Question
I would like to get a profit sharing plan going instead of continuing to give raises. I'm hoping that this will help keep my employees while reducing my exposure if things slow down for a month or two. Anyone have ideas on to how to approach this? Monthly check separate from payroll is what I'm considering. What percentage do you consider appropriate?
Forum Responses
(Business and Management Forum)
From contributor L:
Been told by my CPA that you have to run it with payroll check, or just like one, and give IRS its share. Have heard of shops using gift cards to big box stores like Target, Walmart, Home Depot, etc., tools too. But only a rumor of course. Research has shown 250.00 bonus quarterly will do more to boost morale than raises, and help your exposure.
My guess is that (for good reason) few business owners are willing to make the process transparent by showing employees the books, so the whole arrangement breeds suspicion. ("They're making more money than they're telling us about.")
There's also the problem that such checks are likely to be based on whether the shop profits as a whole, but the choice to work harder or smarter is made by individuals. Any individual who works harder than those around him ends up watching the increased profits that he personally earned get put into everyone else's pockets. I hope there's a good way to set this sort of thing up, but I haven't seen it yet.
Contributor J, being a business owner, I have been there: offer profit sharing in hopes that the crew will finally start producing enough to generate a profit for the business! And yes, the business needs a baseline profit to keep its doors open, but many businesses barely keep their doors open, so profit sharing never materializes. There's a Catch-22 in there somewhere.
For years I looked for a good way to setup a production incentive program, and generally found nothing except consultants that wanted to do it for a fee. But finally I added enough clues together to get something along the following lines. This works well for me, but I do have about 44 employees right now. I know you have to be careful so you don't give away money you don't have! I have done that many times.
Here are the mechanics... First you need something to measure productivity by that you can hold your employees responsible for. I make cabinet doors, so I cannot know what works for you (not all doors take the same amount of labor, so I had to invent a measurement that tries to measure labor equally. I came up with something years ago that started out as a guess on how many minutes it takes to produce a raised panel door, flat panel door, double panels, arches, etc.) I would imagine that maybe counting finished cabinet boxes, or counting lineal feet of cabinets, might work. It doesn't have to be perfect, just maybe 80% accurate for starters as to the relationship to labor input. Let's use an example of lineal feet.
Determine your minimum acceptable profit (10%, for example). Determine how many lineal feet must be produced per day so that even on short months (20 day months), and with the normal business ups and downs, you make 10% at the end of the month. (10 lineal feet, for example.) I am assuming you have already paid yourself something as salary first. Profit is over and above that.
Determine how much profit you make for each additional lineal foot over 10' per day. So for a 20 day month, say this is $900 additional profit for an 11' per day average. (These may be ridiculous numbers, but just examples).
The idea is to motivate: I suggest your payout be 1/3 of that additional profit to the crew, which would be $300 (per lineal foot over 10 ft). They make more, you make more. This is a win/win situation. Don't get stingy. You can't motivate with peanuts.
Now you want to determine what percentage to add to their monthly pay. Say you have $10 and $15/hour employees. Make an Excel spreadsheet that multiplies their hours worked (straight hours, no 1.5 for overtime hours) times their base pay. Now use a long month - 23 days. 23 days x 8 hours x $25/hour pay = $4600. You are going to pay $300, or 6.5% (rounded) of their base pay x hours worked. $120 to one guy, and $180 to the other in a long month
This is how you sell it to your employees - "For every foot over 10 feet average monthly production, you will get 6.5% of your hours worked x base pay for the month." Adjust the percentage up or down as you like. Supervisors get at least double the percentage of floor guys, and a shop foreman with 20 underlings might get 5X that percentage. This allows you to keep supervisor and foreman pay very modest if they are making minimum expected production levels. If they cannot achieve the minimum (average 10 ft per day), then you will be looking for new supervisors/foremen.
Now you have your guys talking at break about how they can do 13 lineal feet per day for May so they can get a healthy bonus. You have more self-directed, motivated employees. You are making more money.
All numbers and percentages are just used for the example. You have to determine what is right for your business. Remember that most months (longer than 20 days) you already have made more than your minimum profit before you start paying bonuses.
The local NPR station interviewed an author not long ago who'd studied employee happiness at many companies. She ranked "more money" as being fourth or fifth on her list of effective motivators. If I remember right, the most important thing was that employers/bosses needed to be aware that their employees are individuals with different goals, desires, and priorities. Policies that assume everyone wants the same things may be attractive because they seem evenhanded and easier to implement, but they aren't very effective. What works is to speak personally with each employee, find out what they want, and do your best to help them achieve it.
This author also covered the basics of what causes employee dissatisfaction. She had a list, but one that resonated with me was that people can't stomach working in the service of values they don't share. My last employer was very religious; dumb people who went to his church were promoted ahead of smart people who didn't. Jesus-talk was tossed around to a degree that made my skin crawl.
To answer the original question, we have two bonus programs (talk to your accountant about why you should not call it profit sharing).
For sales and front office staff, we pay bonuses based on revenue goal attainment. We found with these people, who are money motivated, that setting a high but achievable threshold and then further incentivizing to exceed goals significantly is the best plan. We do not give partial credit (sales rep A achieves 80% of his monthly quota, he gets $0; sales rep B hits 120%, he gets 120% of his bonus).
Our warehouse, manufacturing, and team leads get bonuses based on measurable goals. Since we are lean and routinely make outsource/insource decisions, we do not pay bonuses based on production volume.
Our key objectives are:
Freight claims below 2% of revenue
Order mistakes (wrong item, etc.) less than 1% of revenue
Meet committed ship date 95% of the time
Unexcused absences by all staff less than 2 man days/month (we have 15 people in the shop)
No more than 4 tardy arrivals per month (across the staff of 15)
We set a perfect score for each category that is weighted. Overall perfect score for the month is 1000, minimum score to get any bonus is 750. At 750 they get 75% of the available bonus pool, going up to 100% at 1000 points. We also offer to double the bonus for the quarter if we get three consecutive months of 975 or more (hasn't happened yet but we've been close). Any employee with a write up offense in the month is ineligible for bonus.
We have posters in the break room that I update every evening so the guys know exactly where they are at. We sometimes offer extra credit for things like volunteering to work Saturdays, exceptional customer service, key business or process improvement suggestions, etc.
All the managers are paid on MBOs that are measurable goal driven, like the shop/warehouse plan, but are also tied to the company's performance. Managers who don't meet goals (paid quarterly) are terminated after 2 sequential misses or 3 misses in a 12 month period of time. This has only happened once. Our sales staff average 60% of their total comp in bonuses, our warehouse and shop staff 40%, and our managers 70%.
In my opinion, give them more raises and give them other perks - buy them lunch occasionally or take them golfing or anything, but stay away from profit sharing unless you can guarantee them about the same checks every quarter.
I think we might've worked for the same family.
"...give them other perks - buy them lunch occasionally..."
That company also used to buy everyone popsicles on hot summer days. Employees were almost as disappointed when that stopped as when they quit giving Christmas bonuses - it's not just the measurable value of the benefit that counts, it's also the meaning of it; i.e., does the boss even notice that his employees are in a dusty, sweltering 90 degree shop while he's making phone calls from an air-conditioned office?
I owned a shop for 38 years. I retired at age 56. In the 25 years I had a SEP plan, only 2 employees were with me the required 3 years to qualify, and I put 15% of my net into it every year. I never found that it helped keep any employee even though it was explained to every new hire. I had a 3 man shop and worked right alongside the employees until they went home at 5, then I did all the owner required stuff till who knows when. I have a couple of boats, RV, paid for home, and every toy I ever wanted, all while paying high wages for my area and running a quality shop. Even with a plan that all the employee had to do to qualify for a 15% pay boost was to shut up and work. Believe me, they still eyeball what the owner has, know that it was earned on their back, and never give a thought to the millions the owner has invested that they don't.
If it makes you feel less guilty about having more than your employees, go for it. If you think it is going to make your crew more efficient, or keep an employee from hopping jobs for a 50 cent an hour raise, you are mistaken. Most employees don't think beyond next Friday's pay check. After all, we'll have social security when we get too tired to work... And you wonder why old people end up living on melamine laced cat food from China?
We used to do piecework. People used to make anywhere from 9.00/hr to 35.00/hr. Eventually all the high paid people quit because they didn't like the pace and burnout, and I was left with the slow workers, and was unable to replace the fast workers.
We now try to maintain a nice, clean, professional place to work. We try to help people with their careers, schooling, training, etc. People are not quite as productive, but there are less problems.
I think that the profit sharing deal is not worth the effort and headaches. I mean everyone who does it admits they pay their employees a smaller base rate, anyway.
"Didn't do a damn thing. The people who were showing up continued to show up. The people who weren't still didn't."
That to me says it all. Not everyone is going to be a superstar, but when people can't be bothered showing up, why are you employing them?
We have about 20 guys on our workshop floor - the foreman and supervisor are all on a bonus that is a percentage of profit. They are on an above average basic wage, but they know that the bonus is the smartest way for them to increase their income.
We give away 20% of our profit - we pay profit percentage bonuses to the people who can improve our business as they influence other people or control/supervise areas. That's 18% - the last 2% is basically discretionary; we might pay .25% to a young guy who has just finished his apprenticeship but is doing a great job. We might pay .25% to our receptionist if she's made our life easier. We might pay .75% to our machine operator if he keeps the machine in good condition with minimal downtime and maximum output. We also basically give new kitchens to people who've given us good service - in the past two years we've "given" three employees a kitchen which would retail for around $25k.
Throwing out bonuses to everyone isn't going to achieve a lot - as you said, the good people will continue to be good, the bad people will continue to be bad. Case in point; we recently upgraded a young guy to our "Senior Group" - increased pay and responsibility which he'd been asking for; he's done a very good job since. A guy the same age as him, who is as capable, but has a terrible attitude - we sat him down and told him exactly what we'd done, the size of the other guy's pay rise, all the other stuff - no secrets. Told him that if he could improve his attitude and become a team player then we would increase his wage as well. But we told him it was non-negotiable; either he did it or he left, we don't want him if he's only half-here mentally.
Surprise, surprise, he's leaving. He started making noises in the workshop that he deserved more money and that he was going to look for another job - so we finished him up and told him to go find another job. We gave him the opportunity to make more money, but he'd rather continue to be an idiot. The best part was that a lot of our junior guys basically said get rid of him, he's being an idiot.
We've made it very clear to everyone - if you can improve your performance and it means that you can do the work of 1.5 people, we'll pay you 1.25 times the pay. We want a small, self-sufficient, self-disciplined workforce.
The other important thing, as evidenced here - don't promise bonuses and the like if you're full of shit. If you tell your guys you'll pay them a bonus if they reach a certain figure, and you reached the figure and then stiff them, you'll screw yourself.
Hands down, nothing beats an honest, look them in the eye, talk. Tell him/her what is expected, and provide continuous feedback, with a heavy hand, loud on the praise, and a quick way to fix the screw up. I have made it a point to talk to everyone (about 85 people) and let them know where they stand at least twice a month. That approach has beat out all the convoluted bonuses, performance based targets, retirement plans, etc. we tried and then subsequently dismantled.
Similar to above I've used a specialized bonus to reward the behavior that I want my employees excited to perform at their individual task. It's important to include disincentives for poor quality, attendance, attitude, or whatever else you want to manipulate.
Don't be cheap, make sure it is well understood, and update bonus information for the employees to review (and make it accessible for their review as regularly as possible). What do I mean by not cheap? Give the potential for an additional 25% of gross wages.
It is also a fantastic recruitment tool. It won't take long before your town knows that you take good care of your employees. You want to be the employer of choice, not the employer of last resort. (Couple it with a substance abuse policy if you haven't enacted one already, give your folks 30 day notice that it is coming, if they want to keep their job, it’s time to get clean).
Atta boys are free and they need to be used. I want employees that are thinking about their retirement and so 401kf’s are fantastic, but I want my employees’ spouses happy that their sig other is working for me and that means a regular bonus.
A very wise man once told me "pay your good employees a little bit more than they think they are worth and you'll get it all back." He was right.
