Time limited virtual shares

Pros and cons of profit-sharing

I, like many more people before myself, have often pondered about benefits of profit-sharing schemes within corporation. In theory various option packages could give some more incentive, but given the fact that I work in old and large company, not some startup, there would be limited possibility of those options growing into something huge. And of course, as company has very large amount of employees - my share would be exceptionally small.

Also, as I am just one of thousands of people working for the company, and I am not in very high up position, my influence to general profits and therefore share value, would be very very small. So, I would not feel much correlation between my work and extra benefit of being a shareholder.

If there would be any other profit-sharing scheme, then result would be similar - person working in supporting, IT, Network or Accounting department, would be too detached from actual business decisions to feel that his work is directly influencing the company profit in any meaningful way.

Also, sometimes my feelings as an employee, could completely contradict those that shareholder would feel. For example - if large corporation would decide to cut the workforce of marketing department by half, thus making extra savings and keeping company leaner - then shareholder might get happier and stock value could increase by couple of percent points. On the other hand, for employee of marketing department, it would seem that he has to do extra work (if he is not fired), and as he owns so little amount shares, then any increase in their value would be barely noticeable - thus forcing that person to fight against the change.

Or, for example, if company would decide to move some of its operations overseas, employees would not like it, even if companies profit (including their profit sharing part) would rise. There would be no productivity gain by having profit sharing agreement in those scenarios. In fact, option packages for employees might even become problem in a longer term - as that would mean that people working longer in the company would have more stock than new hires, even if their contribution to bottom line is far lower. That would reward loyalty over merit, and while it could be beneficial for particular employee, for company as a whole it would surely be bad.

Outsourcing as an answer

On the other end of the scale for the company is outsourcing the whole sectors of its work to side companies, while keeping only profit generating departments in-house. In such scenario, profit-sharing schemes might work, as only those people who directly impact the income, would be affected, while all supporting functions are outsourced under contracts with strict SLAs.

Problem with this way of doing business, is that in a longer term, all knowledge of supporting functions stays outside the company, processes are harder to change and multiple vendors become harder and harder to control and there is a premium to be paid for vendor profit margin as well. And of course, people employed by vendor do not feel any connection to client-company profit at all, so all productivity boosting is solely in the hands of vendor management.

Those are two extremes of strategies company could have, with most companies being somewhere in the middle. But 'in the middle' only regarding amount of profit-sharing and outsourcing used, not in the sense of ideas they have employed.

So, how could we put those to extremes together to create some median version to gain productivity and stay competitive; and have all that both short and long term?

Idea

My answer is something you could call "time limited sub-shareholding". Lets take IT department of an medium sized company - it has around 80 people, it has a budget, it has a plan for changes for a year ahead, it has a top manager.

Lets take this department and turn it into virtual company with virtual shares. And virtual profit. All while keeping every single employee/asset/contract as a part of original corporation.

I bet, that many people (Myself included) have often thought about some improvements that could be done to their daily work tasks, environment, assets, software, etc; but could not be bothered, as that would hardly give themselves some direct benefit - more often than not, it would temporarily bring more hassle and more work, to result in long term benefits for the company. Long term benefits for an employee are usually lot less predictable and are along the lines 'will see when we decide yearly salary increase' or 'will take that into account when handing out quarterly bonus'. And often even less.

So, lets take planned yearly budget and give every dollar that is saved directly to employees themselves, at the end of the year. Make figures public and predictable. And keep your promises.

Lets give our example IT department 80 employees, average salary with taxes €70'000, yearly office costs €128'000, software license costs €1'500'000 per year, various vendor support costs  €800'000 per year, amortization and depreciation for hardware and other equipment - €500'000.
It is very simple approximation of our theoretical costs  - but keep in mind, that every organisation does such a budgeting for departments anyway. And hopefully the fore casted budget breaks even.

With this budget of around 7,2 million, it becomes interesting to see what happens if we could cut lets say 20% off of it, each employee could cash in almost €18'000, which is a lot of money for an person who earns €70'000 a year. For a company of course there will be no difference - it will still have to pay 7,2M.

Lets dig in deeper on how to make this work. Obviously if this virtual company with savings shared between employees would last only for one year, then it would be hard to ensure that long term goals are achieved as well. Employees could just decide to do something stupid for a short term gain, without any thought of long term health of say IT system. Other problem would be that changes in staffing would be problematic, if everyone is a stakeholder. Also, new investments for longer term plans would not work well, if not especially catered for.

Answer to first issue would be extension of benefit gained. For example, if, in above example, we see that everyone who has helped to cut 20% of expenses will get 18'000 after year has ended  - we could easily extend this benefit for sub-sequential years as well. If benefits stay as-is and no problems arise because of cuts. Lets say, that people would continue to receive monetary bonus every year for five years, each year twice as small as the year when costs were saved. First year, 18'000 second year 9'000, third year 4,500, fourth year 2250, fifth year 1125, sixth year 562. Good incentive to keep medium term planning good. And if costs start to go up again, benefits are stopped.
Company would start gaining from second year, but it would still be better than no productivity gains at all.

Nice touch would be, that virtual company would exist only in some years, not all the time. So, we have it for one year - everyone involved makes boosts the productivity as much as possible, gets the bonus and start waiting for sub-sequential bonuses. At the same time, virtual company is dissolved, and it becomes department again. Top management then can state, that if department has survived this experiment in a good shape, and for next two years everything works very good, they will repeat the virtualisation. That will give incentive for people who participated in the first round, and also for people who have joined company afterwards and thus do not have previous incentives to look forward to. Of course, planning needs to be clever - so people do not start amassing unnecessary things in their budgets, so they would have something to cut, afterwards.

So, please comment the idea, if you find it interesting. Also, comment if you have constructive criticism.
Btw, if this idea has been described somewhere else already, it would be interesting to read that.