Implementing a Profit Sharing Plan: Educate and Communicate
One of the biggest problems with a profit sharing plan is that people don't know how they can individually influence the overall profit of their company, Stack says. "If you have a highly profitable year, everyone gets to participate in the profit sharing program, but nobody learns anything about the company or what they did to influence that profit." To make your plan successful, educating your employees is crucial.
This can even be as basic as making sure they understand the principles behind profits, and how they work, Wray says. Even though front-line employees in administration or accounting may not control many factors that lead to profitability, such as marketing and pricing of products and services, part of the implementation of the profit sharing plan should seek to educate them of their community role, beyond their narrow job description, he says.
Paul Spiegelman, CEO of the Bedford, Texas-based Beryl Companies, which provide call center services to the health care industry, found that his call advisers liked their bonus program, but didn't know how they specifically contributed to profitability. So, he included client retention, the percentage of client revenue his company retains from prior years, as a specific goal of the program to remind those employees that their performance is closely tied to overall profitability.
The education is part of an ongoing communication process that is necessary to maintain a successful profit sharing plan. Without frequently communicating to your employees about what the company is trying to accomplish, and what the revenue targets are and how close they are to being met, the plan can become routine and a share of the profits can even become expected. "The worst thing that happens is, in a down year, when there are no profits, people are angry and upset because they don't know what happened," Stack says. By communicating to them how the process works, you can combat any potential sense of entitlement amongst your employees. Open-book management, in which employees have extensive knowledge of the company's financial information, can be an effective strategy for helping employees understand the process.
Dig Deeper: Open-Book Management
Implementing a Profit Sharing Plan: Consider Alternatives
A cash or deferred profit sharing plan isn't your only option for sharing your profits with your employees. Those plans tend to focus on the broadly based metric of overall profitability of the company, and the collaborative success of the company. There are more loosely defined bonus programs that are closely tied to the same idea of sharing a company's profitability with its employees. Unlike other bonus programs, such as holiday bonuses, they set predetermined operational targets much in the same way as profit sharing programs do. Only these alternative bonus programs target specific financial ratios, like cash flow or diversification, and factor in the individual performance of an employee or a specific division.
Stack recognized that by putting in an incentive program that only targeted profitability, there was less focus on other weaknesses of his company. For example, when the credit markets froze up last year, he realized that there wasn't enough emphasis on cash flow, and that the growth of his company was tied to the accessibility of credit. So, that year's program set out to increase the cash flow numbers and educated employees in how they could contribute. "We wanted to put in an incentive program that would be an insurance policy; we were working on the weaknesses of the company and driving an incentive to fix those weaknesses, and use it as an education program to teach people how they make a difference in the company," Stack says. "Every year, we have a different incentive program, so it continually creates excitement and also builds upon the value of the company."
Likewise, Weinzweig used to have profit sharing plans for each one of his seven food specialty businesses comprising Zingerman's Community of Businesses, but has since switched to gain sharing plans, that are specifically tailored to each company. Gain sharing plans set specific performance targets, often for a specific division or team of employees, and pay based on the savings from improved performance. By recognizing the specific needs and goals of each of his businesses, and realizing that traditional profit sharing plans weren't meeting those needs and goals, Weinzweig embodies the flexibility that is a key component to implementing any successful variable pay program. "We design it with the idea that we are going to screw something up or that our needs our going to change from one year to the next," Weinzweig said. "We've learned a lot from our mistakes."
Dig Deeper: Jack Stack on the Problem with Profit Sharing
Resources:
The IRS's retirement plan navigator
The U.S. Chamber of Commerce's Small Business Nation: Model profit-sharing retirement plan
The Profit Sharing/401k Council of America
WorldatWork is a human resources organization focused on employee benefits.
