Employees know what the company normally charges customers. For example, in the service department the street labor rate is often posted, in accordance with local ordinances. Employees also know what’s being charged for parts, shop materials, environmental fees and the like. And they certainly know that their pay is only a fraction of all that.
While most employees know the difference between the customer’s invoice and their paychecks isn’t all profit for the owner, they most likely think the profits are considerably higher than they really are.
Should employees be informed of what the real net profit is? The answer is yes, according to Donna Renn, who wrote “Open-Book Management 101” in Inc. magazine.
She suggests treating employees to a demonstration of the company’s expenses, visually illustrated as a portion of a $100 order.
Start by pinning $100 in cash to the bulletin board. The presenter begins by identifying the most obvious expenses — the cost of goods and labor, including any benefits, unemployment, workers comp, etc. — and removes bills from the board representing those percentages of the $100. Then the employees are asked start participating by identifying more expenses. They’ll likely name things like rent, utilities, advertising, shop equipment, and business insurance, among others. With each expense they name, the appropriate bills representing that portion of expenses are removed from the board.
When the employees run out of ideas, the presenter takes over, identifying any operating or fixed expenses the employees likely never think about, such as debt service, property and income taxes, licenses and fees, capital maintenance, training and education, and so on. At the end, there will be very few, if any, bills still on the board, and that should give employees the first realistic view they’ve ever had.
According to Renn, in businesses where this was done, morale was improved because employees had a true insight into the company’s expenses. Moreover, it both dramatized and challenged them to look for ways to further reduce expenses.
The overriding objective of such an exercise is to help employees understand how lean a company is really running. In addition, it graphically illustrates how difficult it is to stay competitive and, for that matter, how tough it is to stay in business and provide jobs in these tough times. Employees need to understand where the company’s dollars go.