How Profit Sharing Can Boost Employee Morale — and Your Bottom Line

Spreading the wealth to employees when times are good can be a valuable motivational tool.

How Profit Sharing Can Boost Employee Morale — and Your Bottom Line

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The business is doing well and you’d like to show your employees some extra appreciation — and maybe encourage them in a meaningful way to keep up the good work. Consider profit sharing.

We mostly think of profit sharing as a big-company benefit. Where I live and work, in Racine, Wisconsin, home care products giant SC Johnson is famous for doling out hefty profit sharing bonuses to all employees. It’s so well-known that some big-ticket retailers, such as car dealers, have tied sales promotions to the annual profit sharing payday.

But what about small businesses like yours? Can a small firearms business really set up a profit sharing plan? Is it worth considering?


Who Shares Profits?

The consensus among economists is that profit sharing plans boost productivity. How much is hard to say because plans and the companies using them can differ widely. Still, the general trend favors them, as a 2010 report from the National Bureau of Economic Research found.

Roughly one in five employers offers some kind of profit sharing plan, says Kerry Chou, an expert on the subject at Stantec.

The available statistics don’t detail whether the companies that participate in such plans are most likely to be large, small or in between, but Chou is confident that size doesn’t matter: “Profit sharing can be an effective plan at any-size company,” he says. “It promotes the cultural element in the company that we’re a family — we’re going to win or lose together.”

They have other things going for them. “One of the biggest advantages to a profit sharing plan is that, regardless of the company’s size, it’s very simple to understand,” Chou says. “If the company makes profits, we are simply going to be sharing those with the employees.”

The typical profit sharing plan is just what it sounds like: The employer takes a fixed percentage of company profits and pays that money out in the form of bonuses to employees.


How to Pay?

The bonus is typically an annual payment, although nothing stops a business from making payments more frequently — once a quarter, for instance.

It’s also possible to set up a deferred payment plan — contributing the bonus to an employee’s 401(k) or other retirement plan, or breaking a payment into two chunks paid over two years “so the employees have to stay another year to get it,” Chou says.

But variations like those can make accounting a lot more complicated — and also less powerful as an incentive because deferred payments “are less of a value to the employee,” he notes.

“The predominant practice is to simply cut the employees a check to give them the actual cash,” Chou says. “Most employees like cash because they can spend it right away.” And if they want to invest it on their own, they can simply do that.

You’re sold on the idea — so what do you do next? Step one, Chou says, is to determine competitive pay levels for the positions at your organization. Check with local wage surveys (there are many sources, including state and federal agencies, your local employers association, and private consultants) to see where you stand. Don’t simply look at base pay. See what forms of variable pay, such as profit sharing or other bonus plans, prevail in your area as well.

Then identify some expert advisers who understand how profit sharing programs work — a human resources consultant or a suitably qualified attorney or certified public accountant.


How Generous?

The typical plan may set a flat percentage of net income or of EBIDTA — earnings before interest, taxes, depreciation and amortization — to be distributed, usually after profits clear a certain threshold. But you don’t want to make the choice off the top of your head.

Instead, Chou says, take a close look at how much you can realistically afford to share and how much you are willing to pay out if profits hit the target at which the bonus is triggered. Of course, you’ll need to think hard about what that target should be in the first place.

There’s also the question of how to divide the total pool. Again, Chou says, your compensation survey information will be important.

Some employers might take the position that everyone should get the same amount, perhaps with incremental increases based on how long a person has been with the company. But market considerations lead most to scale the bonus according to management rank, he says.

A Big Thank-You

All those considerations point to the care required when setting up a profit-sharing plan. But if it’s something you can afford, it may be well worth it. After all, what better way is there to tell your workers that everyone’s in it together?


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