The Downside of Being Upfront with Employees

.Growing your business

One of the core principles of creating a more valuable business is ensuring your business can run without you by getting managers to think like owners.  

The theory goes that empowered employees are the best positioned to solve your company’s thorniest issues, as they are the ones closest to the problems. In theory, people feel more like they are part of a bigger cause and this has the potential to contribute positively to a company’s culture.

‘NZ Data Company’

Potential is used because being too open with employees can also backfire. To illustrate, let’s look at the example of a NZ company we’ll call the NZ Data Company, founded in 2003. The owner had built this consulting business up to more than $3 million in revenue by 2011. Now he wanted to build it into a $15- million business. He knew that a $15- million business would have the scale to provide his employees with more opportunities. It would also provide him with a better exit multiple if he ever wanted to sell.  

Fifteen Cubed— Goal of Getting to $15 Million

To galvanise his team around the idea of getting to $15 million, the owner came up with a catchy concept dubbed “Fifteen Cubed”. The idea was that his team would help him build ‘NZ Data’ to $15 million in annual revenue by the year 2015. If successful, he would share 15% of the proceeds of the sale with his staff. 

The owner announced the goal willing the employees along to their collective goal. The employees stood to gain personally if they were able to achieve their common goal. 

Initially, the program was received positively, but a year after the announcement, ‘NZ Data’ had failed to grow. Another year went by and still the company was stuck at $3 million to $4 million in revenue.

Suddenly, the prospect of hitting $15 million looked like a long shot. Ultimately, the only way he could see them hitting the goal was to merge his company with a much larger one. That’s exactly what he did when he swapped his equity for a minority stake a consulting company five times bigger.

The merged companies exceeded $15 million in combined sales. As a result. his employees were able to participate in the merged company’s phantom stock option program. It was a good outcome for all involved, but not quite the home run that the owner had imagined.

Keeping Employees in the Know

Being open with employees can be a great energy boost when things are going well. Employees see the charts and graphs all moving up and to the right and that can contribute to a positive vibe in the office. But just like using leverage when buying a house can boost results in a good market and magnify mistakes when things turn down, being open has the potential to backfire dramatically if you don’t reach your projected numbers.

Entrepreneurs can handle a high degree of ambiguity and you probably have an abnormally high degree of optimism. Just remember the people who work for you have chosen not to be entrepreneurs and for some of them, there may be such a thing as too much information.

Leave a Reply

Your email address will not be published. Required fields are marked *