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Business Adviser

The importance of people to your business

By Dennis Fortnum
Canadian Managing Partner,
KPMG Enterprise

Upturns, downturns – how the ever changing economic circumstances globally have impacted the environment to build a successful enterprise might be one thing. How this ebb and flow of constant change and uncertainty has impacted the talent pool is yet another. Demographic forces are also at work. Boomers are remaining in the workforce longer than expected and Gen Y is jostling for positions of greater responsibility and immediate input and contribution to their employer of choice.

More than ever, it’s important for business owners to attract and retain the very top talent – and that’s no easy feat. Business owners recognize the more talent you have on your team, the greater your competitive edge – and everyone is looking for that edge. I hear about this all the time from business owners and entrepreneurs across the country. We are often asked about recruiting, developing and retaining talented high potential employees. It’s one of the top issues that keep business owners awake at night. As the nature of the work force changes, from an industrial worker to a service worker to a knowledge worker, the leadership paradigm has had to shift from command and control to participatory leadership that engages the necessary people that will help your business grow and thrive.

Therefore, this edition of Business Adviser looks at the importance of human capital – developing innovative and engaged people – because how you manage this very important component of your business will ultimately determine how successful your business will be.

Innovation starts and stops with peopleal
Network Analysis

By Inge Christensen
Thinking Coach and Creative Consultant

In 2003 I wrote an article for the National Post about a buzzword: innovation. I observed – with data to back me up – that although executives talked it up as critical to survival, few companies were actually doing it.

Four years later, in a survey* of Canadian corporations on the topic of innovation, 88% of executives reiterated that innovation is important to the future of their organization. In contrast, only 22% had a formal process for it and only 33% thought their organization was effective at it. Only 37% said they even understood the process. While admitting slow progress, nearly half claimed that their corporate culture “encouraged innovation.”

Clearly, there is a huge gap between intent and action. Although the reasons for this are complex, in my opinion, one truth trumps them all: innovation starts with ideas, ideas come from people and, therefore, innovation starts (and stops) with people. Creativity is personal and people decide how they will contribute ideas to their organization (or not) based on their feelings. Emotion has turned innovation into murky waters.

I once interviewed William Gordon, famous inventor and founder of Synectics (a global innovation consultancy), and he summed up the barrier to corporate innovation in one word: fear. Understandably, most people are not willing to jump into murky waters. Here’s why:

• They’re not compelled to do it. People turn off when the driver of innovation is fear-based e.g., issues created by a lagging economy. They’re waiting to hear goals that inspire them.
• They don’t know how to do it. People are overwhelmed by the amount of information on innovation; it has made the topic inaccessible. They’re waiting for a way to harvest ideas that is user-friendly and efficient.
• They don’t have time to do it. People won’t invest in “creative work” if it competes with “regular work” for which outputs are measured. They’re waiting for their bosses to address this conflict of priorities.

While employees are waiting for their leaders to make it safe to swim, executives have fears of their own, heightened by their accountability. Some try to go swimming without getting wet i.e., manage risk to the point where innovation is not possible.

So how do you get into the water from where you’re standing right now? Do exactly that: get in. Understand that innovation doesn’t have to be a deep dive. Start by wading in up to your knees and then keep moving. Gather teams and leaders, and walk in together. The first steps are…

• Determine what you want to innovate. Set realistic goals – incremental innovation is where most companies begin – and align them with your strategic plan. Be specific about what kinds of new ideas will create value for the organization and how that value will be measured.
• Establish a common framework for generating ideas. Make it usable by people from all functional areas, for challenges of all types and sizes. Make it simple, efficient and strategic, and describe it in plain language.
• Establish a common language to talk about innovation. Reinforce goals and value in daily “creative conversations” between leaders and teams. Discuss the progress of each creative challenge in terms of the framework (above) so that next steps are always clear.

Is swimming a risk? Yes, but so is staying on the shore. A 2010 survey** revealed that innovation, competition and human resources were the top three factors Canadian executives believe will most affect their company in the next three years. They’re all linked: in order to attract and retain the creative people who will grow your company’s competitive edge, you need to offer an innovative culture. When your best thinkers jump in with great ideas, keep them energized vs. asking them to swim against the current.

It’s only because innovation starts with people that emotion can get in the way of it. The organization that accepts and works with this reality has a platform on which to build and sustain an innovative culture. The key is communication, collaboration and empathy. Inspire employees to share their ideas and then make it safe and productive for them to do that. Tell them, “Come on in – the water’s fine,” and really mean it.

*The 2007 Business Pulse Survey of Corporate Canada produced by the Schulich School of Business (York University). The 2007 edition focused on innovation.

** The 2010 edition of the same survey, above.

The simple truth on minimum wages:
that it’s not so simple

By Ted Mallett
VP/Chief Economist,
Canadian Federation of Independent Business (CFIB)

There are many things in life that I would really like to be true all the time. For instance, I can only imagine what mealtimes would be like in a world where a rule “If it tastes good, then it must be good for you” always applies. Maybe that is just me, but the same applies to thoughts on how societies should function. Alas, despite these hopes, I find that things aren’t so simple.

Honestly, I really wish that society could reduce or eliminate poverty with a sweet and simple policy like minimum wage. I mean who doesn’t? We see most of the general public supporting increases in the minimum wage. And, as experts in political math, our elected representatives are only too happy to oblige. So, in a time of economic turbulence where people are more concerned about wellbeing, it is no real surprise that minimum wages, depending on the province, have increased between 18% and 33% in the past four years. But as with good-tasting food, good-sounding policy usually leads to unintended consequences. In the case of minimum wages, the counterbalance is employment—particularly among the young and inexperienced.

Unfortunately, it is not so simple to raise any concerns about a policy to a great many people who think it is so simple. Any debate about the usefulness of minimum wage policy invariably and wrongly gets parsed down to one of ‘employer versus employee’. Because there are a many more employees than employers, we know who will win a debate on that kind of playing field. CFIB’s approach has been to attempt a reframe of the debate. It involves saying that, other than the pain of transition, employers are not really affected in the long run because they will adjust their operations to compensate. In reality, the true victims are the other employees who lose hours or get shut out of job opportunities entirely. The winners are workers, indeed, but only those who are lucky enough to retain their number of hours of work. Even so, they don’t get to keep all of the benefit since tax and source deductions will claim a chunk.

How big is its effect on employment? That depends obviously on the scale of wage increase. The body of evidence collected by CFIB from dozens of studies conducted by economists in recent years suggests that for every 10% increase in minimum wage, employment of minimum wage workers falls between 1% and 4% depending on the type of job or sector. It would be nice to have more precise estimates, but there is simply no way to get enough data to filter out the effect of the countless other economic influences on wages and employment. Some have taken the imprecision as a sign of proof that no real impact exists, but overall, there are few areas of economics where practitioners have been more unanimous.

As challenging the issue is in the public policy arena, it is in the workplace where the real impacts are felt. Individual employee pay levels ultimately depend on the productive value they bring into the business. Most businesses don’t operate with many minimum wage employees, if at all, so they tend not to be affected significantly by minimum wage legislation. However, others, due to the nature or structure of their business, rely on that form of employment. It may sound cold, but one cannot really expect that employees be paid beyond their level of contribution. Those are the ones who get dropped. Employers also tell us they face internal friction because experienced employees who have earned progressive wage increases due to their higher skills are suddenly paid much closer to that of raw recruits. The equation thus tilts toward employers opting for fewer, more experienced employees or, if possible, alternatives like outsourcing or greater reliance on capital equipment.

Minimum wages are now in the region of $10/hour. No one I know is suggesting we backtrack on the increases that have already taken place. But in the future, we need to look at more targeted policies like employment tax credits or the basic personal exemption levels to address low income and retain opportunities for young people to move into productive jobs. That would be a simpler solution—one worth chewing on.

Reducing taxes can increase wealth

By Charles Murphy
Partner,
KPMG Enterprise/Toronto

As an owner of an incorporated business, it is important to take steps to control and reduce your corporate and personal income taxes. Overlooking these taxes today could significantly reduce your wealth in the future. Experience has shown that the following basic tax planning ideas can help owner-managers get income and capital out of their businesses tax-effectively.

Determine the Optimum Salary/Dividend Mix

Owner-managers of incorporated businesses have several alternatives for getting remuneration from their corporations, such as receiving a salary and dividends on their shares. Unfortunately, there is no “one-size-fits-all” when it comes to determining the most tax-effective split between salary and dividends. The optimum split depends on cash flow needs, the owner’s other income levels, the corporation’s status and its income level, and many other factors.

In the past, it was often a good strategy for a privately-owned corporation to pay enough salary to reduce the corporation’s income to the small business limit (currently $500,000 for federal purposes). This maximized the amount of income that is taxed at the low small business rate, without having corporate income taxed at the higher rates that apply to income beyond the small business limit. If you’re using this strategy, you may want to revisit it because recent changes to the taxation of dividends have upset the old rules of thumb.

Consider Other Tax-Effective Ways to Extract Funds from Your Corporation

Repay loans from shareholders
If you have lent funds to the corporation, it can repay any amount of the loan without tax consequences. Such a repayment is neither deductible to the corporation nor taxable to you.

Alternatively, you could arrange to have the corporation pay you interest on your loan. The interest paid will normally be taxable to you as investment income. The tax effect would be about the same as if the corporation paid you that amount in salary. The interest will generally be deductible to the corporation as long as it has a legal obligation to pay the interest.

Return paid-up capital
Any amount that is less than the corporation’s “paid-up capital” (PUC) may be paid out to the shareholders as a repayment of capital, generally with no tax consequences.

If the corporation was originally funded with a substantial amount of capital, consider extracting funds by a reduction of the corporation’s PUC. Make sure the corporation remains sufficiently capitalized to satisfy any requirements of its creditors or bankers.

PUC is essentially the amount of capital contributed to the corporation in exchange for its shares. However, the figure can be adjusted in various ways for tax purposes. As such, the legal PUC often differs from the tax PUC.

Pay capital dividends
Only one-half of capital gains are taxed. When a private corporation realizes a capital gain, the untaxed portion is added to its “capital dividend account”. Similarly, one-half of any capital losses reduces the capital dividend account.

Any amount in the corporation’s capital dividend account may be paid out entirely tax-free to its shareholders. This preserves the non-taxability of the appropriate fraction of the capital gain. So if the corporation has realized any capital gains (net of realized losses), you should generally cause it to pay out capital dividends as your first choice for extracting funds.

For the dividend payment to qualify for tax-free distribution, the appropriate tax election forms and directors’ resolutions must be filed with the CRA before the dividends are declared payable from the corporation. If you do not file the tax elections in advance, penalties could apply.

Note also that if you allow a capital dividend account to build up in the corporation without paying capital dividends, the account can be reduced or wiped out by future capital losses. Once you have paid out capital dividends, however, they are safely out of the corporation, and subsequent capital losses will have no effect on them.

Other tax planning ideas you may want to explore include estate planning, lifetime capital gains exemption planning, income splitting, life insurance and incorporating your investments.

Business owners that reduce their corporate and personal income tax can help to maximize their wealth and effectively save for the future.

Insight into Next Generation

By Natasha Kanji
Manager,
KPMG Enterprise/Toronto

By Sam Lee
Manager,
KPMG Enterprise/Toronto

Over the years, business leaders, managers, HR practitioners, and workers have developed much interest in discussing and defining the characteristics of the generations. Beyond the office, we continue to hear about this topic through the media, studies and books. A multigenerational workforce comprised of different groups can present both challenges and opportunities to employers as they work to understand and manage generational perceptions in the workplace to translate them into strategies to maximize workforce performance. Various studies have defined the generations slightly differently, but for the purposes of this article we will use the following categorization: Generation X (born 1965-1979), Generation Y (born 1980-2000) and Generation Z (2001-present).

What are some key characteristics of Generation Y and implications for private company and small business employers?
In terms of work, Gen Y’s are characterized as capable of multi-tasking quickly, are results oriented and have a preference for doing meaningful work that is both challenging and fulfilling that makes an impact to their workplace and society. They can be loyal and give 110 percent to an organization, but they are not planning to stay for 10 years. Generation Y is accustomed to a direct and timely communication style and value frequent encouragement and recognition for their efforts. Above all, technology has shaped how Gen Ys learn and process information. They have grown up in a decidedly different electronic world and the internet has offered them greater access to information and virtual communication than ever before.

So what does this all mean for a private company and small business employer?
While there might be great challenges to managing this workforce, there are decidedly great opportunities as well.  Gen Ys are driven by what they work on, where they work and who they work with. This is good news for startups and small businesses that can’t offer the highest salaries to compete with big brand name corporations, but can offer flexibility, a funky workspace and sense of ownership. Small to medium sized businesses hold a special appeal for Gen-Ys, as they appreciate flexibility and nimbleness that an entrepreneurial company can offer as well as space where they can have the freedom to succeed or fail. In the owner-managed business world, the opportunity for immediate impact is very attractive, in contrast to a corporation; there is greater visibility and access to work side-by-side with senior executives of the company and “rub elbows” with the decision-makers.  Flexibility also appeals to the need for work life balance for this cohort. The busiest generation ever isn’t going to give up its activities just because of jobs and a rigid schedule is a sure-fire way to lose your Gen-Y employees invested in various charities and outside activities.

Employers of private businesses should offer an environment where they can act as mentors or coaches rather than managers. Employers can bring out the best in their workers by teaching them about the company and explaining how their work will lead to specific results. These workers want to be assigned to projects they can learn and grow from. Gen Ys are full of ideas and they want to feel like they matter and thus this type of environment works well for this generation where listening and being heard matters. Gen Ys want to feel that they are valuable contributors and as such are generally motivated by working on projects where they can see the results of their efforts. Gen Y also values feedback. Supervisors who set performance objectives, and evaluate performance through quarterly performance checks on an ongoing basis give a sense of really investing time and effort into giving feedback that employees can act on. Often public recognition for a job well done is more effective than a pay raise and no recognition. Proper encouragement can lead to engaged employees who are motivated to show their best work.

In this highly competitive business environment, business owners around the world recognize that a key differentiator is their people. Generation Y represents a large portion of the employee base in the workplace today. A key factor to maximizing the potential of this workforce is by understanding their different motivators and developing approaches, programs, and practices that will allow your business to realize the benefits that each generation brings to the table preparing for the next.

Business Adviser is published by KPMG Enterprise™ specifically for owners and executives of private companies. KPMG Enterprise is devoted exclusively to helping business owners and entrepreneurs build thriving enterprises. For further information about how KPMG Enterprise can help private companies, visit www.kpmg.ca/enterprise.