Increasing Profits by Opening the Books

Financial transparency and giving workers at all levels a direct stake in a company's success can help boost efficiency and earnings, says Jody Heymann

All 213 employees at Great Little Box know exactly how profitable the business is. Executives at the Canadian packaging manufacturer discuss the company's finances, production, and sales performance in detail at monthly meetings with staff that ranges from machine operators on the factory floor to senior managers. Such open-book management is tied to the company's profit-sharing strategy: 15 percent of pretax earnings are split equally among everyone at Great Little Box. The company started profit sharing in 1991 because they believed employees would work harder if they felt "they matter and their work matters," says Margaret Meggy, who co-founded the company with her husband and now serves as its human resources chief.

She's right. Our research shows that sharing financial information and profits with low-skilled workers helps boost both efficiency and profits. Yet while sharing profits and financial data with top managers is common, it is rare at the bottom of the corporate ladder. Only 1 percent of American companies use open-book finances, according to CFO magazine.

At Great Little Box, managers and factory workers alike say the openness motivates everyone to work harder because they want to increase the company's profits—and their own income. And they don't let colleagues slack off because they know that any drop in performance reduces their own earnings. As a result, even the lowest-level employees act like managers, looking for ways to reduce costs and improve productivity. One example: A maintenance worker suggested trimming a quarter-inch of cardboard from some packaging, a change that saves Great Little Box thousands of dollars a month. "The less waste, the more profit," says Tyler Martinuk, 53, who operates a die-cutter and has been with the company since 1986. The company expects revenue to reach $35 million in 2010 from $30 million last year. Though it was hit by the recession, Great Little Box has been able to buy struggling rivals, acquiring the assets of two companies since the beginning of 2009, with two more deals in the works.

Dancing Deer Baking in Boston's Roxbury neighborhood has achieved similar results with what the company calls stock options. Since 2001 the small gourmet baker with 63 employees has offered options to all—managers, bakers, and cookie packagers alike—that are sold back to the company when workers quit or retire. Like Great Little Box, Dancing Deer holds regular meetings to discuss finances, and employees are encouraged to find ways to boost profits. Workers this year found that 15 percent of brownies ended up being thrown out because the shape of the pans required the edges to be cut off after baking. New pans cost $35,000, an investment that paid for itself in three months, Chief Executive Officer Frank Carpenito says. From 2004 to 2009, Dancing Deer's sales more than doubled, to greater than $10 million annually.

So why doesn't every company use open-book management and profit sharing? Perhaps because it seems counterintuitive. If you're operating on slim margins, can you afford to share the little profit that you're making? A better question might be whether you can afford not to. A survey of Inc. magazine's list of what it judges the 500 fastest growing companies in the U.S. reveals that, like Great Little Box and Dancing Deer, 40 percent use open-book management.

I led a six-year global study of companies seeking to improve conditions for employees at every level. After reviewing hundreds of companies from auto-parts makers to drug producers, we did in-depth studies of a dozen of them. Ranging in size from 27 employees to more than 100,000, these companies all make money in part because they improved conditions for all employees. Managers were receptive to suggestions from line workers, who often knew best how to cut unnecessary costs, and they all said the change in working conditions increased productivity. The companies we studied all had managed to achieve one key feat: removing the blinders that can prevent leaders from recognizing that what has worked at the top of the organization can be just as successful, if not more so, at the bottom.

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