Profit sharing that moves your people from just doing their jobs to caring about the business.

Why it matters

A share only changes how people work if the payout is a number they’d be excited about, or at least not dismiss. Depending on your business, ten percent may buy a nice gesture and nothing else. Share too much and you may start resenting the whole plan, and it’s tough to dial it back. In my business, thirty percent was a nice balance.

Considerations

• What payout would your people actually talk about? Start there and work backward.
• Don’t just copy my 30%. Your number may be quite different, but it has to pass the “meaningful” test.
• Where does sharing start? I was lucky enough (uggh) to start at zero profit. I set my threshold at 7% of expenses. Why 7%? Honestly, I don’t remember. It was a long time ago, and it served me well.

Why it matters

The moment shares differ, people start comparing instead of collaborating. Salary already pays for experience and responsibility. The share is for the team, so everyone has the same stake in everyone else’s work.

Considerations

• Communication is key here, since equal shares aren’t the norm. Lower-wage employees aren’t about to complain, but some of your high earners may. Be proactive about the benefits and the reasoning.
• Part-timers, mid-year hires and probation: who’s in, and when? We included new hires after a short probation. The team made sure they got up to speed fast, since they were sharing equally, and everyone expected a real contribution from day one.

Why it matters

Pay more often than once a year and the smaller payout loses that emotional hit. Annually gives time for several cycles of strategy, action and improvement. Don’t take it to the extreme, though. I’m not a big fan of deferred profit sharing programs where your employees can’t touch the money for years. They’re fine for retirement and tax planning but do little to influence your business today.

Considerations

• An annual payout is a bigger amount, so give yourself a three-month buffer after year-end to make sure your cash flow can catch up.
• Think about who’s eligible on payout day. Our rule: if you weren’t an employee on payout day, you didn’t receive a share. We used our discretion for people who left during the year for fair reasons. Those who left us in the lurch or were shown the door received nothing. The cost of replacing them far exceeded their share of profit.
• Because it’s only once a year, it’s fair to make a big deal of it. Plan a celebration that works for your team.
• In lean years, a small payout can be discouraging. As long as you keep up the communication during the year, it won’t be a surprise. The day will slide by, but trust me, there’ll be plenty of ideas and actions in play to make next year way better.

Why it matters

Speaking for myself, financial statements are one of the world’s great mysteries. You don’t need to add an accounting course to the mix to show whether you’re making money. Lock in your formula, add a few definitions everyone can understand, and it’s all good. Anything beyond that and trust me, you’ll lose people. Ours was simple:

Payments received for work completed − operating expenses = profit

• Paid means in the bank, not just invoiced.
• Expenses are normal operating expenses, with larger capital purchases spread over a reasonable time.
• Owner salaries and perks are set at market rates.

No fancy words and no accounting “concepts” necessary.

Considerations

• What do “earned” and “collected” mean in your business? How can you tell when a job is really complete, even if it’s paid for? How will you judge the percentage complete on jobs that run past year-end?
• How big capital purchases get spread out, so one investment doesn’t wipe out a year. We redid our parking lot one year, and I spread the expense out based on the loan payments.
• Setting your salary in the formula at market rate, so nobody can game the number, including you. Sometimes my actual salary was painfully low and sometimes embarrassingly high. For profit sharing, it stayed at market.
• What the team sees and what stays private. Individual pay never shows; payroll is one line. In fact, after the early years we mostly rolled expenses into one number per month. After a while you can’t save your way to rich. We still kept a close eye on it, though.

Why it matters

You can’t share the profit without sharing at least a few basic bits of information. If the score only shows up once a year, nobody can do anything about it. Seen weekly or daily, people adjust while it can still make a difference. It matters most when things aren’t going well, so your team can act.

Considerations

• Start with the basic, easy-to-produce numbers. Don’t get bogged down in complexity.
• Keep the language human. The goal isn’t a team of people struggling to read financial statements.
• We updated everyone every day, and admittedly I was very passionate about this. That may be too much for you. Start with once a week and see if that does the trick.
• Don’t share detailed payroll information. Summarize enough that nobody can reverse-engineer anyone’s salary.
• Make it part of someone’s job description to gather and send the numbers. It’s not an experiment or a nice-to-have. It’s a have-to-do!

Why it matters

By now profit sharing should be top of mind for everyone. So why waste a perfectly good meeting not talking about it? Lots of side conversations about ways to improve will be going on all over your company. Staff meetings bring that thinking to everyone, so decisions get made and the company can act. We led the agenda with profit sharing, and the discussions spawned from there. That put the focus on the right things first. Any time left over went to other important or straggling issues. Watch. I bet you’ll be as surprised as I was, and oddly proud, when you hear your team talking like owners instead of drifting off as you go on and on and on... I speak from experience.

Considerations

• Once the more frequent profit sharing updates are going out, there’s less pressure to meet so often. I wouldn’t go more than a month, though.
• Don’t forget your quieter employees. While they aren’t talking, they’re listening more than anyone. They’ll have important things to say.
• You have a culture of ownership now. Take advantage: ask more, answer less.
• You’ll still need strategic plans and other initiatives on the agenda, but they all tie back to profit sharing.