In the war for talent, organizations are ultra-focused on recruiting highly-skilled job seekers and retaining top employees. In addition to a competitive base salary, employees value other total compensation elements that help make an offer worthwhile.
We previously discussed performance sharing and individual performance-based plans. Here, we will hone in on profit sharing plans and explore some of the standard metrics and measurement methods that dictate payouts.
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, profit sharing plans 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 and education efforts.
Here are some of the common drawbacks that compensation professionals should be aware of when considering a profit sharing plan:
Employees may focus solely on short-term financial results. This could be harmful to the long-term financial and operational success of the organization.
In most cases, 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 factors, such as economic, legal, and political. These 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 business, organizational goals, and how you want to motivate and evaluate your employees.
Want to learn about other short- and long-term incentive plans available to engage employees in your organization? Download our whitepaper: Understanding STI and LTI Data