(The Saga of RB Builders©, written by Fletcher Groves III in 2007, looks back futuristically from the perspective of 2012. It is being republished this year, as a nine-part series in Big Builder. It is a glance into the process of continuous improvement, a glance into the never-ending quest for better operating performance and higher economic return)
The final condition imposed by RB Builders’ owners was that any cost associated with this results-based approach be self-funding (in other words, it had to be paid for from the outcomes it produced). Therefore, payouts under the plan had to come from performance above the GI Baseline; in no way could any payout diminish Net Income.
Mindful of the self-funding requirement and comfortable with the decision to focus on Gross Income--and wanting a plan that would be seen as reasonable and would motivate the behavior of all its internal stakeholders--RB Builders’ owners agreed to distribute all of the 2008 Gross Income Reserve (the Gross Income earned above the GI Baseline, projected to be the difference between the GI Baseline and the GI Target) on the following basis:
Retained Earnings: 30% ($450,000)
Distributions to Owners: 30% ($450,000)
Employees: 30% ($450,000)
R-B Consultant: 10% ($150,000)
Having the same percentage distribution (30%) as RB Builders’ owners made the company’s employees--for the first time--want to think, care, and act more like business-owners, and, thus, they began to view RB Builders’ owners (and their intrepid, results-based consultant) as partners with common goals and mutual self-interests.
In order to maintain the level of intensity and interest throughout the year--and to avoid paying distributions from Gross Income the company would have expected to receive anyway--RB Builders created a progressive, rear-weighted payout system based on the achievement of Gross Income Milestones.
If RB Builders fully-achieved its Gross Income Target, the plan would pay out eight times a year. The amount of a GI Milestone was determined by dividing the Gross Income Target ($12.5 million) by the number of milestones (8). In 2008, the way the numbers worked out, it resulted in GI Milestones sized at a little over $1.5 million:
$12,500,000 ÷ 8 = $1,562,500
Whenever the company reached a GI Milestone (i.e., generated $1,562,500 in Gross Income), the plan would pay out the employee and consultant portions of the distribution. By design, each successive GI Milestone was worth more than its predecessor. The first payout was only worth $30,000, but it would payout early in the year, around mid-February; the eighth payout was worth $150,000, but the team would probably be in a race to reach that milestone before the end of the year. The amounts of payouts two through seven fell progressively between payouts one and eight.
The distribution of Gross Income above the GI Baseline was strictly conditioned upon the generation and receipt of Gross Income: If fewer milestones were reached, the number of payouts was automatically reduced, and--owing to the progressive nature of the payouts – the amount of the payouts from the milestones that were reached was considerably less. The arrangement applied to everyone--owners, executives, employees, intrepid results-based consultant, alike. It was perceived as fair, by everyone. It was an arrangement ideally suited to a savvy, mutually-accountable, motivated team pursuing a common goal, one in which there would no longer be winners and losers, only winners or losers. It was an arrangement that gave company leaders the credibility to lead, to demand performance and results.
Part V: Setting Out: 2008-2009 (July 2016)
Part VI: 2010: Farewell to a Trusted Advisor (August 2016)
Part VII: Pre-2012: A Changing Market (September 2016)
Part VIII: More-for-Less (October 2016)
Part IX: 2012: Beyond Current Possibility (November 2016)