A Profit Sharing Plan to Consider

This is the time of year when we think about giving and receiving, either personally or within your company.  The question is, how do you determine how much to give and how do you allocate it amongst your employees?

    Over the years I have seen all manor of bonus or profit sharing programs, and most of them have been somewhat vague and subjective in nature. Often bonuses are determined for selective employees at the end of the year and depend, to some extent, on the mood of the owner. Sometimes it is the same amount as the previous year, and is pretty much an expectation as far as the employee is concerned. In other words, instead of a bonus based on performance, it becomes part of the expected annual compensation. My suggestion is that you turn any giving into an opportunity to motivate your employees to maximize the profitability of the company. A set plan to share profits is the way to do this. 

    I believe that the most effective way to set up a profit sharing plan is to set a minimum net profit threshold (before tax) at the beginning of the year that is retained with the company, and then agree to share anything over that with the employees. This threshold is set so that the company has sufficient retained profit to allow for necessary reinvestment in the business and allows the company to maintain a strong balance sheet. 

    This threshold can be set in a number of different ways; as an amount over a certain net profit margin, an amount over a certain return on equity, or an amount over a set return on total assets. Any amount over the threshold is shared on some percentage basis, which could vary between say 30% to 70%. The greater the percentage, the more the employees are motivated to work hard and beat the threshold. The threshold is established at the beginning of the year and communicated to the employees. It is then important to report periodically on how the company is doing versus the threshold so that they can see if their hard work is paying off. 

    The end result of this plan is that employees are seriously focused on maximizing the profit of your company and their goals are in perfect alignment your yours. This is a very powerful and exciting situation because they know that the harder they work the more they will make (and vice versa).

    Distributions from the profit sharing pool can either be on a per capita basis or based on compensation or level in the company. I have a number of clients on a plan like this and I can report to you that it works really well. Employees have a laser beam focus on the bottom line and work very hard to make it as much over the threshold as possible. 

    Click on the following link to download a detailed outline of this type of plan. My hope for all of you is that you have lots of profits to share, and that you have a joyous and happy holiday season and new year! 

Profit plan outline

Tracy Bech