Whitepaper: Open Book Management & Bonus on Goal Program
What it is:
Open Book Management is a program that shares, educates, and links employee decision-making to the financial performance of the business. In concert, these concepts give Rhino Foods’ employees the ability to understand the impact of financial decision-making and to impact financial outcomes in their day-to-day activities.
Most businesses don’t share financial information with the majority of their employees. This is a missed opportunity. Rhino thought that getting every employee to think like an owner, rather than just an individual who punches in and out each day, would lead to a more engaged and productive workforce.
If employees don’t have access to or an understanding about the financial performance of the business, it’s difficult for them to become invested in decisions and initiatives. Conversely, when a company shares financial performance information, educates their employees about its meaning, and then links that performance to daily decision making on the employee level, the result is an employee base that think and act like business owners themselves.
Simply speaking, employees see how actions they take can affect the bottom line and themselves. More importantly they have a deeper understanding of the business that empowers them to generate and implement ideas to benefit both the company and them from a financial perspective.
Rhino Foods identified which key financial information and business concepts are critical to understanding the company’s financial health and educated every employee on these concepts. These concepts are touched on in monthly company meetings to support retention and to help new employees get up to speed.
One to three critical measures are identified to mark intended yearly progress and company goals are built around these. To further support engagement, financial bonuses are linked to each of these goals. Progress against the goals is reported to the employees on a daily, weekly, or monthly basis as appropriate.
The sharing of information helps employees see the impact of their daily work on the key financial measures and ultimately on the finances of the company as a whole. The corresponding decisions at monthly company meetings on what went right, what went wrong, and what can be done in the future supports an atmosphere of continuous improvement, everyone being part of the company’s success, and teamwork.
Over the years, Rhino Foods has focused on a variety of financial impact measures that have led to numerous improvements including:
- Increased efficiencies in manufacturing
- Increased customers’ On-Time-In-Full levels
- increased product first time quality
- Lower workmen’s compensation rates
- Increased engagement has led to implementation of improvements suggested by front-line employees.
- Created new leaders within the company.
- Financial literacy and business acumen have increased throughout the workforce.
- Employees have earned their bonus by meeting the goals. Bonus on Goals is a profit-sharing mechanism connected to employees’ efforts therefore it doesn’t become seen as an entitlement.
How to Implement the Program:
Here are the basic components of our Open Book Management and Bonus on Goals Program to help if you are interested in trying this at your organization.
- Decide what financial information your company is willing to share with every employee. Note: At Rhino, wage information and events covered by HIPAA regulations are the only subjects not discussed in our meetings.
- Determine how frequently and in what arena will the information be shared (e.g. individually, department meetings, company-wide meetings)? Determine the best way to present the information to your intended audience.
- Determine one to three critical measures for your company and build your Bonus on Goals around these. Determine how frequently meeting the goals will be paid out. At Rhino Foods we do payouts twice a year. The goals should be a stretch but possible, our rule of thumb is thinking we could hit them 50% of the months.
- The funding and management of the Bonus on Goals is based on the level of the company’s profitability so that as the company does well the employees do well. At Rhino Foods if we do not meet our budgeted gross margin for the six month period, no payout is made.
- The payout for meeting goals needs to be significant enough that employees feel recognized for their engagement while ensuring the payout doesn’t have a longer term negative financial impact on the company. This is one reason to not do it monthly or maybe quarterly.
- Educate all employees on both concepts of Open Book Management and Bonus on Goals. Continue this education as you present the periodic results to strengthen financial literacy.
- Your company needs to help each employee see how their actions and their decisions impact both the goals and the higher-level financials to feel empowered.
- Continually improve the presentation of the information to better engage your audience and respond to feedback on what does and doesn’t work.
Your company management decides what financial information will be open (e.g. budgets, revenues, margins, profit, etc.).
- The company’s biggest challenges are used to determine the few critical measures at a corporate level, not at departmental levels, to which the goals will be tied.
- For example, the measures could relate to increasing sales, increasing margins, increasing run efficiency, reducing injury rates, reducing rework.
- The goals are set for each measure. These should be attainable but a stretch for the organization. If the right measures and goals are chosen, the company’s profitability will increase over time.
- For example, increase sales by 5% in 3rd quarter over last year; increase run rates by 10% in six months.
- The bonus structure is set for reaching each goal.
- The frequency of progress updates towards these goals is determined.
- The progress updates need to occur frequently enough to keep up engagement.
- The updates create the opportunity to acknowledge good work and to refocus on key issues if progress is not being made.
- Decide how initially all employees will be educated to understand the financials, the measures, the related goals, and the pay-out structure. On an on-going basis, how will new employees be brought up to speed?
- The education needs to be tailored to different types of learners and probably to different employee segments.
- Continually adjust communication tactics in response to results, engagement level, and employee suggestions to make the linkage between Open Book Management and Bonus on Goals as effective for your company as you can.
- Involve as many employees in the reporting function as possible. This is an integrated company-wide program in which everyone can celebrate success.
- Financial data is shared accurately and in a timely consistent manner and is meaningful to the audience.
- The goals have been attained at least 50% of the time. Employees are engaged as they feel they have a stake in the company and feel recognized for their efforts.
- These two concepts working together have aligned and focused the entire company on meeting the goals which has built stronger teamwork, increased skills, and has been fun.