As a business owner, you want to create the best possible work culture for your employees. One way to do that is by being transparent on the financial side of things. Start educating your employees about the business and what makes and doesn’t make a profit. Because when employees have the right information, culture just gets better on all fronts. Join Ryan Englin and Jeremy Macliver as they talk to Alex Freytag about sharing financial information to transform your culture and cultivate your workforce. Alex is the expert EOS implementer at EOS Worldwide. He is also the author of Profit Works, a book that teaches you how to maximize your company’s potential. Learn how to simplify incentive plans, improve profit, and develop culture. Start becoming a business leader of tomorrow!
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Only 100 Pennies To Transform Your Culture With Alex Freytag
In this episode, we are going to talk about something that I feel might drive some fear in the heart of our audience, especially if you own a business and you’ve got thin margins, which is not always a bad thing. Sometimes, that’s just the way the industry is. With hiring being so difficult and understanding what job seekers are looking for, we’re all looking for ways to differentiate and find new ways to attract and retain great people.
We are going to talk about ways you can simplify incentive plans where you create transparency with your team so they know exactly what they need to do to perform and generate results for your bottom line. Our guest is Alex Freytag. He wrote Profit Works. He is an EOS Implementer and has a wealth of knowledge. He has been doing this for decades and has worked with business owners all over the place in different industries. He knows what works and what doesn’t. Get ready to take some notes. Buckle up because we are going to talk about how you can create amazing incentive plans to motivate your workforce.
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Alex, I’m excited about this episode and to have you here. Welcome.
Thank you, Ryan and Jeremy, for inviting me.
It’s good to have you.
We’re going to talk a lot about how to get your employees to get excited about helping you drive your organization into positive territory, but before we get into that, what’s the biggest myth that owners tell themselves about what you do?
This is the biggest myth that I’ve been exposed to, and this is 26 years of overnight success. I’ve seen a lot of head trash or stories we tell ourselves, specifically in the frontline workforce. Probably the biggest myth is, “My people will never understand this stuff.” It’s just not my experience. When I do a presentation for groups of business owners, I say at the very end, “Whether you believe your employees will understand this stuff or you believe they won’t, you’re right.”
It becomes a mindset. When we’re talking about incentive plans and understanding how to drive profitability and that stuff, it sounds like it could get complex pretty quick, which is true but we’re not going down that path. We’re going to try and keep it at a pretty high level with enough information for your employees to be dangerous in driving improved profitability. They are smart and good people. They respect receiving the information.
If I’m understanding this right, you’re saying that what causes us to make profits and not make profits, you can translate that to the entire organization and get them to understand it. I have to ask. That sounds scary. Why would I want to share that with my team?
There are a couple of reasons, Jeremy. The first one that comes to mind is in the absence of information, people make stuff up. You have a choice as a business owner to not share anything, but then whatever story they’re telling themselves, it’s going to become your reality. In my experience, I started surveying employees in ’96 when my brother and I started Profit Works. We would say, “What percent of sales would you guess for profits?”
These are frontline, under-educated, good people but they’ve never been exposed to this stuff. Their average guess is about 50% are what they think profit is up sales if they even know what profit is. For some, profit sales are the same thing. It’s not because they’re dumb. It’s because we haven’t told them. If you have employees walking around thinking the company is making 50% profit or this “us versus them” thing creeps in, there are consequences to a lack of transparency.
I’m not saying you open all the books, but you got to find your comfort point. When employees have the right information, they make better decisions at the moment. That has been my experience. There’s a bit of dignity there and an honorable thing to do to share the information that can help them do their jobs better, contribute, and be more actively participating in the financial side of the business.
We had a steel company and we asked that question. We were struggling to make profits. We were growing but we’re getting a lot of kickbacks. We’re an open and honest team. We had a big old group huddle on the shop floor. “If we make $100 in revenue and sell that, how much do we get to keep?” We had everybody write it down. We did end up with 50%. I think it was $37 out of every $100. We had some $50s.
When we told them, “We would be happy if it was $8,” they fell over. We could just hit $8. It’s the transformation there. I think also about a plumbing company. They are trying to get their guys to sell? They’re like, “You can buy this part for $10 at Home Depot. Go there.” It doesn’t quite translate. I love that you’re educating them. What is the number one thing that’s holding a business owner back from scarcity, not sharing to abundance, and everybody is engaged in driving towards it?
Whether you believe your employees will understand what you're talking about or you believe they won't, you're right. Click To TweetThere are a couple of things that come to mind. One is finances can be a mess. You can run a lot of personal stuff through there. It’s a big mess. You don’t want to go there, which I get. Number two is the business owner thinks, “If I share this information with my employees, they’re going to want more money.” My experience was they were so surprised by how small actual profits are if it’s 5, 10 or 8 cents on the dollar. That’s before taxes usually. There’s a conversation in there as well.
They’re not thinking, “I want more money.” They’re thinking, “How do we drive it higher?” Ryan, you probably see this too in your experience with business owners. It’s lonely running the business. If we can enroll more of the folks to share the insomnia of what keeps you awake at night and have them thinking about the business like you do, thinking about opportunities, process improvement or moving something to technology that’s manual or whatever it might be, they will see things.
The ideas are sitting out there in your workforce. Our ability to tap into that untapped potential is huge. It’s a cool opportunity. It’s unique for business owners to do it. I would argue that it’s a bit leading edge to engage your folks, try to understand it and feel a part of it. They can find money that has fallen through the cracks in the business, which is such a relief for the business owners to feel like they’re on a team.
It reminds me of a client I worked with a few years back in construction. They were talking about selling the business to the kids. I was like, “Do your kids even want it?” They’re like, “I don’t know.” We went and talked to the kids. The kids were like, “Yes because I know mom and dad have a private yacht and an airplane somewhere.” They are rolling in the dough.
This is a company that if they hit double-digit profits, they were stoked. It’s a $12 million to $15 million a year company. Of course, there are millions of dollars in the bank that they’re hiding from the kids. The kids were so excited to be able to get their hands on it. After the kids found out that it wasn’t that profitable, they’re like, “Maybe I’ll be okay working here for a little bit until I figure out what’s next.”
You draw a good point toward the risk. The whole risk-return equation is not broadcast or taught in schools. People get in and don’t think about all the risks and the sleepless nights that you’ve had as an entrepreneur, the bank, the mortgage, and all these kinds of things. In reality, we expect a return on our investment, but it’s not without all that risk that’s taken. That’s a great place to start with folks because employees are investors too in certain ways. They might own a house. They might even have a car or things that they’ve invested in. They expect a return on that investment.
That whole risk-return basic element of our capitalist system is true. All returns come from profit. There’s an element of teaching folks around profit as a driver for that return on investment. It’s one element of what we do with profit. Even if it’s 20% of the bottom line, we’ve got to pay taxes, provide a return on investment for taking all the risk, reinvest in the business, pay down debt and take care. When those kids in the construction company are thinking about all that stuff, it is a real eye-opener. It’s like, “There’s a lot of stuff going on in this game here that we didn’t know about.”
The irony of that is the kids are close to mom and dad. They’re connected. You would think that they would be getting it. Maybe you could share a story of an owner that went from one to the other so we can visualize that. Kids are struggling and they’re right there. You can only expect how much less the employee is seeing.
The way I picture it is that if you can picture a line, a spectrum or a continuum. On one end of the continuum is a closed book, not sharing anything with anybody like kids or employees. On the other end is radical transparency. What those parents in that construction company were doing was they were shielding their kids probably from some of the harsh realities of risk and the things that make them sweat. There’s somewhere in the middle there just with the kids.
I had a big a-ha. There’s a bell curve sitting on top of that transparency where performance is the up and down access. If you don’t share any information, people are in danger in their comfort zone. If you share too much information, people freak out and run around scared because they’re like, “I didn’t know if all of this was true.” Somewhere in the middle, there are higher levels of performance when people have the right information.
There’s a bit of an art form to what you share, with whom, how often, and how much detail. We try to coach clients through what to share without getting them too uncomfortable but the whole transparency piece is interesting. I had one client in Florida. She has a company that does pump systems for pools. There’s a group of employees who are out in the field and trucks with lots of equipment doing jobs, all these informs, and going through it. She maybe has 30 employees and had never shared any information. We met during a Vistage talk I was doing several years ago.
We started working together. Went through the whole education process, designing an incentive plan for her organization. She decided to pay the incentive plan out equally to all employees. If it’s $30,000 and there are 30 people, everybody gets $1,000. It was easy to administer. She eventually changed it to the percentage of wages. It was very interesting to watch her culture transform over a period of years. She eventually sold it to the employees. It was cool that the culture, she had done right. The profits were there and the employees understood what it means to be an owner. It was a fun case study across.
When employees have the right information, they make better decisions at the moment. Click To TweetWhat are two actions that the audience could take to enter into this and begin the journey?
If they’re running on EOS, which is a more frequent occurrence these days, they’re probably in some sort of meeting discipline where they’re meeting with the employees, hopefully with a recorder doing a state of a company meeting or something like that. In those meetings, it’s all hands. You’re doing where we’ve been, where we are, and where we’re going kind of stuff. They could begin to share the scoreboard.
If you think of business as a game. If you’re playing football and you can’t see the scoreboard, it’s not nearly as fun. You don’t know if you’re winning. You’re just like a pawn in there. When you start to help everybody become aware of what winning looks like at the company and you’re sharing that, you start to enroll them in the game a bit more. It becomes more fun for everybody.
You’re providing them with tools, resources, training, and things to help them become more actively engaged in the game. Scorecards, measurables, departmental meetings, and those kinds of disciplines are great tools that employees can use to affect their scores. There’s a weak link often between the choices or the activities that employee does every day, especially the frontline folks. They come, do the job and go home.
To this degree, they start to create a stronger link between their activities and the score at the end of the game. It’s a lot more interesting and there are a lot higher levels of employee retention. The employees are curious and appreciate being asked their opinion on things. You can start to evolve that culture slowly.
In that state of the company, to answer your question more directly, you can start to share a very simplified version. I use sales minus expenses equals profit. It’s three lines. You could break it down into maybe five where sales minus direct costs equal gross profit and then maybe stay there. You don’t have to go to the bottom line. Help the employees to understand how we affect the cost of sales, labor and materials typically. If they see that it’s 30% or 40%, they could start to help you with that. That’s one idea.
What would be something else?
The one activity that has been a home run for companies is called the 100 Pennies Exercise. I talk about it in the book. You lay out 100 pennies and ask somebody to come up and remove the pennies that they think are labor and materials out of the 100 pennies. You get to your gross margin there. You have somebody else come up that removes all the pennies that are SG&A or operating expenses or the indirect costs. There are 5 pennies left or sometimes 8 pennies as in your example, Jeremy. That’s a cool exercise. It doesn’t cost you a lot. It’s a huge a-ha for most people.
The first time you do it, you’re like, “There’s no way. It’s baloney.” It’s like, “No. This is true. This is before taxes.” You have to do it. People have to hear that seven times for them to hear it for the first time. Once you got the seven times there, they start to realize, “This is the way it works.” You can share industry averages as well if you have that data and show them, “It’s not just us. Our industry is 5% to 10%. We are the best in class. We should be 10% or 12%. We don’t want to be mediocre or average.” Those are a couple of exercises. They’re in the book Profit Works. We have a class online where they could easily watch videos.
Some of what you’re saying and I hear you talking about it for the whole company, that 30 or 150 employees. How many times have you used the leadership team? How many times have you seen that working with clients like, “This sales guy or sales leader knows how we make profits.”
It’s a great way to think about the project. If your ultimate goal is to cascade it throughout the organization, you’ve got to think about those milestones like, “Let’s get the leadership team exposed to this.” To a degree, everybody who is on the leadership team can teach the folks who are also leaders. Maybe they’re not on the leadership team but they have to lead, manage and hold people accountable below them. If we can teach them, there will be the conduit for that front line often.
We want business literacy or financial profit education to become a part of the expectation of being a good boss. You should understand the basics of a profit and loss income statement. What’s the difference between profit and cash? To your point, Jeremy, if we can teach the leadership team first and enroll them, it’s a great way. You can do this over a period of months and quarters. In year two, you start going deeper into the organization and so forth. It is a worthwhile endeavor because it starts to build a culture of appreciation, trust, enrollment and engagement by everybody in the organization. It is a long-term cultural shift.
If you're playing a game and can't see the scoreboard, it's not nearly as fun. You don't know if you're winning. So when you help everybody be aware of what winning looks like, it becomes more fun. Click To TweetYou’re building pay plans from all of this. I love to shift it over. You have a whole scorecard. I would love to talk a little bit about the mindsets that are going on, and then maybe move it into what we’re working around helping them hire. How does this change the whole underneath of the business essentially? If you want to share a little bit about the scorecard and high level, I would love to know that.
This isn’t for everybody. The mindset scorecard is a strategic coach tool. I did some thinking and research on the eight mindsets that I see in our best case studies. A lot of them are in alignment with our core values, which is interesting, but being disciplined around data, running on an operating system, having a sense of teamwork, comradery, and wanting that. The scorecard asks you, “Where are you now on these eight mindsets and where do you want to be?”
One of the key ones that people tend to have an a-ha is around transparency and what they historically have shared, if it’s a family business, what their folks shared, which was usually nothing, and then what they want to share. They typically want to share more and maybe aren’t quite sure how to do it. That’s an interesting conversation to have.
We’re not pushing people to open all the books and everything, but there are consequences either way. It depends on what you want from your business and culture. A scorecard is a thinking tool for the entrepreneur. It’s in the back of the book. It’s also online. It’s one of the free resources. You can take that and do some things. It can probably take seven minutes to take it and it spits back like, “This is where we are, this is where you want to be, and here are some ideas.”
One thing I liked about it is as an entrepreneur, you’re wondering, “Do I have what’s in it?” It makes it simple to look at it and say, “Everything here, I have the foundation and the core principles,” or as said, the core values of that. “I have those but I’m not getting what I want.” Seeing where we’re at made it so much so that someone is like, “I could do this and go for it.”
One of the most critical words to this whole psychology is the word simple. Whether it’s incentive plan design or teaching business and finance to people, we’ve got to keep it simple. You could easily make it super complex but as we say in the US, the art is in the simplicity of it, even an iPhone or something. It looks simple but there’s a lot of work that goes into making it look simple.
We tried to make the book simple because a lot of visionaries and entrepreneurs don’t have the attention span like me. They don’t have time for it. It’s a 2.5-hour listen unless you’re on 1.25 or faster. You can get through it a lot, but keeping it simple is very core to our philosophy of incentive plan design. If it’s simple, it’s easy to communicate with people and easy for them to understand. There’s more trust in simplicity. The same thing goes with business literacy and educational pieces to keep it simple.
One of the things you said in one of the masterclasses I watched you do is this is about shaping behavior and making sure that your team is behaving in a way that’s going to either increase revenue or lower expenses. I love your example about how they can participate in the expense reduction. Everybody can. It’s not just the sales team. Usually, some people are like, “I don’t know how to drive revenue. I’m just a frontline employee.” You can at least be honest about your hours. You can clock in and clock out on time. You can stop grabbing a couple of sodas for the drive home. There are a whole bunch of ways as a frontline employee where you can reduce those expenses.
One of the things I remember thinking going through this as an owner myself is, “This sounds awesome.” When we get there at the end, it’s going to be great but there’s this journey that has to happen. It’s like the example you gave about the gal that had 30 employees. It was years of transformation inside her culture and her company before she was ready to exit to her employees. This isn’t something that you wake up one day and say, “I’m going to be a transparent and open book and give everybody this. Everybody is going to be happy and it’s going to work perfectly.” This is something that takes time to get right.
It’s a shift and glacial. There will be little data points along the way where one of your employees asked you a question that a year ago they never would ask. That’s a great indicator that something is sinking in there. I was on a call with a company and the HR guy said, “What can my frontline guy do in the field? They’re not going to be able to drive different costs down.” He was addressing me. The owner said, “They can upsell and offer a filter and these other products,” and some of the things. He gives examples.
There are so many opportunities. These are little decisions that folks can make in the field to drive. Those pennies add up. It becomes a behavioral shift. We define the ideal purpose of the incentive plan, which is the financial carrot that’s out there. It’s not the only thing that’s causing behavioral change, but the ideal incentive plan should shape employee behavior toward improving the financial performance of the company.
It’s not in isolation. It’s not the only thing that’s doing that. It’s got to be buffered with education, reinforcement, meetings, communication and data. If I pull this lever, does the cost go up or down? It’s that kind of thing. It gives them a response and that’s our duty. That takes time. On the accountability chart, those bullets in each of those seats are an element or representation of time. We got to spend time teaching it, reinforcing it, and not getting tired of it. Lencioni calls a Chief Reminding Officer, “They’re going to think I’m being repetitive but I’m telling you, they don’t remember what you said 90 days ago.”
When teaching business or finance, just keep it simple. There's more trust in simplicity. Click To TweetThat’s a key piece too. What I heard you say was there are going to be things, setbacks, and times you have to repeat stuff, remind people, and all the other stuff. As the owner, this is already probably scary for them thinking about this process, but don’t let that fear or those setbacks get in the way of you moving forward to the final thing. Something we see happens a lot is that we know hiring is hard and retaining people is difficult.
Someone told me, “Business would be amazing if it weren’t for the people.” There’s a lot of truth in that, except that what creates the business is the people. For the people that get through that fear and they see the value in being able to get their team to embrace it, transform their culture, get their teams to work on both the revenue and the expense side of the equation to help drive more profits, what is your experience is that we are in one of the most difficult hiring spaces we’ve been in a long time? How does something like this help you differentiate your business? Have you seen 1 or 2 examples of how people were able to use this and being able to bring in more quality hires as well?
It starts on the front end of the hiring process to discuss concepts like cash, profit and understanding that we are running a business. It’s not a not-for-profit. We have to have something down the bottom line to move toward the future. Look at the best places to work surveys. I’m in Columbus, Ohio. A lot of the folks that are winning that type of recognition, typically are serving the entire workforce when they get the data back and compile it.
It’s employee engagement and participation. Hopefully, it’s not just coaching them. They take the survey because we want to show up here and try to attract more candidates. There might be some of those but the bulk of the folks who are getting that type of recognition is attracting higher-quality candidates who want to work at places where they’re respected and their information is shared. We know the winning or losing. They’re working with companies, employees or coworkers that are aligned with their core values. They’re not going into a toxic environment.
A lot of the process, not only in the US but also in Profit Works, pulls out is this, I don’t want to use the word safe environment but it’s not fear-based. There are high expectations of performance. If you come in here, we’re going, traveling and challenging. It’s not like you come in here and you can quit and stay. We’re going to be measuring things. We are shining a light in every corner of the business. We are striving to grow the business. We are ambitious.
There’s an element of an earning mentality that you can interview for. Earning attracts earning. There are no entitlements in a mentality. If you have an adult agreement with your workforce where you live your core values, treat each other with respect, you don’t shoot the messenger, and those kinds of things, you can keep that high level of performance where people are shooting for the big one and not afraid of getting shot.
As you’re talking about that, it’s got me thinking about this topic that has been trending on social media around quiet quitting. I don’t know if you’ve heard that term. During the pandemic, what happened was a lot of organizations laid people off for whatever reason. Instead of rehiring and bringing back all the people, what they did was say, “Alex, you’re a great performer. Do you think you could take on a couple of extra things that aren’t normally within your job description?”
The employees that don’t want to get laid off were like, “I’ll help.” Employers got numb to it and said, “Things are going good again. It’s difficult to hire those so I’m going to let Alex keep doing all the extra things.” The employees are getting wise now and they call it quiet quitting where they said, “You hired me to do X, not X plus Y. I’m going to stop doing Y until you decide you want to compensate me or take care of me for that.”
That’s a great conversation to have. If I want to get paid more, I got to earn it but we’ve got to have that conversation upfront.
It makes conversations like this so much easier. I can go to them and say, “Remember that incentive we talked about? If I go hire somebody else, that takes more of our ability to make profits away.” What I love about it is as scary as it is and as beneficial it is for the owner, it can be very incentivizing and beneficial to the employee as well. That transparency you create through doing this is going to make those conversations so much easier.
When we talk about employee retention, there are intrinsic motivators like what drives you and there are extrinsic ones like money. There’s a balance here in terms of our philosophy at Profit Works where we’re balancing those two. It’s intrinsically valuable to be part of a winning team. A winning team is a profitable team with good cashflow and a great healthy workforce that’s growing and attracting great candidates to our company and so forth.
There’s also that financial piece. Ryan, to your point, it’s got to be interesting. It can’t be too much of a stretch and unattainable wish that set up on a mountain. It’s got to be in there. Our responsibility as entrepreneurs is to provide our team with all the tools, training, and resources to help them achieve that financial performance and take home some extra pay.
Our experience is 5% to 15% wages, you’re in the right ballpark, especially if you’re exceeding your minimum threshold of profit and starting to reach for stretch goals. You’re up to 15%. It’s all very on-the-table conversation. There’s a balance. Part of that entrepreneurial art is balancing the intrinsic with the extrinsic or the money with the softer stuff.
There’s so much in here that we could dig into and so many things that you said that I have thoughts and questions on it. Our readers are like, “I want to know more about that.” How do people learn about you, find out more, and get ahold of you?
The website is probably the best place. It’s ProfitWorksLLC.com. That will get the conversation started. They can certainly send me an email. It’s [email protected]. If you want a conversation, talk about incentive plans or how this work, those are probably the best place to start. I’m also on LinkedIn.
You got a masterclass and a book. There’s a lot of information out there. You got a special offer for our audience. Do you want to talk about that?
Part of the Blue Collar exclusive offer here is if you’d like a hard copy of Profit Works, send an email to us and we’ll get that out to you. Include your mailing address and we’ll get you a copy of Profit Works. It’s a part of trying to help you get better and stronger and think about this more deeply. Take the mindset scorecard at the back of the book. You can also find on ProfitWorksLLC.com the scorecard and other free downloads. I’m happy to offer that free book to your audience.
Alex, thank you so much for being a guest. I’ve enjoyed the conversation so much here that can affect not only employees’ performance and retention but also our ability to attract people.
Thank you, Ryan and Jeremy. I appreciate it.
Important Links
- Profit Works
- ProfitWorksLLC.com
- [email protected]
- LinkedIn – Alex Freytag
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