Start-up Entrepreneurs' Blog

Does Revenue Sharing Work?

July 8, 2010

Revenue sharing is used to entice prospective employees to join the company.  It can also be used to drive schedule progress.  Some companies want to use it to develop a certain corporate culture. But does revenue sharing programs work and under what set of conditions can it succeed? Here is a story of a medium sized company that experimented with such a program.

Brian, the CEO of a privately held company, didn’t want to dilute the equity in the company and didn’t want to give new employees stock options as part of their compensation package. The company stock was held only by the original founders. The company was poised to go IPO in the next year and wanted to offer stock only after the company became public. But Brian felt he had to offer prospective employees something that would make their company’s job offers look as attractive as all those other companies offering stock options.  At the same time, Brian didn’t want to increase the salary offers in order to conserve cash and wanted to bind the employees to the company for several years with the promise of some future bonus.  The company also had a high turnover rate among employees. Brian wanted to alleviate the churn and subsequent disruption to the development process. Brian’s solution was to offer revenue sharing as a substitute for stock options.

The revenue sharing plan had limits and restrictions.  Brian didn’t want the employees to get too much from this plan, but enough to entice them to join and motivate them to work hard during the course of the project.  First, it only applied to the development staff.  Second, it only applied to the revenue from projects that the employees were assigned to.  Third, the amount that any employee could collect was based upon how much revenue the company realized from the product and was limited to $3,000 per employee, which was less than 5% of the employee’s annual salary.  The amount an employee received was based upon management’s opinion about how much each employee contributed to the program. Fourth, employees would only collect if they were still employed by the company when revenue became available.

How did the prospective employees react to this idea?

Not one prospects ever included this issue when negotiating their compensation package.  On the other hand, prior to implementing the revenue sharing program, human resources were often questioned about why the company didn’t offer stock options because these prospects had offers from other companies that did.  So while the program didn’t entice people to join, the prospects did consider the job offers more seriously since it responded to the issue of the lack of stock options.

Did the revenue sharing plan keep the employees motivated to work hard?

No, not one employee ever mentioned the revenue sharing plan while the project was ongoing.  This program didn’t encourage them to work harder to reach their schedule milestones.  The managers concluded it did not motivate employees in the short-term.

How did the employees react when it was time to receive their revenue sharing checks?

Everyone likes to receive unexpected money and this is exactly how employees viewed it. Interesting enough, not all the employees on a project participated in the revenue sharing program; only employees who joined the project in the first year of development were considered eligible.  Employees who were not eligible were not happy campers when others received checks and they didn’t.

What did the rest of the company think?

This program was first implemented with two new projects.  The company itself had other ongoing development projects. It wasn’t long before employees in those other projects learned that those assigned to these two new projects would be earning something more.  This just added to the tension between the development groups which often had to share resources.

Where did the concept go wrong?

Development projects in this company took three years to complete, and then it took another year to realize revenue so the employees weren’t going to receive checks for four years.  The reward was too far out in the future to motivate the employees in the here and now.  Second, the amount of money was too small to encourage people to stay.  When employees resigned and took a new position, they easily made up the amount in the salary increase from the new job offer.  Lastly, it became a management and human resource nightmare to track which employees worked on which projects and who was eligible for which product’s revenue sharing program.

What ultimately happened?

Since it didn’t seem to entice employees to join, the program was eventually discontinued. In order to motivate employees to accomplish tasks in accordance with the schedule, a quarterly bonus program was implemented.  Employees set their own quarterly milestones. Of course, the managers checked the milestones in order to make sure they were reasonable. The experienced project leaders set the quarterly goals for the college hires, who were not able to determine their own goals. Based upon how much of their goals employees accomplished by the end of the quarter, employees collect a proportionate amount of their maximum bonus.  This program worked quite well in getting employees to achieve their goals.

Filed under: Funny Stories and Humor,Management,Team Building

Tags: bonus plans, project management, revenue sharing, start-up human resources, stock options