Your company would not be where it is today without your team. One way to say thanks and give back is by offering a profit-sharing plan. This incentivized compensation program increases employee loyalty and can encourage them to be more vested in the business’s long-term success.
There are a number of different options when it comes to developing a profit-sharing program and you can customize it, so it suits your organization. This offering is viable for both small and large businesses.
The goal of profit sharing is to help employees save for retirement. The amount given to the employees is based on your discretion and this can change from year to year. Also, if a profit is not made during a given year, you do not have to make contributions to the plan.
Why Offer Profit Sharing
Barry Schneider, president of Surrounds Landscaping, based in Sterling, Virginia, says they offer profit sharing because he found at their previous company, it had a positive effect on the team. He says it helps add a bit of reality to their conversations.
“For instance, when we are having a team meeting and saying we’re in this together, we’re a family, we’re almost there, let’s finish strong,” Schneider says. “It’s a form of what’s good for owners is good for the rest of the team. I believe it’s important to put your money where your mouth is. It’s definitely an added benefit that our company rallies around, especially at our quarterly state of the company meetings. There the leadership reports to the entire team how we are doing and what profit sharing looks like if we follow our plan the rest of the year.”
At Landscape Workshop, they implemented their incentive structure when their current CEO joined in 2014.
“Our goal was to align compensation with both individual and company performance to the greatest extent we could get good data,” says Christianna Denelsbeck, CFO for Landscape Workshop, based in Birmingham, Alabama.
Jim Westover, president of LandOpt, adds that profit sharing helps employees take ownership of their jobs as they have “skin in the game” and can actively influence what they earn through bonuses or other incentives. He says offering profit sharing also gives companies a competitive recruiting edge and helps with retention as well.
If you decide you’d like to implement a profit-sharing plan, there are several elements you’ll have to define, such as what type of plan you’d like to use, what are the revenue goals before staff is awarded, and who on staff is eligible for profit sharing.
Two main profit-sharing plans are the cash profit-sharing plan and the deferred profit-sharing plan.
A cash profit-sharing plan pays a portion of your profits directly to employees and is taxed as regular income. Employees don’t have to use this money as an investment or retirement money. It is a good option for younger employees who prefer to have more cash upfront. Schneider says they use a cash profit-sharing plan.
Meanwhile, a deferred profit-sharing plan is a retirement plan for your employees. The portion of your shared profits is contributed to the plan pre-tax. Your employees do not contribute to the plan and are only taxed on the proceeds when they withdraw funds. When they reach the age of 59 ½, employees can take distribution penalty-free. For those who leave your company before retirement age, they can transfer their assets into a Rollover IRA.
“This should be considered on a case-by-case basis,” Westover says. “For the majority of the industry, a cash profit-sharing plan is necessary due to turnover and employees’ desire to be paid quickly. However, a deferred profit-sharing plan could be used to incentivize employees to stay longer and build loyalty to the organization. This approach may be most appropriate for managers and senior-level management.”
As for determining the revenue goal for payouts, Westover says he commonly sees companies create a bonus pool for employees that is awarded after the company exceeds their profitability goal for the year or quarter. Some use a model where 20 percent of the profits are shared with employees once the annual profit goal is met.
Schneider says their expectation is for the total company to have a minimum net profit of six percent in order for profit sharing to pay out. Landscape Workshop incentivizes based on their bottom-line performance using their EBITDA as a metric.
With employee eligibility, Schneider says every employee is immediately eligible for profit sharing. Even those who don’t work a full year get a prorated share. Denelsbeck says currently the managers of the company are eligible for their incentive structure after joining the company, but they are hopeful to roll this further down in the organization in coming years.