Hope to hang onto your best employees? Do this one thing.

By Bill Fotsch and John Case

Today’s tight labor market presents some pressing questions for entrepreneurs. How can you make your workplace so engaging that your best people have no reason to think of leaving? How can you keep attracting the new talent you need for growth?

You can always raise pay levels and improve your benefits. You can also sponsor all of the things that are supposed to boost employee engagement: better workspaces and equipment, contests, trips, picnics, bowling nights, and so on. Of course, it’s not clear how well any of these measures work. The only thing that’s certain is that they cost money.

But what if you could boost people’s engagement and increase their pay and make more money in your company, all at the same time?

It’s very possible, and no, it’s not snake oil. It’s a market-tested method of management that we call economic engagement. It’s also known as open-book management, though that’s really a misnomer—you don’t have to open the books if you don’t want to. The key isn’t sharing all of the financials. It’s helping employees understand the economics of the business and figure out how to improve results, and then sharing the incremental wealth. As we and our colleague Dennis Campbell have argued in Harvard Business Review, economic engagement not only boosts a company’s performance, it also improves people’s work lives and paychecks. It makes employees more valuable to their employer because they understand the business. 

Know your numbers

The system begins with an observation: business is pretty interesting. Most of us like to make money, and figuring out how to do so is a challenge we enjoy. Of course, people have to know the rules of the game. They need to know how their company makes money—the fundamental economics of the business. They need to know how they and their teams contribute to the value the company creates.

The best way to build this knowledge is to identify one or two easily understandable numbers that are directly tied to those economics. Billable hours. Shipments. Average tab in a restaurant—whatever makes sense in your business. Getting everyone involved in determining the right performance metric will help generate buy-in. 

Next, ask people to track the performance metric week to week. Once they’re comfortable, ask them to forecast the number a few weeks or a few months out. Pretty soon they’ll be thinking proactively, in terms of cause and effect, and coming up with ideas for moving the needle in the right direction. 

If your company is too big for everyone to be involved in tracking overall corporate performance, try breaking the organization down into natural economic units, such as branches, divisions, or profit centers. Even cost centers, like HR and back-office operations, can be treated as separate businesses. Just imagine that the rest of the company is contracting with them.

Metrics that matter

Once people are familiar with the key number, work with them to set targets—targets that will generate incremental profits. If they hit or exceed the targets, they get a bonus—maybe 15% to 30% of the additional gains. That way, both they and the company will come out on top. 

We work with an engineering firm in Idaho that has grown in recent years from a handful of employees to a staff of more than 40. The folks there track revenue per total paid hours on a scoreboard that everyone in the company sees. Right now, the firm is on track to generate a bonus worth 12 extra weeks of pay for everyone on the payroll, plus record profits for the company. Last year’s bonus was 11 weeks of pay and the company also enjoyed record profits.

Money like that has a way of encouraging people not to jump ship. It also has a way of creating a good feeling about the business: We’re successful. We’re building value. We’re sharing in what we create.

The risk of inertia

Is economic engagement for everybody? In our experience, some owners and managers are reluctant to share any numbers at all with their employees, though their reluctance decreases when we explain that they don’t have to post full financials on the wall. Even so, some are old-fashioned control freaks, preferring a company where employees do what they are told and don’t ask too many questions. Economic engagement is not for them. 

Of course, the command-and-control companies may face challenges from competitors that do embrace economic engagement, and that are therefore more nimble, more efficient, and more focused on customers. Over time, we suspect that the best employees will gravitate to the latter group. Working that way is more profitable, and more fun.

Bill Fotsch is founder and president of Open-Book Coaching. John Case is a writer who has published widely on open-book management and related business philosophies.