The Design Builder's Blog

Simple Profit Sharing Plan For Contractors

Recently, several of the contractors I work with have asked for help developing profit sharing plans.   Because they are looking to take advantage of the benefits of profit sharing I thought others may want to consider a profit sharing plan at their  remodeling businesses as well.

Profit is the reward a business and the business owner earns for the risks taken by being in business.  Profit sharing is in effect a type of reward program for company employees.  It is based on sharing a percentage of the total profits earned by the company with the employees who helped earn it.  Profit sharing plans are used to help encourage and foster employee awareness and participation in creating, protecting and maximizing the profit earned by the business. 

Open Book Management:

Open book management is the process of sharing in detail the company’s financial statement with the entire staff on a monthly or quarterly basis. If you want your employees to contribute to protecting and earning profits you'll need to share financial information with them and help them understand how to interpret and use that information.

Why Profit Sharing and Open Book Management?        

• Both can increase collaboration between office and production staff to help improve efficiency and productivity.
• Everyone has a stake in working together to eliminate waste and duplication of effort.
• Because the responsibility as well as the benefits of profit are shared, team members take ownership in the company’s profitability and health.
• Open books and sharing of profit can create a trusting and supportive environment for all involved.

Creating a Profit Sharing Plan for Your Construction Business

Creating a profit sharing plan can be very involved process.   Lots of details, way more than can be included in a short blog post, need to be considered before offering the plan to employees.  If not well thought out before it is introduce, mid stream changes to the plan may cause employees to lose their confidence in the plan and the business.  

Sample Plan

Below is an illustration of how a simple profit sharing plan might work.   This plan is based sharing 10% of a company’s planned net profits with all employees.   With this plan pay-out to employees for profits earned each quarter would be 50% of the profit sharing earned with the balance paid after year end final accounting has been completed.  Also, in the example below if quarterly profit goals are not reached, employees will not receive profit sharing funds during that quarter, but may still get the money earned for that quarter at the end of the year if the overall performance for the year proves successful.

Annual profit goal: $100,000

Quarterly profit goal : $25,000

Based on the example above, assuming you have a total of 10 employees on staff:

• First Quarter – no profit sharing would be paid
• Second Quarter –each employee would be paid $150 in profit sharing (50% of $300)
• Third Quarter – no profit sharing would be paid
• Fourth Quarter – each employee would be paid $200 in profit sharing (50% of $400)
• If Annual Goal is achieved – each employee would be paid an additional $650 in profit sharing

Total bonus paid to each employee for this example ………. $1,000 ($10, 000 ÷ 10 employees)

Five Great Books for Remodeling Business Owners

 I have always loved reading to learn about new subjects.  When I was first in business as a remodeler I read a lot of articles in trade magazines.  They offered great ideas, best practices and sample paperwork or forms I could put to use right away.   However, right about the time I sold my business I also started reading books on business related topics.   After reading a handful of titles I came to the realization that the articles in the magazines were helpful and offered individual solutions for a variety of typical business challenges, but the books I was reading offered much broader and more comprehensive views about big picture business strategies and opportunities. 

In many ways the books I read helped me understand how I had grown my business, what made me and my business more successful than many other remodelers and their businesses, and they helped me better understand why my business had salable value beyond just the value of the hard assets.  I quickly came to the realization that, had I read those books much earlier in my career, perhaps I could have increased the level of success I enjoyed.   I also came to realize that I would have dramatically reduced the time it took to build my business had I read those same books when I first started my business.  

The books in the list I offer below fall into the top five books I think remodelers should read if they want to grow a successful business and reduce the total time it takes to do so.   More importantly, these books can help remodelers avoid the frustrations, wasted time and wasted money that come with the trial and error approach of going it alone as a business owner.   Even if you still can’t build the business you want on your own after reading these books, you will definitely know what help you will need to get there

“The E-Myth Contractor” by Michael Gerber

This is one of several E-Myth books by Gerber.  They are all worth reading, but if you’re a contractor this one gets right to the point about what you need to do to build a contracting business that runs without you needing to do everything yourself and be there every minute of the day so things get done.   If you ever want to sell your remodeling business, or at least be able to take an extended vacation, make sure you grab this book.

“Good to Great” by Jim Collins

Many business owners are happy having good businesses.  Others decide that their businesses, when compared to other businesses, fall into the good category; a term sometimes referred to as relative success.   If you want more than just a good business Collins and his team has done the research to figure out how it’s done.  He offers some great strategies to consider as well as some great examples of companies and their leaders who made the jump from good to great.  He also shares the importance of and the type of leadership required to achieve greatness.

“The Great Game of Business” by Jack Stack

 If you would like to have an open books business that involves all employees in the creation of and sharing of company profits you should definitely read this book before you do so and well before you start creating your plan.  Not only does Stack share strategies for doing so, he lets you know the challenges to expect, how to get ready for them and how to identify employees who will never go along with the changes.  He also shares a process to use to help educate employees about business financials relative to their job positions, how profits are earned and how they can measure their individual contributions in ways that are real for them.  As I mention in my blog about profit sharing, businesses that share profits often earn more profit as a result!

“Selling the Invisible” by Harry Beckwith

Back before the September 11^th attacks my remodeling business was humming and qualified leads came in faster than we needed them.  Then, after the attacks and up through February, we had only sold about $15,000 worth of new work.   I had to do something to get the business back on track.   That’s when I found “Selling the Invisible” and it changed forever they way I looked at and did marketing.   In his book Beckwick discusses the difference between the “outside perception” people gain of your business from traditional marketing and the difference a business can enjoy if its marketing projects the “inside reality” customers who do business with you come to know.  Customers spend way more money to get something they consider different.  If your business has an inside reality that really differentiates your business from the competition you will not regret reading this book.

“Managing for Excellence” by David L. Bradford and Allan R. Cohen

There are all kinds of books available on the subject of business leadership and I’ve read at least a handful of them during my career.   In my opinion this is the best book on leadership that I know of.  If you looking to not only be a great leader yourself, but also create a whole team of leaders at your remodeling business this is the book that best describes how.  As a word of caution; if you’re afraid that one of your employees might become a better leader than you, don’t bother getting this book.  As you will learn in the book, the only way you can become a great business leader and create a great business is to create other leaders who can replace you.  If you want to sell your business someday you need to read this book.

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.

Employee Bonuses vs. Profit Sharing; What’s The Difference?

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.

Need help?

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!

Employee Bonuses Vs. Profit Sharing; What’s The Difference?

Every year a good number of businesses give their employees bonuses right around the first of the year, often right at Christmas time.   Other companies offer profit sharing, typically distributed around the beginning of the New Year, but after the business has had time to review their accounting and access true profits for the previous year.  It’s important for both businesses and employees to understand the difference between the two.  

Let’s define and look at some of the differences between a bonus and profit sharing. 

Employee Bonus:

Bonuses are compensation for employees for work performed; they are paid in addition to salary or wages.   Often business owners give out bonuses without any structured plan or objective method for determining the amount or even how the bonus can actually be earned.  Although typically given out around Christmas time, bonuses can be given out any time of the year.  

Bonuses are typically used and are a good way to recognize special efforts or performance by individual employees.   For example if an employee comes up with a good idea that saves the company a lot of money and or time, that employee might be given a monetary bonus as a reward.   The amount of the bonus is typically left up to the employer, but can also be based on some type of pre-established formula where the employee gets a certain percentage of the actual savings.

Bonuses are considered compensation if (per the IRS) they "arise out of an employment relationship or are associated with the performance of services." Bonuses are considered taxable to the employee and are considered an expense of doing business.  In most cases, bonuses are a tax benefit to the employer.

Profit Sharing

Profit Sharing is an arrangement between an employer and an employee in which the employer shares part of its profits with the employee. The key difference between a bonus and profit sharing is that there must be profit before any is shared with the employee.  

As payment under a profit sharing plan, employees can be given stocks or bonds, or cash (cash profit sharing plan).  If the profit-sharing dollars are part of an employee's retirement plan (deferred profit sharing plan), they are received at retirement rather than now, and depending on the retirement plan they may be tax-deductible. There can be eligibility requirements for profit-sharing plans.  For example, the employee may be required to work for the company for a certain period of time before he or she can partake in profit-sharing.

Three Good and One Bad Reason to Offer Profit Sharing Rather Than Bonuses

Other Business Considerations:

Keep in mind that depending on how a bonus or profit sharing is distributed the employer may incur additional costs over and above the dollar amount given to the individual employee.   Depending on the employment relationship the company has with the employee, the business may incur the expense of payroll related taxes, liability insurance and/or workers compensation insurance on the dollars paid to employees.   Its best to consult with your accountant regarding the total cost of offering a bonus or profit sharing plan before discussing with or offering either to employees.

Also, it’s a good idea to let employees know they too may have to pay payroll and income taxes on any bonuses or profit sharing they receive.

Need help?

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!