Your business has been doing considerably well this year. You have increased sales, improved customer service, and nearly doubled your profit from last year. You know that a large part of this year’s success is directly contributed to your hard working, devoted team of employees. You want to show your appreciation and reward them for their dedication. You are considering offering a profit sharing, which does have its pros and cons. Before jumping in, there are a few things to consider.
The obvious benefit of a profit sharing plan is employee morale. Your employees will appreciate that you have noticed their hard work over the last year. Morale will improve as employees are aware they work for a fair and honest employer.
However, morale can quickly change should the employees find out that management got a considerably higher bonus. Employees that contributed the most may be resentful that a low-performing manager received more money.
Profit sharing is generally calculated using one of many set formulas. One common formula awards an amount by taking the percentage of profit (as designated by employer) divided by the number of employees. This type of profit sharing will seem more fair to lower pay employees, while it may seem unjust to higher salary employees.
Some companies may calculate the bonus using an employee’s yearly salary. For example, an employee may receive 1% of their yearly salary. However, we all know there are employees making way more money than they deserve.
A less popular formula considers the amount of years the employee worked there and their age. For example, a 40 year old employee working there for 15 years would have a score of 55. The amount of the bonus would then depend on an employees’ level in the scoring system.
There may be controversy with any one of the above mentioned formulas. However, for the most part, employees will just be appreciative to receive any type of bonus. They will feel good that, as a team, they have accomplished goals and worked hard together.
If you are going to offer profit sharing, be aware that over time it may become something employees automatically expect. Be sure to clarify that profit sharing will be based solely on the financial figures regarding profit. If you are having a negative year, profit sharing may not be allocated for. However, if you address the guarantee of profit sharing in a job offer or contract, you are required to follow through with your promises.
Profit sharing is generally distributed once a year, after yearly totals are in. However, some companies may issue it every 6 months or even quarterly. The general goal is to reward employees for hard work. However, handled improperly, profit sharing can quickly lower morale. It should be handled as something that employees can expect when they’ve worked hard and contributed toward an increased profit.
If you promise it, follow through. If your company has a tradition of sharing profits with employees, strive to continue it. Consider Wal-mart’s recent announcement of the end of its 40 year long profit sharing program. Do you think employee morale is going to be affected?
Profit sharing can be a great motivational tool used to reward your hard working employees. Handled correctly, you may just see your employees working harder to increase your company’s success.
Don B says
I set up a profit sharing plan with Steidle Pension Solutions a few years ago that has been a great benefit to be able to offer my employees. I did not think that a small company like mine could afford it, but Steidle’s low fees have made it quite affordable. The plan also allows employees to defer salary to the plan, which I know they appreciate.