Profit sharing, when implemented properly, can be a valuable component in your company's compensation and human resources management strategy. Profit sharing is a good way of making your employees feel they're valued partners in the company, improving employee loyalty and retention, increasing productivity and profit, and building a company culture that's based on teamwork as well as personal accountability.
A March 2003 study by Statistics Canada found that companies in the services sector that practised teamwork and profit-sharing lost only four per cent of their employees. In contrast, companies that didn't offer these programs lost about 16 per cent of their employees in the same year.
"Sharing your profits makes employees feel like they're not 'just employees' and encourages them to work harder towards the end-goal of achieving profitability," says Nadine Winter, president of The Winter Consulting Group, a Toronto-based human resources consulting firm. "It also makes them take an interest in the achievements of the company, and encourages them to understand how the business makes and loses money."
More than 20 per cent of Canadian companies today have a profit sharing program in place. Before you add your company to this group, take a look at some of the key points you need to consider when setting up a profit sharing plan:
- Not all profit sharing programs are alike. You can make your program as simple as a universal plan or as complicated as a multi-tiered program with unique targets and reward levels for each department and individual. For small businesses, Winter recommends universal profit sharing, in which a business owner sets aside a portion of the profit to share among all employees - providing targets are met, of course.
"It's a good idea to announce up front what the profit target is and what portion of this target will be shared with employees," says Winter. "You should also specify right at the start how it will be shared - equally, pro-rated based on the number of days you worked that year, or percentage of base pay."
- Sharing profits also means sharing financial information with employees. This doesn't mean that you will have to lay all your books on the table. Typically, says Winter, employees will want to know what percentage of the company's operating budget goes towards salaries, and how much is spent on rent, advertising, office supplies, and janitorial services.
- A clear and realistic financial goal, a system for performance tracking and achieving profitability are a must. Give your employees a target and let them know, on a month-to-month basis, how the company is performing against this target. But don't just throw out numbers and bar graphs; provide an analysis of the results. Is waste on the production line cutting into profits? Are travel costs eating into the operating budget? As partners in the business, your employees need to know these things.
- How can employees make a difference? Spell it out. For a profit sharing program to be effective, employees need to know how their actions - individually and as a team - affect the bottom line. Let your accounts receivables clerk know that invoices sent out on time means less dipping into the commercial line of credit. Show your customer service representative how many accounts were lost last year because a complaint wasn't answered or resolved quickly enough. When your monthly profit results come in, call a meeting to explain the key factors that detracted or contributed to your performance and discuss what each employee can do to improve results.
So what if your company fails to make a profit this year? Could profit sharing turn from an incentive program to a cause for disgruntlement? "Employees will be disappointed if you don't turn a profit," says Winter. "But they'll strive even harder next year to make a profit for you."
How you communicate the year's results can make a big difference in how your employees' react to the bad news. Take the time to explain why and where things went wrong and what can be done to turn things around in the coming year. But take care not to point the finger of blame at any specific individuals or departments.
To find out more about profit sharing and how to create a model that works for your company, check out Human Resources Development Canada's Digest Of Benefit Entitlement Principles. Or find an HR consultant in your area by visiting the Canadian Council of Human Resources Associations and clicking on Members Association. You may also wish to pick up a copy of Profit Sharing in Canada: The Complete Guide to Designing and Implementing Plans that Really Work, written by David E. Tyson and published by John Wiley & Sons Inc.