Profit sharing plans

Developing a plan where employee compensation is linked to productivity. June 24, 2001

Question
I am looking for a profit sharing plan where employee productivity can be linked to compensation.

Forum Responses
I've created many profit sharing or incentive pay systems. It's hard to set up one that's simple and fair to both the employee and company. You could start with an incentive pay agreement that pays a bonus on completion of a job under budgeted hours, but this may have a negative effect on quality and safety. You could also just pay piece-meal, but this is very difficult for a small shop with mostly custom work. You could get more complex by actually paying a true profit sharing bonus, but this involves you "opening up" your books and I have found leads to more questions than anything.

In the end, I think the plans that work best involve a small portion of all of the above. One that rewards employees for efficiency, quality, safety and profitability.

In a small shop with only a couple employees, you could have an incentive plan based on completing jobs on schedule or ahead of schedule with part of the calculation based on a quality ranking. I'm a big fan of the customer rating the quality, by use of a follow-up letter/survey or phone call. I've also seen quality measured by a subjective score card completed by the entire crew, customer callbacks or scraps and reworks.

I like to use systems that reward for safe work on a monthly basis. There are many programs out there, some similar to bingo games, but your workers comp carrier should be able to help you out with these.

Lastly, the yearend bonus based on company profitability. I've seen these work in several different ways, also. One of the best was a profit chart that was posted on the wall and updated monthly. It didn't show the numbers, but simply a year end goal and a line. Then the actual line was plotted against it. Very effective as a daily reminder of good work.

If you create a formal plan, make it in writing and state something like, "Nothing in this agreement is intended to change the at-will nature of the employee's employment...." You still want the ability to terminate the employee at any time and for any reason.

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I've made two guys small partners with a buyout option (they can still quit and I can still fire them, but it costs me or them money). Other than that, if I'm raking it in, I do the random cash bonus to the guys that put in the effort to help the profit margin. I think across the board employee ownership is not appreciated and often not deserved. You bled for the business and made it--give freely when you feel like it and more permanently to those you could not live without.

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I tried a profit sharing plan. It turned into a disaster. Everything was fine when we were making good money, then along came a couple of poor quarters where we lost money. I was accused of cheating by some employees, others had already pre-spent their share and were mad when they didn't get any. Several didn't think they got a big enough piece of the pie. One told me that since I was making money off the employees I owed them the bulk of the profits! Never again! I now pay bonus money as available. I tie it to profit but don't state it exactly that way. I will pay more or less quarterly, but not exactly. I don't want them to tell me "It's July first, where's my money?"