce these Michael

[00:07:21] so the first one I trial is simply bonuses okay

[00:07:26] and the bonus area I use the word trial because sometimes it doesn't work

[00:07:32] in that it doesn't either get it isn't engaging or attractive to employees

[00:07:38] for whatever reason or it just doesn't work in moving the needle

[00:07:43] in stepping up our productivity in our performance so the word trial

[00:07:48] which clients love means that we've got to get out of jail card free right

[00:07:52] so if it doesn't work we're so it's going to try it for a figure 24

[00:07:56] so the next financial year we're going to try this for Michael

[00:07:59] and so within those bonuses I start off I should say there is a two types of bonuses

[00:08:05] there's a discretionary bonus which is the more typical Michael's done a great job this year

[00:08:10] he's an amount of money I'm not a particular fan of that because it often

[00:08:15] well I always say people talk and employees go out for Friday night drinks

[00:08:19] and I say oh how was that Michael I couldn't believe when the boss gave me 5,000

[00:08:23] and you say what you know 5,000 I got two and a half you know so

[00:08:27] that can create other problems so and also it's a excuse me an expectation

[00:08:32] that that might be forever and always which I'm always reluctant to set these precedents

[00:08:38] the second type of bonus that I much prefer using is what I call target bonuses

[00:08:44] and so I split the bonuses over the trial period into three categories

[00:08:48] the first category is if we hit our threshold target which is effectively

[00:08:52] our baseline target of sales or revenue or GP or profit then

[00:08:58] there's a certain percentage or dollar amount that I share at that baseline target

[00:09:04] the second one is normally what I call a stretch target so that might be a dollar amount

[00:09:08] or a percentage above that baseline target

[00:09:11] and the third one is basically what I call the kicker which is the above that stretch target

[00:09:17] and this allows us flexibility and it allows us to reward based on where we hit

[00:09:23] that number over those three thresholds and I found that works really well

[00:09:28] and then of course we've got all of the benefit of hindsight after the trial period

[00:09:32] and then we sit down in the June quarter of the following year towards the end of the trial

[00:09:37] we normally distribute this in late July at the end of the financial year when the data's in

[00:09:41] and so our game plan and our strategic plan and our budgets are all tied in together

[00:09:46] across the whole organisation with these bonuses

[00:09:50] so that's the first place we start

[00:09:53] Yeah, in that couple of things that were notable

[00:10:00] you wait till the end of the period before you measure

[00:10:05] whether the team, the staff have hit the target

[00:10:08] is that typically a good question

[00:10:11] typically we found that the most because we're talking about frequency right

[00:10:16] so when I've got very fundamental blue collar labour

[00:10:21] I've found that a shorter period is better being a month or a quarter

[00:10:25] because the recency of the performance needs to be tied in

[00:10:30] in the mindset of that operational worker in the front line

[00:10:34] where I have more management mid to upper level management

[00:10:39] or more seasoned workers, particularly white collar workers

[00:10:43] or more middle management across the board

[00:10:47] we find that quarterly six month or annual is the best

[00:10:50] but annually can be problematic because it's a long time between that recognition

[00:10:55] Yeah, sure is and you need, you know, things happen

[00:11:00] and it's not, I'm assuming that you have some capacity to perhaps even vary the way you measure things

[00:11:08] during the period of something extraordinary happens

[00:11:11] but you don't leave it right in disappointment or completely surprised

[00:11:16] The idea is to report the news on a regular basis

[00:11:20] and to share the Intel in conjunction with some monetary reward

[00:11:26] So that bonus is normally what I call the entree

[00:11:30] into moving forward with these incentive schemes

[00:11:33] Now if that's successful Michael, we can then dare to dream about

[00:11:37] the next incentive scheme on the basis of that

[00:11:41] which would be the second one I use which is profit share

[00:11:44] And this is where owners bravely I recommend they consider

[00:11:50] sharing between 5% and as much as 20% of operational profit

[00:11:56] with either individuals, teams or all staff or a shandy of all three

[00:12:03] And you hinted early in our chat about the fear of open book management

[00:12:10] I think it's in the US where it's like everything can be on the table in some businesses

[00:12:15] and the theory is that everybody's aware

[00:12:18] and if you've got the right staff they'll all pull together when they need to

[00:12:21] but this gets closer to that in terms of staff saying well how do we calculate profit

[00:12:30] Yes, you need to normalise that for extraordinary

[00:12:36] Should there be any extraordinary expenses that are put through the books in relation to the directors

[00:12:42] Employees have an incredible radar whereby they can tell if they're being gained

[00:12:50] and as soon as they think that whether the perception is true

[00:12:53] or it's just a figment of their imagination, the jigs up

[00:12:57] And so from that point on you lose that connectivity

[00:13:01] And the whole point we're trying to do is to have a win-win

[00:13:05] We're all on this bus together and as soon as you start having people doubting

[00:13:08] whether we're on the same bus or in fact we're driving to the same destination

[00:13:13] that's when it falls away

[00:13:15] So look I've had clients where they have been sensitive around profit

[00:13:20] and I respect that right, it depends on if you've just got like your senior

[00:13:24] senior long term management team often they'll be open to profit

[00:13:27] but sometimes we might just do it on sales which is a fairly vanilla number to share

[00:13:33] or even gross profit margin because at the end of the day if we get our gross profit margin of 33% say

[00:13:39] on our sales revenue then generally speaking you're not sharing your profit

[00:13:44] so they still don't know what your operating overhead is

[00:13:47] Yeah, and look it can be commercially sensitive in some businesses

[00:13:53] as in I forget about stuff we don't want this leaking out for whatever reason

[00:13:59] And on today's edition of Small Business Banto

[00:14:04] chatting again for the second time in a month Darren Burke Business Coach

[00:14:09] So Darren, we were chatting just before we started this about some case studies

[00:14:18] or examples of businesses where you've implemented some of these things

[00:14:22] and I look you know I look at businesses day in day out

[00:14:25] the biggest cost in most businesses is staff

[00:14:29] so if you can get more engagement, better performance, productivity, satisfaction

[00:14:36] you're going to be a long way ahead

[00:14:39] So we've covered those different types of incentives

[00:14:46] Are they becoming more of a baseline requirement now to have those

[00:14:53] whatever incentive package in place or is it we're just throwing around different ways of rewarding people

[00:15:02] What's different?

[00:15:03] Yeah, look I think certainly there's more of an appetite for

[00:15:07] well in a labour short market that we find ourselves in

[00:15:11] and with people getting above market increases and the employee feeling as if they have much more

[00:15:19] you know they have much more sort of calibre of respect and attraction in the market

[00:15:24] so we have to shape things up

[00:15:26] Now we've gone through the last time we spoke about the qualitative side of it

[00:15:30] working from home and how to engage and empower on the non-financial side

[00:15:34] This is only as good as our ability to complement those terms and conditions that we talked about last time

[00:15:40] with some monetary incentives that will hopefully

[00:15:44] basically what I'm trying to do is to lock in these team members with us

[00:15:50] so that they don't start that thought bubble around going to a competitor

[00:15:55] or moving for money or other reasons

[00:15:58] just kind of helps to take it off the table

[00:16:00] while being able to maintain our base salaries at budget so they don't race away from us

[00:16:06] and also too, and this is something that plays to your area of expertise

[00:16:11] the third of those after profit share is obviously you know some sort of minority equity

[00:16:16] or even a path to equity through succession

[00:16:19] and so SME owners as you know better than any of us Michael

[00:16:23] find it very difficult sometimes in their industries to find that white knight to come in

[00:16:28] and buy them as a Mr X third party

[00:16:32] and the thought of being able to sell a portion of the business to existing employees

[00:16:37] or family members

[00:16:40] or a management buyout

[00:16:42] it becomes more relevant to them with so many baby boomers trying to exit their business at the same time

[00:16:48] Yeah, it sure does

[00:16:50] and it's you know as a progression through those different types of incentives

[00:16:55] that's where we get truly well an employee becomes a shareholder in some of those cases

[00:17:00] so they're one and the same

[00:17:03] but the pathway you know is for the founding owner to think about both performance of the business

[00:17:12] while they own it but also how can staff be a part of their individual exit

[00:17:21] which doesn't, it's never easy and so even if the staff don't become shareholders

[00:17:28] they're vital in the transition of a lot of businesses from one owner to the next

[00:17:32] so you still need to look after them and incent them

[00:17:36] you know through the through a sale process

[00:17:39] but yeah you're right with those the employee share plans

[00:17:43] and it's when you start to have to release all of that information about the business

[00:17:51] and it's in its minutia because you know someone's going to need to understand what they're buying into

[00:17:58] what's the profit not just as a participating employee but as a part owner

[00:18:05] Absolutely and I mean that third tier let's call it

[00:18:09] is kind of you're getting into your sort of your brown belt black belt territory

[00:18:13] where the bonuses in the profit share give you all of the benefits of incentivization

[00:18:19] but without it's completely flexible it can be you know year on year

[00:18:24] you can run trials people can come and go and depart the organization

[00:18:28] of course when we consider an equity model you know we've got all of the

[00:18:33] you know those aspects you just touched on there you know what happens when they leave their job

[00:18:37] you know how do we value their shares should they leave

[00:18:41] you know the cost of having shareholders agreements

[00:18:45] you know minority shareholders voting rights dispute resolution

[00:18:49] this is now this isn't that's not to say they don't work

[00:18:53] but I believe that trialing these earlier ones are introduced

[00:18:57] is a much better way into it because you get to assess the lay of the land with your cohort

[00:19:02] and if you get any amber or red flags around those participants

[00:19:07] potentially being problematic if we stepped it up to equity

[00:19:11] well that's your due diligence so you actually get through those earlier schemes

[00:19:15] a real line of vision on whether there's a natural

[00:19:19] you know sort of continuum towards something like equity

[00:19:23] or manage and buy out so it actually adds a due diligence aspect

[00:19:27] to the journey as well long in advance of needing it.

[00:19:31] You're right on the money there it's an interesting way to look at it that

[00:19:35] because being a shareholder or a partner is not for everybody

[00:19:39] it's extremely there's so much more to it than

[00:19:43] just being a really even just being a really effective

[00:19:47] employee. It can be

[00:19:51] a whole set of challenges around governance and

[00:19:55] risk you know put maybe you have to borrow to get in so

[00:19:59] yeah it's but you're right then it might

[00:20:03] I suspect that over the next 10-15 years

[00:20:07] a lot of the businesses that are planning on

[00:20:11] selling are going to actively need to consider

[00:20:15] firstly two types of buyers

[00:20:19] one is direct competitors which is always really tricky

[00:20:23] reaching out to or taking a call from a competitor

[00:20:27] the other group will be employees and they

[00:20:31] so what you've described there if the owner's tuned in

[00:20:35] and phases in and trials incentives you can have a pretty

[00:20:39] good look at who's got the ability to be a very good employee but also

[00:20:43] potentially if not the owner or partner owner

[00:20:47] and I like the way you've framed that.

[00:20:51] You mentioned Michael um were there any examples of

[00:20:55] because people like to hear real case studies a couple of quick ones

[00:20:59] that come to mind I've got one client that does

[00:21:03] two of his key people on a 7.5% profit share

[00:21:07] so they get an interim amount for the first 6 months

[00:21:11] 7.5% each and then once the account finishes the year in

[00:21:15] tax returns there's a final dividend so it's a 15%

[00:21:19] of the taxable income of the year and that

[00:21:23] works well. I did another one with a client whereby we did

[00:21:27] a stepping stone equity model where both of

[00:21:31] the key one of the general manager or commercial

[00:21:35] manager in the back office we got him up to 10% over a

[00:21:39] 5 year period and the frontline manager

[00:21:43] out on the sites he got 10% as well and we basically

[00:21:47] did a very simple model where they got bonuses

[00:21:51] and they rolled their bonuses over a 5 year period at 2%, 2%,

[00:21:55] 2% and then we gifted them the last 2% in year 5

[00:21:59] to take them up to 10% each

[00:22:03] and then we actually took their salaries up to a

[00:22:07] capped total remuneration package and then just basically said that it was

[00:22:11] CPI increases after that so we have no further wage discussions ever again

[00:22:15] and then the final one we're looking at

[00:22:19] currently is whereby there might be children in the business

[00:22:23] that can't necessarily fund a purchase prior to

[00:22:27] the

[00:22:31] estate being wound up upon the parents

[00:22:35] passing which we don't want to think about this early stage but what we've been able

[00:22:39] to do is come up with a more of a long term 8 to 10 year

[00:22:43] model where we can transfer equity in a lock step way

[00:22:47] over a longer period with a trusted family member which

[00:22:51] gives the children an opportunity to get

[00:22:55] equity over a period of time but the owners also

[00:22:59] or the parents to still get the lion's share of the profits

[00:23:03] over that period too so again win-win if that makes sense.

[00:23:07] Interesting ways

[00:23:11] because there is a very strong element of phasing things in

[00:23:15] which in another way is saying you don't leave everything

[00:23:19] until the end or you don't do things

[00:23:23] in an unplanned way but the advantage also is that

[00:23:27] culturally, emotionally, whoever's coming in and whoever's

[00:23:31] going out does it over a period of time

[00:23:35] and gets used to this idea of sharing and linking performance to

[00:23:39] payment of some kind of incentive.

[00:23:43] And to flip it back just to a quick sub point to that we've been largely talking about the employees

[00:23:47] or the incoming to come back to the group that you

[00:23:51] often deal with being the exiting owners. Well the owners also

[00:23:55] have a lot of legacy issues and a lot of

[00:23:59] psychology and major, major long-term

[00:24:03] hangups that we've got to unravel within them and each one of them is

[00:24:07] unique but around how the hell do I get out so once they know

[00:24:11] that they've got a runway often having that 5 to 8 to 10 year

[00:24:15] lead time I find that's very cathartic for them

[00:24:19] to allow them an adequate period of time to get

[00:24:23] their head around it as well because there's a lot of emotion

[00:24:27] and psychology in their exit for them individually and now I'm talking about

[00:24:31] a more humanistic level Michael. Yeah which is in small business

[00:24:35] is critically important and it's the same for

[00:24:39] the owner as it is for employees. We all go to

[00:24:43] work and we all want to be relevant and happy

[00:24:47] and get rewarded.

[00:24:51] It's often left

[00:24:55] unspoken and undiscussed and it's to the detriment

[00:24:59] of everybody because I haven't met too many

[00:25:03] owners that have been in business for 20, 30 years

[00:25:07] that talk about wanting to get out tomorrow and some

[00:25:11] genuinely do, some genuinely need to but a lot of people

[00:25:15] they've been successful because they've been wired in a particular way

[00:25:19] and it's not great just to kind of terminate that all of a sudden

[00:25:23] so this all the stuff we've talked about of transitioning out over

[00:25:27] a longer period of time is I think is incredibly productive

[00:25:31] and also it sounds like the way you work with your clients you talked

[00:25:35] about three case studies and they're all quite different but they're

[00:25:39] all quite tailored I'm guessing to the culture or that particular

[00:25:43] environment that particular owner instead of employees so

[00:25:47] Darren look a really terrific discussion

[00:25:51] don't have long but do you want to just again shout out your website

[00:25:55] if people wanted to make contact with you.

[00:25:59] Yeah please, LinkedIn as we said last time is a great

[00:26:03] spot but my website is Darren K Burke

[00:26:07] b-o-u-r-k-e dot com

[00:26:11] I've got obviously my book the fourth moon and they can obviously reach

[00:26:15] out to me via email. Excellent hey Darren another

[00:26:19] really practical discussion thanks for taking time

[00:26:23] and for sharing all that with us I know that people will

[00:26:27] get an awful lot to think about and hopefully action out of that thanks very much

[00:26:31] and thanks for the opportunity again Michael it's been my pleasure. Good oh

[00:26:35] thanks Darren, thanks Michael. So that is all for today's episode of

[00:26:47] Small Business Banta. I continue to be inspired bringing you small

[00:26:51] business experts and other small business owners and hearing their stories

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