Here’s a question I received from an MSP client:
“I’m considering offering profit sharing on MRR deals with a percentage of profits divided between all employees. My thought is that they will better serve the client if they are getting a piece of the profits. What are your thoughts and do you have a recommended profit-sharing plan? My thought is, 10% shared with employees that touch the client, after all hard expenses?”
This is a great question but one that is not answered quickly. Let me do my best to be concise, yet complete enough to be useful.
Let’s start with the question we’re really trying to answer here, which is “How do you motivate employees to do an EXCELLENT job?” That’s really what you’re trying to figure out. An aside: It’s helpful whenever you are trying to solve a problem to spend a little time defining what the problem IS or what the RESULT is that you’re after, THEN be open to any and all ways of achieving that. But I digress; back to the question about getting employees to perform…
For starters, not all employees are money-motivated. Yes, they will take it if you OFFER it. But will they work harder, smarter, longer hours IF you give them more money? Maybe.
If that were universally true, then salespeople would be working from the crack of dawn until late into the evening to build their pipeline, prospecting their little butts off, documenting, practicing and perfecting their sales presentations. Hell, most MSP owners aren’t that motivated. If you think you are, then show me what you did in the last week to ensure you earned more money – and I don’t mean the day-to-day running of the business and fulfilling on services already sold. I also don’t mean what deals you closed (those were already in the works). I asked, what did you DO…IMPLEMENT…put into ACTION to dramatically improve your sales and profits?
So, while I’m not opposed to profit sharing, I would NOT just give your employees a cut of the profits with the hope that they will care more and do their job better. Let me walk through the process of what I would do so this doesn’t end up being a giant entitlement program that drains your profits.
FIRST: Do each of your employees have an updated, complete job scorecard that spells out the results they are hired to deliver? Have they been told and shown what excellence looks like? Do they know what the OKRs (objectives and key results) are for their position? Have you detailed out HOW to take care of customers – and I mean in detail, role-played, scripted and practiced?
If NOT, you need to start here.
How should they respond to tickets to ensure high CSAT (Customer Satisfaction Score) and profitability? How do they handle an upset client? What should they be doing weekly and daily to ensure the best possible service to your clients? When Nido Qubein, president of High Point University, teaches his leadership team what excellence is, he doesn’t just talk about it. He walks the campus and SHOWS them what excellence looks like. He points out a trash can that has the seam showing instead of being turned to the wall as it should be. He points out the rocking chairs that have not been wiped dry after the rain. He orchestrates, to the minute, how an employee should perform the new student tour, scripting each pause, each question, each story of every part of the university. He has highly trained compliance managers looking for UN-WOW.
So, before you start implementing profit sharing, do you have what “success” looks like clearly defined, so you can build your incentive program to drive the standards and behaviors that drive success in their job.
Next: Get a solid handle on your finances BEFORE you start designing ANY incentive plan. I may be wrong (because I don’t know your finances), but 10% seems way too rich. My guess is that you don’t have reliable or accurate financials, and you need to learn a bit more about creating a budget for your MSP before promising more money to your team.
For example, your service gross margin (not hardware and product resale) should be 48%+, with an overall gross margin (before SG&A, or sales, general and admin) of 42%. If you are nowhere near these percentages, no one should be promised an extra dime – you’re underperforming financially. This may require you to raise your prices, lower your COGs (tools and labor) or fix your service department so the techs are far better utilized.
But even IF you’re hitting those targets now, giving 10% of top line would require you to raise your rates by that amount to cover the added costs. Ten percent off the top means 10% off the bottom line as well. If you’re only generating 40% gross margin and then you give another 10% of top line, your gross margin instantly drops to 30%, which is unsustainable, and you will tank your business or face the reality of not sharing profits.
Now, let’s suppose you’re hitting those margin targets. Here’s a simple example of how you might share those profits:
MRR: $100,000
Gross Margin Target: 42% or $42,000
IF gross margin gets to 43% or above, that 1%+ goes into a profit pool that is shared. I would suggest some portion (50% or less) goes to the company, and the rest is shared with the team. For example, let’s suppose in Q2 your team gets to 45% gross margin. It would look like this:
MRR: $100,000
Gross Margin 45%: $45,000
Profit Pool: $3,000
50% To The Company: $1,500
50% Shared: $1,500
Note: You can always use your company portion to gift to employees if you like, but this allows you to share in the profits and set aside retained earnings OR invest it into marketing, tools, training, etc.
The $1,500 should be shared with those who directly impact that. You could share it so everyone gets something, but the majority of the money should go to the service manager, lead tech or the individual who had the top performance.
Finally…
Once you have a baseline for performance (scorecards) and a solid handle on the financials, I’d advise you to START by incentivizing them on things they can specifically control. Can a Level 1 tech control gross profit? No. Can they impact it? Yes, but their impact is limited UNLESS they are given full and complete control to make financial decisions, as well as hiring and firing decisions. Therefore, you want to bonus them on what they can control, such as:
- Ticket kill rate
- Utilization
- CSAT on their tickets
- Following your processes and procedures
Giving them an arbitrary percentage of MRR will do nothing to incentivize them to improve their specific performance. They might be happier, but they didn’t have to improve to EARN it. And trust me when I say that giving employees money is not a guarantee they’ll remain loyal, hardworking and grateful.
The other reason to tie the bonus to things they directly control and impact is so you don’t create an environment of resentment.
If MRR drops because the sales and marketing department isn’t doing their job, that tech is very likely to resent you and the marketing and sales team since they are suppressing his/her ability to make more money. You offered it, and now it’s what they expect. Know this: Once you tell an employee you’re offering a profit-sharing plan or a bonus, they’ve already mentally developed an entitlement to it. They’re picking out the new car and looking at vacation packages.
Therefore, you have to be VERY careful about implementing incentive plans where they are not 100% in control of the outcome. You can provide a small team incentive, but the bulk of their bonus needs to come from what THEY do. Nothing is more demoralizing than employees who feel they are being screwed out of compensation they are “owed” or dangling a carrot that is impossible to reach OR that is completely out of their control. It breeds drama in a culture.
And finally, let me share another caution about profit sharing (speaking from the voice of experience here): Make sure they cannot abandon all success metrics to hit THE metric they’re getting bonused on.
Let’s say you bonus them ENTIRELY on profitability. You have to make sure they don’t cut corners on customer service or burn the team out in an attempt to just hit that metric. They can become SO focused on profitability that they make decisions based on what moves that metric instead of what’s best for the client, the team or the company, giving a short-term win (and getting their bonus) but doing long-term damage. When I bonused team members, the stipulation was that all other critical metrics (customer satisfaction, churn, employee morale, etc.) remained high and on target.
With all this said, I’m 100% FOR some type of profit sharing. For the right people, it’s an extremely smart move to incentivize them to take ownership and allow them to be rewarded for their hard work. But I would only do it in very specific situations with someone who I know CAN take on that responsibility, where performance standards are already clear and being met, processes and procedures are in place and TRUST HAS BEEN EARNED.
Give it to the employee who is ALREADY exceeding expectations, taking on responsibility and being a true asset. Do NOT give it to the underperformer in an attempt to turn them into a rock star. You’ll be sorely disappointed.
