Profit Sharing to Increase Profitability

Using a very specific model of a profit sharing plan, this article considers the needs of employer, employees and the customer to arrive at a situation where everyone comes out a winner.

Related Topics:

If you are like most employers in today’s world, you are faced with a conundrum: you want to reward your staff fairly, you want to make a profit, you want to retain your good staff, you want to increase productivity, and you want to stay in business. If you answered yes to all of the above, read on. With all probability, you also will want to fulfill this dream with a minimum of output in effort, cost and headaches of administrating such an undertaking.

In order to be effective and fair for both the employee and the employer, the profit sharing system has to answer a number of requirements. They address the perception of fairness, profitability and long-term viability among other topics. To meet these requirements, we need to look at the desirables, the needs of everybody involved.

Desirables

Any kind of profit sharing or rewarding your employees auto-matically conjures up visions of complicated bookkeeping, record taking and added cost to apply the system. The secret is to minimize the effort for all involved, thereby keeping the application and operating costs to an absolute minimum. In addition, the employees would have to feel that their contributions are rewarded fairly.

Talking with most employees, you will find that for them the fairness is a major point of contention. It would be viewed as unfair that those working right from the beginning of a project spending most of their time on it were to be rewarded at the same rate as those who only spend little time on the project. Or that those working on a different project, which proves less profitable, should get a share of the high profit-making project. In addition, there should be an incentive for the others to work hard on any project to make it profitable.

The criteria for the employer are quite different. For him or her, the application of profit sharing has to be manageable, it should not cut into the profits but, ideally, it should increase them. The system should be encouraging employee fidelity (loyalty) as well as encouraging increased output and reducing overhead and waste. At the same time, the benefits also should extend to the client base to encourage customer loyalty and satisfaction.

A good profit sharing system also can have a beneficial effect on the client base by creating an environment conducive to the production of satisfactory products at a timely rate. Since the profit sharing system is conducive to high quality and better quality control, letting your clients know that you are on profit sharing becomes an added and valuable sales tool.

 

Employee Retention

The hardest thing to do is to convince employees to join the profit sharing plan within the organization, as it means to abandon the guaranteed high wage for a lower one while assuming responsibility for the product of the company and committing to a trust situation within the staff community.

It also is very important that all members of an organization will sign up to the plan. This means that there has to be a full commitment to the company by each and every member of the company. Only in receiving that commitment from each employee, can the profit sharing plan lead to its fullest potential. However, as a result, the employee is rewarded with a greater satisfaction of their work, higher wages in general than under a conventional wage plan, and a feeling of far more control over their wages and the work they perform.

Because the actual profit sharing payout only occurs toward the end with the actual delivery and payment of the product delivered in a satisfactory manner and state, the employee will think twice prior to leaving the company where he is shareholder of a profit yet to be delivered. In addition, by this time, a considerable effort will have already occurred toward the next project, that again a willingness to abandon stakes in that project will not be forthcoming without serious reasons.

It will be necessary to include in the sign-up agreement a proviso for shares in case of early departure from the staff community as such leaving will have a major effect on all staff involved. As you can see, profit sharing not only brings financial advantages to those involved, but also major improvements to the work community of the participating companies. These benefits include more work satisfaction, a more coherent workforce, greater cooperation, and last but not least, certain financial benefits—all will be encouragement for employers and employees alike.

 

Rewarding Employees

The greatest pressure toward staff retention would be payment only after the completion and delivery of a job, similar to the situation of the employer himself. However, unless we are talking about very short-term projects, this is a proposal fully out of the question. Therefore, we need to consider that the employees will receive base wages or base salaries, which also carry a certain amount of financial charges or overhead.

The payment received by the company from the customer or client also needs to cover the immediate expenses of the company, such as overhead, capital costs, tax installments and employee deductions, etc., which are deducted from the gross profits prior to share pay-out. These deductions also include commissions and other financial obligations, though the members of the plan also will need to reserve some funds for the running of future projects. This can be done by deciding on a percentage allocation for those funds and one for the margin of profit to be allocated to the profit sharing plan.

It is this margin or clear profit, which is then fairly distributed among the members of a certain project, and only of that project. Other projects running within the organization and their contributing members do not fall within the picture and those members will receive their dividends at the conclusion of their respective projects.

Practically every member of the company personnel can and should be on the profit sharing plan, each at the rate commensurate to their ability and to the extent of their input. In other words, even staff support personnel, office staff, engineers, etc, all should be part of it to bring them the greatest advantages of the plan as well as to the company. The full adherence to the plan also will assure that every member is rewarded fairly for their contribution.

 

Rewarding Employees Fairly

Fairness of the plan is probably the biggest hurdle toward the introduction of a profit sharing plan. There are plans that allocate salary percentages; others offer lump sums of equal size to each member of the receiving group. Neither one is fair toward the contributing members of a plan, as the ones doing much of the work should receive a share according to the effort and value contributed. Similarly, someone who has a high salary might just come in toward the end of the project and contribute some effort with the aim of reaping a major share of the dividends, a movement often comparable to dragging feet and then working overtime.

Ideally, we would want a profit sharing plan to encourage time management and planning, which foster early involvement through its reward system. This would mean that the early involved people receive a form of bonus or higher percentage than those involved late at the stage. This then encourages staff to get involved at an early stage and get the project off to an early start, resulting in faster delivery.

Skills and experience also need to be addressed. For simplicity, they can still be expressed in dollars or hourly wage settings. As the profit sharing plan delivers only a sum of money divided into shares of various sizes to the employees according to their input, a typical scale of wage rates comparable to other shops is totally appropriate. Particularly special abilities and experience can be rewarded by applying a higher scale for the distribution of shares while the base salary remains constant. Employees involved in the input of their values and contributions will perceive the plan to be that much fairer.

For additional fairness and openness, the group might actually have a regular meeting and discuss the various levels of skill values to be applied; however, this does not need to be done if it causes friction among the staff. Another alternative to individual skill values are groupings where a group receives a certain percentage per person. This however, would detract from the true fairness toward individuals.

One last word about fairness: Fairness also has to be perceived as such and therefore depends a lot on the perception by the various members of a profit sharing plan. From that point of view, it is important that certain terms—such as percentage of the profits, timing of dividends or shares, etc.—are agreed upon at the outset.

 

Business Needs

Any kind of plan would be counterproductive if the needs of the business were not met, as this could be detrimental to the enterprise. Too much work in the administration or a system too complicated to administer properly so that the pay-out becomes delayed or fraught with errors is something that could drive away the staff. The ability to have at any time access to the on-time share allocation picture will not only add to the perception of fairness and openness, but also allow constant tracking of time spent on a project, acting as a schedule supervisor for the administrator.

Ideally, a good plan will need an absolute minimum of administrative input. Accordingly, the workers themselves would enter their data and the administrator would only need to verify the input. If project specific time-cards are used, duplicate or simultaneous entering of the data could be made possible. Otherwise, client access to their own accounts via a system similar to the banking systems in operation today, allowing the workers to enter their own contributions subject to verification by the systems administrator, is an option. All of these are options requiring very little input or work by the administration.

Data entry for the particular projects also has to remain at a minimum to prevent the plan from becoming a nuisance and hence despised by the administrator. In other words, the ideal plan would only require input of the name of the project (customer project number), and subsequent verification of all the plan members and their input.

Should the plan require much more work on behalf of the administrator, the latter’s costs could easily escalate and therefore discourage participation by the members as the costs of running the plan would be perceived as top-heavy or administration-favorable and therefore counterproductive.

 

Application

The Ottawa-based Inventors Resource Co-operative Inc. (IRC) has developed a profit sharing plan designed to meet the criteria outlined above. Drawing on the knowledge and availability of the local college students, criteria and needs were applied into a Web site with access to general public and members, where the latter will input their own data and participation in various projects, their effort values and hours of work equivalent. All of this is, of course, subject to validation by the administrator who holds the highest level of security access.

While the general public can see some of the activities and information of the IRC on the Web site, the information to the details of various projects is restricted to members and the administrator. As each member inputs their data concerning their work involvement on particular projects, this data is submitted to the administrator for approval. The program then automatically applies the data to the particular member and project, keeping track of date and values, and continuously updates the information of the various projects.

Members investing their time and effort early in the project are awarded a higher percentage share than those who come in later in the game. This encourages early participation which, for example, in the moldmaking industry would translate into early starts and initial progress. However, the members are only able to access their own database and information, and they are not able to see or access other member’s information. They are given the information pertaining to their individual shares within each project, though, in percentage points, as the final profit allocated to the project is not available until the pay-out date. The system keeps track of several different projects, with many members participating in several of them.

 

Benefits

For the employees, the major benefit will lie in the satisfaction of being rewarded commensurate to their effort, yet also knowing that it is a fair and just share of the available profit. In addition, the employee will most likely receive a better wage than by being on a standard wage structure. The larger check size will make a greater impression on its earner, and often participants in profit sharing plans use these checks for specific larger planned purchases.

For the employer, there are several benefits, the first being a better use of cash flow and financing, as a good percentage of the salary expense is paid out only once the project has been paid for. A second benefit is the improved quality of the product delivered, as employees strive to maximize returns and profits. It is for the same reason that the employees also will bring the project to conclusion at a faster pace, which in turn increases the annual production throughput. This, of course, means higher returns and profits for the company as a whole.

The customer also benefits from such a profit sharing plan in receiving delivery of a superior product in a timely manner. As the staff tries to improve its quality and productivity for the obvious reasons of greater profitability, they also establish a better relationship with the customer. Clearer communication and better consideration of the customer’s needs are just some of the secondary benefits, bringing to a full circle the win-win-win potential of a well-designed profit sharing plan.

By leaving the responsibility of registering or entering their own contributions to the project, the employees also are encouraged to assume a greater responsibility and ownership of their position within the company. The employer should not be surprised to find a greater involvement and cost-consciousness on the part of their staff, once the first profit sharing payout has occurred—all of which leads to a more profitable enterprise for the employer/owner as well.