“If everyone is moving forward together, then success takes care of itself.”
Commissioning salespeople with a percentage of gross profit is an informal standard in the kitchen and bath industry. While there’s no established standard for rewarding key staff people and managers, there are two incentive concepts I’ve favored throughout the years due to their flexibility and practicality. They’re simple to implement, informal, and can change as the economy changes.
These concepts have served kitchen and bath remodeling firms in the past – and they can help yours.
Incentive Concept #1: Gain-Sharing
- No need to introduce a formal profit-sharing plan that requires staff-wide enrollment
- No federal laws to comply with due to the reward program
- Avoid stressful administrative burdens
Here’s how it works.
Owners determine their firm’s net profit goal during their annual budgeting process for the upcoming year. The incentive goal becomes the “gain” in pre-tax net profit over the previous year.
The owner identifies which salaried employees – including themself- will significantly impact achieving the net profit gain stated above and will pre-determine how the overall gain will be split.
Owners may want to add additional key personnel to share in the rewards program in subsequent years. They would do this by offering a percentage reflective of their employee’s involvement in achieving that year’s goal.
Here’s an example of how a gain-sharing rewards program might look:
Previous year’s pretax net profit (after owner’s salary) = $180,000
Upcoming year’s net profit goal = $300,000
Pretax net profit gain = $120,000
Amount to be shared among key performers (50%) = $60,000
Key performers, percentage assignments, and profit rewards:
President/Owner 60% = $36,000
Project Manager 30% = $18,000
Office Manager 10% = $6,000
The flexibility of a gain-sharing incentive program makes it very appealing. It furnishes an incentive structure that affords a wide latitude from which to operate.
Decide how the rewards will be given out and tweak the percentages yearly as needed.
For example, because our economy may slow in 2023, owners may wish to reduce the gain to be shared from 50% to 25%, keeping cash in reserve in case funds are needed to cover monthly overhead expenses during the downturn.
Incentive Concept #2: Equity Participation Plan
Owners wanting to elevate and reward outstanding employees in high-level positions are encouraged to consider an Equity Participation Plan (EPP).
An EPP does two things:
- Reflects the cumulative value of the employee’s contributions to the future of the company
- Encourages a long-term commitment between the employee and your firm
The team member awarded the EPP ought to be someone who will have a significant role in the firm’s development. For example, you promote a lead sales designer to becoming the sales manager of your first satellite showroom, assisting in the showroom plans, staffing, and launch.
This sales manager would then earn “equity units,” permitting them to share in:
- The proceeds resulting from the sale of the firm
- The value of the firm upon disability, death, or termination without cause
As an owner, you retain 100% operational control. Those who have had business partners in the past know how critical this consideration is.
EPPs are referred to as “phantom stock” because the manager never has a direct interest in the company or is entitled to any part of the firm’s annual profit. EPPs can be a compelling incentive to retain a gritty staffer who might be considering starting their own operation.
If you decide to initiate an equity participation plan, make sure to hire an attorney specializing in small businesses to draft it.
Here’s a look at how an equity participation plan should be set up. Equity units are earned if the following pre-tax net profits are attained in a fiscal year of the company:
Year Pre-Tax Profit Goal # of Units Earned
1 $300,000 10
2 $380,000 10
3 $420,000 10
4 $550,000 10
5 $675,000 11
After 5 years, there is a potential of 51 units to earn. The units earned for a particular year come after the previous year’s profit goal has been achieved. The awarded manager becomes vested in their units based on their consecutive years as employees.
Years as full-time employee % of units vested
If the manager earns 51 units at the end of their seventh year of full-time employment, they would be entitled to 35.7 equity units (51 x 70%) if the business were to sell. Otherwise, any such manager would ostensibly have worked for the company for ten years to be fully vested with 51 equity units.
Owners usually opt to place a two-year restrictive covenant in exchange for this benefit, while the payout is over seven years. The agreement would also stipulate how the company is valued, but typically, the weighted average of pre-tax earnings is four to six when there’s an optimum strategic fit.
The beauty of this incentive plan is that both parties are winners. The manager can earn a large equity reward while the owner retains a robust and motivated manager and total operating control.
—Ken Peterson, CKD