In addition to a competitive base salary, employees value other total compensation elements that help make an offer worthwhile. In addition to performance-based short-term incentive plans, profit sharing plans are another way to provide bonus pay for employees.
What are Profit Sharing Plans?
In profit sharing plans, payouts are contingent upon the overall financial performance of the organization. Typically, companies will use a formula to determine how much of the profits are shared, as well as how they are distributed. The performance measures used vary by organization, with consideration usually given to revenue, net income, and earnings per share. Profit sharing rewards can be the same amount for all employees or vary based on seniority and tenure.
Because they are generally available for all employees regardless of team, a profit sharing plan can unite teams around key financial goals and make them feel more invested in an organization’s success. Unlike performance-based plans that use a variety of methods to determine payouts, profit sharing plans usually require only a few metrics, simplifying communication.
Challenges of Profit Sharing Plans
Here are some of the common drawbacks your organization should be aware of when considering a profit sharing plan:
- Employees may focus solely on short-term financial results. It's possible that certain actions may increase profits (and therefore, payouts) in the short-term, but not comprise the best strategy for your organization in the long run. This could be harmful to the long-term financial and operational success of the organization.
- Payouts are based on organizational performance. Without any individual performance measures, low performers could be rewarded equivalently to high performers.
- Organizational financial results could be affected by external forces. Economic, legal, and political factors are generally unrelated to the organization and its employees, but could still have an impact on payouts.
Deciding which short-term incentives are right for your organization vary widely depending on your pay philosophy, organizational goals, and how you want to motivate and evaluate your employees.