Three Good and One Bad Reason to Offer Profit Sharing Rather Than Bonuses
Often, employees expect to receive a bonus around Christmas time because they have in the past. When the economy was good and businesses were making money, it was easy and felt good for the employer to give out bonuses. And, employees typically feel if they worked hard they deserve a bonus. The problem with that method is that in tough economic times when profits are small or even non-existent, the employees still expects bonuses. Employers who put themselves in this position can be extremely challenged trying to explain why they are not giving out bonuses even if employees had been working really hard. To avoid the the challenges that come with bonuses remodelers can consider offering profit sharing instead.
Profit sharing can be used and offered for a variety of reasons. Profit-sharing plans can be a great way to improve and keep employee morale, loyalty, and retention up. They are also a good way to motivate employees in participating in earning and protecting company profits because as part of the plan they have a vested interest in doing so.
Three Good Reasons to offer profit sharing
Reason #1: Some profit sharing plans have to do with creating retirement plans for employees. Remodelers who have the ability to offer such plans can take advantage of them to attract good employees. Most remodeling businesses do not offer retirement plans, so if yours does you might be able to grab the “cream of the crop” to enhance your team. Also, properly designed profit sharing retirement plans can even help keep employees working at the business long term by including a vesting schedule that requires the employee to be at the business for a certain amount of time before all or portions of the money shared becomes theirs. If you would like to use this type of profit sharing plan one of your first decisions should be whether to set up the plan yourself or to consult a professional or financial institution for help with establishing and maintaining the plan. I recommend getting help due to the complexity of legal and tax considerations.
Reason #2: A smart remodeling business owner understands that employee performance is tied directly to how vested they feel to the company they work for. Because they can be a powerful incentive for employees to work harder for the company many remodelers are now beginning to consider profit sharing plans. By sharing profits earned the plans benefit both the business and the employees. Employees gain a sense of satisfaction from knowing they'll all get a cut of the profits. For the business, it's also likely that the added productivity will increase the overall financial performance of the company. Basically, if the business earns more profit, and the amount shared back with employees is less than the extra amount earned, sharing some with employees is a no brainer.
Reason #3: By creating and offering a profit sharing plan a business can change the culture from "let’s just get it done" to how do we get it done and maximize profits at the same time. As long as employees have a way to understand how profits are earned and can then measure how their efforts impact the company’s bottom line, the business can create a culture where the entire team feels and believes “we are all in this together” and everyone involved is focused on profit. An additional benefit of such a culture is that vested employees start holding other employees accountable to contributing towards profitability.
Now the bad reason...
The success of a profit sharing plan lies in the details. Many remodeling businesses struggle to determine a good profit sharing strategy, often because the business and or the business owner don’t fully understand how to predict and or measure true profitability. If the business or the owner doesn’t understand the profitability concept, it’s also likely that the business’ financial system is not adequately setup to accurately measure profits. The business' financial system should also be set up to provide reporting in a simple and easy to understand format so as to help both the owner and employees determine the amounts that will be shared.
When an inadequate financial system exist results can include:
- The owner struggles to explain the plan to employees
- Employees struggle to understand the plan
- Employees are challenged to understand how they can actually affect profits
- Employers and employees can’t reliably measure the effects of their efforts
When some or all of the above happen:
- Employees lose trust in the employer
- Employees lose motivation to participate in the plan
- Good employees looking to share in the profits leave the business.
If your business doesn't have an adequate financial system, or you and/or your managers don't understand your financial system, it might do more harm than good to offer a profit sharing incentive. That being the case maybe its best to stick with using bonuses where the business and or the owner can decide the criteria for how often and how much an employee gets as a bonus.
If you’re looking to start a bonus or profit sharing plan at your remodeling business give me a call or shoot me an email. I can help you develop a plan that works for your business as well as your employees. Businesses that share profits often earn more profit as a result!