I often tell my students that management’s philosophy can make or break a business. A good example is the decision to practice open book accounting. The recent settlement between the NBA Owners and the players union focused on the split of revenues from basketball operations. The players have claimed 57% of net revenues since 2003 when the last collective bargaining agreement was signed. Most teams/owners claimed they could not make enough to cover this level of profit sharing so they locked out players on July 1st of this year. The league has been closed for business for the last five months. http://www.washingtonpost.com/blogs/wizards-insider/post/nba-lockout-owners-players-reach-tentative-agreement/2011/11/26/gIQA5EeRyN_blog.html
Entrepreneurs succeed in a large measure according to how well they recruit and retain talent. One reason employees leave a position for another is higher compensation or the “potential” to make more through stock options or profit-sharing. Without profit sharing, players claim the NBA owners are making millions and stingy with player’s salaries. Owners complain that players high expectations and demands drive them into the red.
In order for profit sharing to work as part of an employee’s compensation, the workers or employees must agree to take a portion of the total net revenues whether they go up or go down. In some ways, the employees that accept profit-sharing become part-owners because their compensation contains a fixed and variable amount tied to the success and profitability of the venture.
Accepting a profit-share and opening the books are both conscious decisions that increase the potential for team oriented goals and decisions that impact all contributors to the success of the business or venture. The risk is misunderstandings and combative relations when a cohesive strategy is not agreed upon.
Employees or in this case, the NBA players union had access to the financial data for each club and from league operations since 2003. At a minimum the players wanted to see the franchisee’s income statement and balance sheet, but that information does not provide the “granularity” to determine what products are losing money and those that are extremely profitable.
In the ideal situation, a profitability analysis is provided along with a list of highly compensated managers. This requires a high level of trust between the owners of the business, its management, and the employees. This level of trust opens management up to criticism because under open book accounting, management’s compensation, major expenses, and income statements can be accessed and scrutinized by the employees or their union representatives.
On the other hand, management shares the real costs of doing business which is often hidden in public accounting reports. Employees often have the misperception that the company or certain profits are much more profitable than they really are. For the season to begin the NBA owners required a reduction to 49% in the player’s profit-share. There was certainly more “give and take” to the final agreement, but we do not have those details yet.
For NBA players and owners, the 2012 season will be the one when all stakeholders decided to “share the pie”. For the NFL, the players and owners believe they can grow the pie and benefit all parties. It has been one key ingredient in the NFL’s success and sets the standard for all of professional sports.