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Profit Sharing at Stylus Systems

By Vinny Alex

Human resource management has always been an important area at Stylus since it's inception. One challenge was to develop a compensation system that would be fair, yet at the same time based on results.

In our case (as with many other smaller companies) the operation teams are also closely involved with client communication, marketing, and in many cases, even mundane office work such as accounts, buying office supplies etc- all of which would somehow help save costs and increase profitability.

The challenge was to evolve a system of rewards based on performance that encouraged people to look at long-term results

As a startup with just 3 people (all promoters) it was pretty easy and intuitive - everybody just did what it took to stay afloat. But as the organization grew, it added on people who are looking at building careers and who were more specialized in their chosen areas.

This brought us to some fundamental questions - if a software developer only developed software, then would we not need specialists in every area such as accounts, billing and payment collection? And even in design, there were the architects, the designers, the database programmers, the ASP/ JSP / Perl / Cold fusion programmers, QC teams etc. In such a scenario, would not the generalist who does a number of tasks, some of which are "non-billable", get sidelined? For example, how would we evaluate the "value" contributed by a person, who spent the extra time taking designing, developing, and nurturing our own websites? After all, it may take months to show results, by which time these contributions would get long forgotten. Another question was the Catch 22 situation that all small companies face - we can't offer high salaries till we make more money, and we can't make more money till we attract the best talent by offering great salaries.

The easy way out was to decide fixed salaries based on the perceived value that the person brought to the organization, rather than just the number of hours of client or "billable" work. But this calls for arbitrary decisions and compromises. The problem with compromises was that it, at best, left everyone equally unhappy. And besides, any ad-hoc rewards only encouraged everyone to look at short term, spectacular solutions. The challenge was to evolve a system of rewards based on performance that encouraged people to look at long-term results.

This seemed to be the ideal time to introduce Stock Options. Unfortunately, we were not yet at a phase where we could look at an IPO, and neither were the promoters too keen on "selling out".

Thanks to the power of the Internet and the Search Engines, we were quickly able to look at different options available in this area. Conventional 401K / ESOP/ Stock Option programs were screened out simply because we were not listed on any Stock Exchange. Finally, after almost 4 weeks of research, we settled on the Stock Appreciation Rights program (commonly called SAR or Phantom Stock Options) as a probable delivery vehicle for our reward dreams. Based on this framework, we devised a novel (at least we think so!) rewards program.

The SAR would be linked directly to the net profit of the company. At the beginning of the year, we would settle on the percentage that will be kept aside for distribution. We would also update the entire organization on the financial status of the organization, as well as the plans for the coming year. Financial updates would be published on the Company Portal at regular intervals, so that every employee knows the current status of the SAR and our progress against the year plans.

Any activity, whether it increases revenue or reduces cost would be valued, since both help increase the overall profitability.

Any activity, whether it increases revenue or reduces cost would be valued, since both help increase the overall profitability. Even adding new resources would be done carefully, since more people would mean less for each person, unless there was more than proportional increase in profits. Thus there was an inbuilt incentive to build efficiencies and this ensured that the organization remained competitive at all times.

In order to keep the systems of rewards objective and integrated with the various performance measurement criteria, the development team set about defining an objective "grid" which took into account the individual's score on factors such as the Competency Improvement Plan (similar to a Performance Appraisal, but focusing on building the individual's and organization's competency) experience, market value, and alignment to Core Values.

Of course, in tune with our philosophy that all employees add value, even employees that were in staff functions such as Human Resources, Finance, accounts and system administration were included in the program. This helped bring the team together, ensuring that every employee was aware (or made aware by his colleagues) of the value that they brought to the organization.

The team also studied other organizations where the SAR program had failed, and identified that one major reason for the failure was the complexity of the entire program. Unlike a conventional Stock Options program, where the daily Stock Exchange quotes told the employee how much his stock was worth, the SAR demanded that he/she do the complicated calculations himself / herself. In order to simplify this process we developed a "calculator" where all that the employee had to do was to type in the number of shares, and the projected income for the period and they would instantly know how much they would make. The calculator also allowed the employee to view the share value under different scenarios, such as higher productivity or changing workforce.

Overall, it helped to boost the feeling of value and ownership in the minds of all the member of Team Stylus, in addition to the fact that it fostered longer-term thinking and teamwork, since success benefited everyone. Above all, it created an environment of fair play, where every employee knew what was up for grabs. Moreover, since the monthly financial summary was presented monthly to the entire organization, everyone felt the need to involve in ensuring the organization moved ahead, month after month.

Will it succeed? We figure that only time will tell. But in one area at least it's already proved it's worth - in terms of the time that top management now needs to spend to decide on ad hoc rewards. This time saved could be put to better use in planning and ensuring that the company made money - for everyone.