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