Motivating employees is more than just paying salaries; it’s about aligning their goals with the business. On this week’s Exit Insights podcast, Darryl Bates-Brownsword and Kevin Harrington discuss the ladder to equity, a powerful framework that moves from bonuses to employee ownership.
Starting with monetary bonuses, they explore the pitfalls of subjective payments and KPIs, highlighting how profit sharing creates team alignment and accountability. “Educating employees on profits,” Darryl notes, “helps them understand their role in business success.”
Finally, the discussion turns to equity options and Employee Ownership Trusts (EOTs). These tools reduce turnover, encourage long-term thinking, and prepare your business for a high-value exit. “The best way to get employees to act like owners is to make them owners,” Kevin points out.
Watch the episode here:
Kevin, welcome to another episode of the podcast. We’re quite good at this with just you and me. How’s your week been?
It’s been grand, thanks, Darryl. How’s yours?
Yes, a lot going on, always good conversations with clients and some of those conversations that give me the inspiration for the ideas for us to talk about on the podcast. So there’s a bit of fuel for today’s conversation. What I wanted to talk today and explore with you and get some of your thoughts and background on is the different types of ways that we can motivate our employees when they’re part of a team? How do we inspire them? What are the pros and cons and the tool that we call the ladder to equity? So, Let’s jump into that, shall we?
Yeah, we use this quite a lot, don’t we? But I think the thing that we should put on the table straight away around this is there are two different management styles before you even get started. There’s Theory X and Theory Y managers. When we talk about our ladder to equity, it works for Theory Y managers. Let’s explain why. Theory X is kind of old school authoritarian management style that suggests that the harder you beat people, the more work you’ll get out of them tell them to do it and stick on top of them and push them and prod them. That’s theory X. And the whole assumption is that people lack motivation or ambitions, therefore we’re going to force them to do stuff. Modern management styles and the enlightened operate in theory Y, which is the assumption that first of all, people want to do a good job. People turn up to help achieve the ambitions that they’ve been set and the list of things they’ve got to do, their roles, etc. But they also want to help the business. And we’re talking about Theory Y managers who want to go a stage further than just being good around that. How can they really help people on this ladder to equity with motivation and engagement with their teams?
Yeah, the assumption, the starting assumption being that people are always working, they’re doing the best they can with the tools and resources they got available to them. And if they’re highly skilled and they’ve got resources and tools and everything to help them, they can do a better job. If they don’t have those tools and resources, they can’t do such a good job. And it reminds me of the last podcast we did a week or so ago when one of the tools we were talking about was communication. Like communication is a tool. Having a methodology for sales conversations is a tool. And that’s what we’re talking about here. It doesn’t necessarily have to be physical, tangible tools like a hammer or some sort of piece of equipment. And theory X that you’re talking about, that sounds like it reminds me of the Victorian management style during the Industrial Revolution when
When people employed the factory owners, they just employed people and they didn’t employ their brains. They literally just employed their physical labor. They didn’t want them to think. They didn’t want to contribute ideas. And it’s even reflected. And even when I started work a few years ago now, I worked on a power station and that mindset was still reflected in some of the job titles people had. We had leading hands were some of the job titles of people that they were just employed. Well, the name suggested they were just a set of hands. When I was working there in the 90s, they were highly regarded, highly trained, highly capable tradespeople with a bucket load of skills. And for myself as a graduate engineer, I learned to truckload by following those guys around. So, it’s the theory why we want the modern day thinking. We’re not interested in that industrial revolution mind where we’re employing the whole body and we’re insuring, assuming that that body wants to be part of something special, wants to contribute something bigger, acknowledges that business is a team sport and they want to do a good job.
Yeah, exactly. And so as you say, let’s park the theory X and let’s talk about theory Y and our ladder to equity and the options people could and should consider for engaging and motivating their teams.
So, what’s the first one? The first one that business owners always start to think of is, you know, from the some sort of monetary performance bonus. So, if the person does well, let’s give them a bonus for the job that they’ve done this year. So, some sort of performance bonus. What are the pros and cons of that? What that approach?
Well, if you set up the extra payment of bonuses in line with the business’s objectives, people’s performance is in line with the goals of the business. And that’s really very important. And sometimes the bonuses don’t need to be that big. It’s just getting a focus around it saying this is what matters to us. That’s why we want to give you a bonus at the end of it.
Typically, we’re talking about bonuses that get paid in salaries here, but there are other bonuses that can be given in terms of leave or meals out or meal vouchers, whatever. All of them can be considered, but the benefit in performance bonuses is aligning people’s activity with the goals of the business.
Yeah, and the thing, the way bonuses, performance type bonuses are typically paid is that they’re typically, we go at the end of the year around Christmas time, we’ll have a look at how much money’s in the kitty and we’ll have a look subjectively how well each person has performed and it’s often subjective and we’ll give a notional amount of money to them. And I guess it’s worth noting in this conversation, we’re not talking about any of that tax advantages or pros or cons of the tax impacts of each of these bonus mechanisms. Excuse me. We just want to look at the way the bonus is structured. So, the first one is we’ll just give some sort of subjective payment to the person. sometimes these sometimes they’re subjective payments and sometimes they’re role based. So, we can give someone a create a KPI around their role.
Okay.
And yeah, that gets a bit tricky then when we go to let’s play with the first one first. Yeah, when it’s just a subjective amount, how do people feel when, you know, whenever we just come up with a bonus and often at the end of the year?
Well, one of the issues with bonuses is that they’re a great idea, but only if done properly. If you separate the award of the bonus, the delivery of the bonus by sometimes weeks and months from activity, it’s not really helping to align people and people have forgotten that the sort of muscle memory of what they did that earned a bonus doesn’t really come into effect. So it’s a bit of a blunt instrument. It can cause some challenges across an organisation where some people don’t have bonuses, some people do. If it’s too hard nosed sales focused, it can engender bad sales performance where I’ll get this sale come what may, because I’ve got a £100 bonus on this sale this month. So there are things to watch out for. People think it’s dead easy to up bonus schemes, they need to be set up very carefully, and then they will still look simple and they can work, but the dangers are as we’ve discussed.
I have never really seen a performance based, excuse me, a performance based system work. So, for the reasons you say, when, if it’s a sales based or a role based system, it just opens up the person, people put the effort in where they’re rewarded. So if they’re not gonna, if they’re target based in a certain role and they can see they’re not gonna make their target this month, they’ll delay work and activity till next month because then they’ve got a better chance of meeting the target. And then people from different functions are almost pulling against each other because their KPIs, their personal objectives are pulling them away from the other person’s objectives. So they’re almost working against each other. That’s the negative that I see when you have role-based bonuses.
Yes, very much. So, I think what we need to do is roll on here and say, well, so, okay, well, what’s better? I’ve never ruled out performance bonuses, but I think we’ve given enough warnings and health warnings around that.
Yeah, well, there’s just one more that’s come to mind for me. And that’s when you’ve got that subjective bonus that we go, hey, let’s pay a bonus. We’ve had a good year. People have worked hard and it’s a subjective bonus and we pay it at Christmas. The problem we come up against then is that people relate Christmas or associate Christmas with I’m going to get a bonus. And they’ll assume if you paid one last year, if you had a good year and you want to reward the employees and share some of the prosperity then they’ll just assume because they don’t have visibility of the numbers that come next Christmas, they’re going to get another bonus because they don’t have any visibility of how the payment was made. So there’s the risk of just doing some sort of subjective bonus. And the other side of that, the other risk is when we go, if it is subjective, you know, my one manager might like an employee more or, for whatever reason, personal biases come into play. And then not everyone feels like they’re getting treated equally. And there is a risk of end up being a bit of resentment on how much they were paid or what they were paid when the whole intention was that you would develop some some loyalty for the business and think you’re doing a good thing by paying them some something extra.
Yeah, and you’re reminding me of the Christmas turkey. Don’t forget the Christmas turkey. And so what do people do that every Christmas in yesteryear, it doesn’t happen so much now, but people might be given a turkey. Well, isn’t that great? know, so you’ve got a nice turkey at Christmas, big one. Then for whatever reason, you stop giving them a Christmas turkey. And everyone behaves like they’ve been made redundant. It’s the kind of shock around it’s hard to describe really. I’ve seen it happen in a couple of companies where that type of thing has ceased and everyone thinks the world’s coming to an end. And the ambition of motivating people has just turned itself on you and it’s the complete opposite being achieved.
Yeah. So, warning, if you are going to give an ad hoc bonus, don’t associate it with any particular time of the year and make sure you give a full explanation as to why they’re getting the bonus and how it was calculated. And this is just a one off. So I think we’ve done that one to death. Why don’t we move on to the next layer, which is something aligned to profit and some sort of profit share.
Yeah, and profit sharing is, is a more sophisticated, more elegant way of going about things. And one of the things we want to do if we’re to run a successful business, is start to get people feeling like they own the business behaving like they own the business. So that the passion they they put into dealing with a client and the enthusiasm they have making sure that every penny that’s being spent is spent well and delivering a good return to the business. That’s the end game we’re trying to get. And so profit sharing can achieve that because people can see it. You can declare to people what the profit’s been through the year and you can explain how it’s calculated so people can start to learn how the business works. And then the employees, the team can start to understand how their role is really important in achieving that end goal. They know the part they play and they can also observe other people in the organisation and go, hey, do you know what, you know, if you did it like this, Frank, that client, we’d all be better off and we’d make more profit. So, profit sharing is a great system. People are reluctant sometimes to do it because all of a sudden you’re having to, in one way, shape or form, tell everyone in the team your business makes a profit and they’re not getting all of it and they feel a bit exposed, the business owner feels a bit sort of threatened by that in these things that were previously secret perhaps and now starting to get exposed.
I think profit sharing is a really good one because you mentioned on it, can start educating your employees. You don’t have to reveal all of the numbers, but you can reveal some headline numbers so that you can keep them motivated along throughout the year. You can go, we’re on track to achieving our profit share and you can keep score. I think the other benefit is it aligns everyone in the same direction. So, everyone in the business is now rewarded for the same thing.
The managers don’t have to pull people into line. Each of the employees be with a bit of education and awareness of how profit works can pull everyone into line. And it creates that team based accountability culture, which we like. So, there’s a couple of bonuses of the profit and and people start to understand. I think the good thing in a small business is once you start telling, sharing, profit sharing and helping the employees to understand how the business model works.
It it reveals that the owners aren’t sitting there pulling in a small business, pulling millions out of the business, which is sometimes the perspective or perception that that employees have. They seem to think that the owners exploiting them and and they’re being paid minimum wage and they’re coming in and the business is only successful and only survives because of them. And they have got this perception that the owners are ripping millions out of the business. And that’s rarely the case.
And some sort of profit share opens their eyes and creates awareness of what’s really going on. And then, yeah, they’re all in this together and they all benefit when things go really well.
Yeah, a lot of these steps on the ladder to equity that we’re talking about. If we extended the conversation around them, you could talk about how in detail they can be implemented. But with this one, my practical personal experience has been get all the managers in the business in rooms, if there’s too many of them, run multiple sessions, and then say to them, okay, we’re going to do the profit waterfall in our business. We sell this service for a thousand pounds or this product for a hundred pounds or whatever it is. How much money do you think we make out of that? What do think the profit is? What do you think the costs are? What do you think it costs to rent the building, et cetera? And take all those lumpy bits of cost and show people how actually, so how finely balanced businesses are. know, most businesses are three to 20 % net profit, aren’t they? And most of them are near a five.
That’s how it goes. And when people start to discover it for themselves, they start to realize it’s really important we do things efficiently.
I have never really seen a performance based, excuse me, a performance based system work. So, for the reasons you say, when, if it’s a sales based or a role based system, it just opens up the person, people put the effort in where they’re rewarded. So if they’re not gonna, if they’re target based in a certain role and they can see they’re not gonna make their target this month, they’ll delay work and activity till next month because then they’ve got a better chance of meeting the target. And then people from different functions are almost pulling against each other because their KPIs, their personal objectives are pulling them away from the other person’s objectives. So they’re almost working against each other. That’s the negative that I see when you have role-based bonuses.
Yes, very much. So, I think what we need to do is roll on here and say, well, so, okay, well, what’s better? I’ve never ruled out performance bonuses, but I think we’ve given enough warnings and health warnings around that.
Yeah, well, there’s just one more that’s come to mind for me. And that’s when you’ve got that subjective bonus that we go, hey, let’s pay a bonus. We’ve had a good year. People have worked hard and it’s a subjective bonus and we pay it at Christmas. The problem we come up against then is that people relate Christmas or associate Christmas with I’m going to get a bonus. And they’ll assume if you paid one last year, if you had a good year and you want to reward the employees and share some of the prosperity then they’ll just assume because they don’t have visibility of the numbers that come next Christmas, they’re going to get another bonus because they don’t have any visibility of how the payment was made. So there’s the risk of just doing some sort of subjective bonus. And the other side of that, the other risk is when we go, if it is subjective, you know, my one manager might like an employee more or, for whatever reason, personal biases come into play. And then not everyone feels like they’re getting treated equally. And there is a risk of end up being a bit of resentment on how much they were paid or what they were paid when the whole intention was that you would develop some some loyalty for the business and think you’re doing a good thing by paying them some something extra.
Yeah, and you’re reminding me of the Christmas turkey. Don’t forget the Christmas turkey. And so what do people do that every Christmas in yesteryear, it doesn’t happen so much now, but people might be given a turkey. Well, isn’t that great? know, so you’ve got a nice turkey at Christmas, big one. Then for whatever reason, you stop giving them a Christmas turkey. And everyone behaves like they’ve been made redundant. It’s the kind of shock around it’s hard to describe really. I’ve seen it happen in a couple of companies where that type of thing has ceased and everyone thinks the world’s coming to an end. And the ambition of motivating people has just turned itself on you and it’s the complete opposite being achieved.
Yeah. So, warning, if you are going to give an ad hoc bonus, don’t associate it with any particular time of the year and make sure you give a full explanation as to why they’re getting the bonus and how it was calculated. And this is just a one off. So I think we’ve done that one to death. Why don’t we move on to the next layer, which is something aligned to profit and some sort of profit share.
Yeah, and profit sharing is, is a more sophisticated, more elegant way of going about things. And one of the things we want to do if we’re to run a successful business, is start to get people feeling like they own the business behaving like they own the business. So that the passion they they put into dealing with a client and the enthusiasm they have making sure that every penny that’s being spent is spent well and delivering a good return to the business. That’s the end game we’re trying to get. And so profit sharing can achieve that because people can see it. You can declare to people what the profit’s been through the year and you can explain how it’s calculated so people can start to learn how the business works. And then the employees, the team can start to understand how their role is really important in achieving that end goal. They know the part they play and they can also observe other people in the organisation and go, hey, do you know what, you know, if you did it like this, Frank, that client, we’d all be better off and we’d make more profit. So, profit sharing is a great system. People are reluctant sometimes to do it because all of a sudden you’re having to, in one way, shape or form, tell everyone in the team your business makes a profit and they’re not getting all of it and they feel a bit exposed, the business owner feels a bit sort of threatened by that in these things that were previously secret perhaps and now starting to get exposed.
I think profit sharing is a really good one because you mentioned on it, can start educating your employees. You don’t have to reveal all of the numbers, but you can reveal some headline numbers so that you can keep them motivated along throughout the year. You can go, we’re on track to achieving our profit share and you can keep score. I think the other benefit is it aligns everyone in the same direction. So, everyone in the business is now rewarded for the same thing.
The managers don’t have to pull people into line. Each of the employees be with a bit of education and awareness of how profit works can pull everyone into line. And it creates that team based accountability culture, which we like. So, there’s a couple of bonuses of the profit and and people start to understand. I think the good thing in a small business is once you start telling, sharing, profit sharing and helping the employees to understand how the business model works.
It it reveals that the owners aren’t sitting there pulling in a small business, pulling millions out of the business, which is sometimes the perspective or perception that that employees have. They seem to think that the owners exploiting them and and they’re being paid minimum wage and they’re coming in and the business is only successful and only survives because of them. And they have got this perception that the owners are ripping millions out of the business. And that’s rarely the case.
And some sort of profit share opens their eyes and creates awareness of what’s really going on. And then, yeah, they’re all in this together and they all benefit when things go really well.
Yeah, a lot of these steps on the ladder to equity that we’re talking about. If we extended the conversation around them, you could talk about how in detail they can be implemented. But with this one, my practical personal experience has been get all the managers in the business in rooms, if there’s too many of them, run multiple sessions, and then say to them, okay, we’re going to do the profit waterfall in our business. We sell this service for a thousand pounds or this product for a hundred pounds or whatever it is. How much money do you think we make out of that? What do think the profit is? What do you think the costs are? What do you think it costs to rent the building, et cetera? And take all those lumpy bits of cost and show people how actually, so how finely balanced businesses are. know, most businesses are three to 20 % net profit, aren’t they? And most of them are near a five.
That’s how it goes. And when people start to discover it for themselves, they start to realise it’s really important we do things efficiently.
Absolutely. So, what we’ve discussed so far is the ladder to equity from a financial incentive and bonus structure moving from pure cash all the way up to profit share to equity. We haven’t even touched on all the other types of bonuses and incentives that you can provide employees, whether it be a one-off gift or recognition or voucher or hamper or something or membership to gym or health and wellness type of things.
through to your team events and social events and Christmas events, all those sort of other things, all packed together to create that whole benefits package to employees of why they want to work for your organisation. And I think business owners would do well by shouting about all those extra things they package in on top of their salary, which makes it a good place to work.
Absolutely. If the potential employer just talks about salary and a bonus, that’s all that’s going to be talked about when it becomes a negotiating, I want more money, I want more money. And nearly every employer has got elements of the package that people are buying into that are much broader than that. And people today, the millennials, etc. want more flexibility. mean, primarily interesting, they want to work for a company that’s doing good things. That’s quite interesting, isn’t it? So, companies that doing things that are sustainable, environmentally friendly, carbon neutral, or heading that way, is a big draw for people today in employment. Then once they’ve got a base level of salary in place that they can live on, it’s a whole bunch of other things that make people switch on. You know, how can I get more education and training? So, that I can grow in the future. Those sorts of things, which of course the business owners not thinking about, not, they’ve got no interest in that for themselves. But we have to look at businesses through the eyes of the employee. And every employee is different, but there are groups of them that will be turned on by different things. And I think for these kind of softer benefits, I think we’ve got another podcast really that we should do around it and talk about how those things can be put together.
Yeah.
But what we’ve talked about so far in bit of detail is the monetary element, it’s the equity elements, which are a subject matter in themselves. And we’ve talked about those well today.
Yeah. And just while we’re on the non-monetary stuff as well, one of the ones that I’ve seen done really well in a business that I’ve been involved with, was celebration of milestones. So, as their employees reached a certain number of years with the business, or it was engaged, a certain number of engagements with clients was the type of work they’d done, or their clients that they’d worked with that they helped achieve milestones for. These were all celebrated at at their annual annual get together. So, it was a Christmas function. They shared awards and incentives and recognitions for for people who’d been around a long time and achieve certain milestones. And what I saw over a number of years was that people tended to really appreciate and value those acknowledgments and rewards. And and it was like a status within the organisation. You know, I’m part of the 100 club, the 500 club, whatever those metrics were or three or five year club. And those rewards and recognitions just were highly valued within the organisation. So, what are we learning is that there can be monetary rewards and non-monetary rewards don’t have to cost a lot, but they can be highly valued in an organisation.
Yeah, recognition costs nothing and recognition can achieve more than a bonus performance scheme that actually rents a business apart. Recognition, why don’t we just say thank you to people more often.
Yeah. So, there you have it, the ladder to equity. Thanks for sharing the insights with me today, Kevin.
It’s been fun, look forward to the next one, Darryl. Cheers.
Cheers.
About Kevin Harrington
Kevin Harrington- Succession Plus UK Partner
Having worked in technology, telecoms, consumer electronics, payments, media and publishing, Kevin has enjoyed an interesting career history that embraces product and services businesses at all stages of their journey.
Before joining Succession Plus he was CMO with The Panoply plc, a digitally native technology services company, founded in 2016, with the aim of identifying and acquiring best-of-breed specialist information technology and innovation consulting businesses. He joined The Panoply from Tungsten Network where he was Chief Commercial Officer.
Previous roles have included working with SMEs and large international businesses. Some highlights are Managing Director at the Emerging Payments Awards and the Prepaid Awards; Managing Director of Gx; Director of Sodexo Motivation Solutions; Global Marketing Director at BBC Worldwide; Product Group Marketing Manager with Sony UK.
His career started out in a completely different direction. His first two full-time roles were as a junior in an architect’s office and a civil engineering technician. Some of his drawings and designs were constructed and are still standing.
If you would like to learn more about how to start preparing your business, then you can get more information here: https://page.succession.plus/it-all-begins-with-insights-exit-insights
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