Start-ups want to motivate employees with a share of profits
Brno startup ROI Hunter helps to effectively manage marketing campaigns on social networks. His boss has been thinking about the possibility of employees sharing the company’s profit for some time. “Since we openly share the company’s turnover with our employees every month, we said that instead of dividends, which do not even exist at startups, we can simply give an equal share of turnover above a certain goal we have for this year,” says Karel Schindler. According to his predictions, the company should be able to reach this year’s target at the end of the third quarter.
The company had experience with profit sharing from the previous year. “At that time, however, we did not yet have the concept of sharing turnover and we joined the goal of increasing budgets for benefits and salaries,” explains Schindler. However, convincing investors to permanently link the company’s profits and employee rewards was a more difficult task. “We believe that this reward system is closer to the startup mentality, where one can get more interesting money than in corporations, but it is not guaranteed and it really depends on how well you are doing,” he argues.
The feeling of working on common things
The math that results in the employee’s final remuneration is relatively simple. “As soon as the company reaches the minimum planned monthly turnover, we will immediately give people a bonus of one third of their salary. Then, in the coming months, we accumulate part of our turnover above this minimum, and at the end of the year we simply calculate half of this money by the number of employees, ”describes Schindler.
According to pessimistic estimates of the company’s development, employees will receive half an extra salary. “In the case of an optimistic scenario, this is a multiple increase in remuneration,” he adds. The decision to share the company’s profits with employees also reflects the difficult beginnings that the startup has gone through in the past.
“Most people have had a hard time with us when we launched a pilot version of the company two years ago and we had to openly admit that we only have money for half a year of operation,” he recalls. But changing pay is not just a way to thank you for your patience or a way to increase productivity. “Our goal is to do things together,” I say.
However, Schindler’s ambitions are tied to concrete financial results. “Our goal is big – we want to affect more than five percent of the global e-commerce markets, the twentieth online purchase in the world. We currently have 1.55 percent of them, so I think it’s possible. To achieve this, we need people who are not only motivated by money, but also by the need for self-realization, “he concludes.
Outdated tax system
ROI Hunter’s story is not unique. In the beginning, startups usually can’t afford to start competing wages to get the people they need. Their main advantage is the vision of rapid growth and the entry of interesting investors, which will be reflected in the remuneration of employees.
“Today, the share in the value of the company is offered to employees almost exclusively by startups from the technological environment. As the Czech technology sector grows, so does the company’s interest in this form of employee motivation, ”says Pavel Marc, a lawyer at the Novalia law firm, who focuses on helping set up stock option programs. (the right of an employee to repurchase a certain number of shares at a pre-agreed price – editor’s note).
Marc sees the main problem in the fact that American option models are transferable to the Czech Republic only by demanding programs, due to the outdated tax system. The investment fund Index Ventures has even included the Czechia in the group of European countries that are supportive of employee option programs.
“One option is virtual option programs, where employees receive money that is taxed as a salary if they end up. This is unfair, because other shareholders have a much lower tax burden, “describes the lawyer.
The second option is schemes in which employees have shares at the beginning of taxes in order to put them on an equal footing with other investors. Although the acquisition of the options itself is not subject to taxation, once the employee has purchased the shares, the difference between the market price of the share and the price at which he bought the shares when exercising the option is taxed as employment income. As a rule, social and health insurance contributions are also paid from such income.
“The law on income taxes needs to be amended to create uncertainty. Within the startup communities, our office strives to professionally support the substantive intent of the amendment. A few weeks ago, we decided on selected politicians who could take advantage of the change in the law, “adds Marc.
The signatories also appeal about the amendment of the tax and framework, which is available easier and more advantageous use of employee shares. Challenges for the second economic transformation, among which are the heads of the largest Czech companies. He considers employee participation in companies’ capital returns to be a good “tool for motivation and social cohesion”, he says on the call page.
It doesn’t work without communication
However, another challenge awaits companies. According to the working psychologist Komárek from the educational company Motivation Labs, in order to really achieve the desired result, it is necessary to be able to interpret the novelty correctly for employees. One possibility is to explain the offer of employee shares as a kind of remuneration, which, however, the employee can deprive of factors that are not directly related to him.
“The company’s shares or profit are often influenced by completely external influences, which cannot be controlled and controlled even by the owner of the company, let alone an ordinary employee,” explains the psychologist.
In this case, the effect may be quite the opposite. “He can translate the risk of reducing the shares in such a way that there is no point in trying, because he does not have it under his control. As a result, creativity and performance in general can be reduced, ”explains Komárek.
Another danger is that a series of small declines and subsequent increases may occur within the long-term growth of the value of shares. “It’s an effect we know from long-term investment. But what if an employee works above standard in a given month and then looks at the value of their shares, which fell that month? ”The psychologist gives another example.
According to the psychologist, the introduction of a profit share should also accompany a change in negotiations with the employee. “The moment employees receive shares as a welcome step, which shows that it is ours, but on the other hand, the company and its managers treat them as subordinates, there is a huge discrepancy between what is communicated internally and what employees really live on, ”he adds.
According to him, the share of profit should be accompanied by a partnership approach of managers to colleagues in teams, invitations to important decisions at the team level, explanation of the context of work and a truly open internal internal.