Open the books Featured

10:04am EDT July 22, 2002
Chad Engler has seen the value of open-book management. His company, Rochester, N.Y.-based In-Seitz Inc., a business-communications agency, was opening up its books before the term open-book management was created.

"Before we went to open-book management, we were paying our employees a salary plus overtime," says Engler. "That just encouraged everyone to work more overtime, and it doesn't help the company make more money. They were being rewarded for taking longer to do a project."

The company eliminated overtime, and replaced it with a profit-sharing plan that linked an employee's success to the company's success. A formula was created for different groups within the company, based on the particular job function. The formulas are intended to measure how well people are doing the job, then relate that directly to payment. A better effort or result means a bigger share of the profit-sharing checks.

"For people who are paid a lot [through salaries], they are expected to deliver a lot," says Engler. "A newer person has less expected of [him]. They're not held to the same stringent conditions a seasoned person would be."

The formulas continue to evolve as business conditions change or the company finds a better way to measure performance. Finding an accurate formula can be difficult, especially for a receptionist or someone who keeps the computers running.

"Some of the formulas take a little while to create, but you can get everybody," notes Engler.

Leadership is key

"The most important ingredient to successful open-book management is the trust the employees have in their leader," says Frank Shipper, a professor of management at Salisbury State University in Maryland. "The person needs to be straightforward with everything-the good and the bad."

The leader also needs to make sure the system is fair to everyone, regardless of what was done in the past. "The right type of person will not accept excuses that provide rewards the books don't justify."

Information regarding an employee's affect on the bottom line have to be tied to a performance bonus. In one case, a company that Shipper studied implemented open-book management, but wasn't willing to link it to money.

"It didn't last very long, because the employees were asking, 'What's in it for me?'" says Shipper. "The company was privately held and the owner was unwilling to share the profits. The company is in worse shape than it was before. You have to share the pain and the gain."

Implementing a plan that exposes the company's financial information to everyone can take courage. Overcoming the fear can be one of the most difficult steps.

"The main fear of business owners is that the employee's will figure out the owner is making a lot of money," says Engler. "Business owners get scared when they consider this."

While some open-book companies go so far as to reveal individual salaries, In-Seitz stopped short, revealing a group's combined payroll expense instead. The employees have enough information to measure their group's performance, without making people uncomfortable. Sharing information is important, but it would be a waste of time without an effort to educate the employees as to what the numbers actually mean.

"One of the biggest pitfalls is to allow people to see the financials, but they don't know how to read them," says Engler. "They can be very confusing and it can have a bad effect."

Engler leads a weekly forum where everyone has the opportunity to discuss particular issues or expenses, and how they can be improved. The employees learn what the numbers mean and how they can achieve a bigger bonus.

"You have to get everyone to act as if it were their own company," notes Engler. "You want them to act just like it's their money. You give them a stake in the results, and give them feedback and training along the way."

Shipper echoes Engler's sentiment, saying that everyone can be taught to read a financial statement. "If you look at every kind of employee, they all have the capability of understanding baseball stats," says Shipper. "There is nothing different between financial statements and baseball stats when taught properly."

But don't expect employees to take ownership and keep a close watch on financials when the stakes are low and the bonus checks are issued annually.

Shipper says that employees should be able to earn 15 percent of their total salary through the performance bonus.

"If you're only going to offer 2 or 3 percent, then don't bother," says Shipper. "If you are not willing to really share all of the information and, to some extent the profits, then don't start."

The more frequently the checks are issued, the more employees will realize their actions affect the bottom line.

"Some companies hand out a check once a year, announce what the profit was and say 'Have a nice day,'" says Engler. "The employees feel like they have no control over it and they don't trust it. The immediacy of the reward helps.

"I really encourage business owners to keep an open mind about open-book management. Sharing company information works to your advantage, not your disadvantage. Imagine everyone working in a company treating every dollar as if it were theirs."