I am trying to get some insights regarding potential gross margin sharing approach for a hardware company. Company sells hardware to consumers, it is already profitable.
Engineers are scarce and management wants to optimize performance. One of the ideas they are considering is gross margin (Revenue minus COGS) sharing for the company.
They devised a system that is semi democratic. People and managers collectively allocate percent for each member out of a total pool. Pool doesn’t get large, new members reduce everyone’s share. They will make twice a year payments to people who has this right.
Their thinking is
- This doesn’t dilute ownership of the company and existing stock holders,
- This creates incentive for people to be more motivated (participation in company success, better pay)
- Other side benefits (better retention, more productivity and less hiring since the sharing pool gets larger, individual shares get smaller, likely better alignment because people will crowd out non performers and will force people to play nicer)
I am trying to think about counter points about their approach and one of them is that it will possibly create a bit more hostile environment if the share allocation is not managed well. Otherwise it is a well devised system.
What do you think ? How it can/will break and fail ?