Written by Barry Raber, Entrepreneur
Barry Raber is a serial entrepreneur, president of Carefree RV Storage, a 22-year member of the Entrepreneurs' Organization (EO), the founder of Business Property Trust, and an EO Portland Entrepreneur of the Year. He shares his successful business secrets at Real Simple Business.
I have always felt that it wasn’t quite right for 100% of a company’s profit to go solely to the owner. Yes, the owner may have started the business and taken risks to build it, but much of the customer experience magic and overall success is due to the hard work of the entire team. If your team helps generate the profits, doesn’t it just make sense that they should share in them, too?
The challenge of achieving profitability
The primary challenge is the biggest hurdle: First, you have to make a profit, and do so relatively consistently. Your company needs to generate a fairly consistent profit for the profit-sharing program to work and motivate your team. A lot of businesses do not.
My first company did not make a profit, and I always felt that if we had a good year, and I distributed some of the money, I would want it back the next year to save the company. In that case, it is necessary to find other ways of motivating and rewarding your team.
My second company was a different story. Once it started making a consistent profit, we carefully structured a profit-sharing plan and implemented it. As we thought deeply about it, there were as many pitfalls as positives with profit sharing—meaning that what seems like a positive could become a negative if not handled well. We valued what we felt our company would get out of it enough to spend the time thinking through and girding against some of the possible negative impacts.
Benefits of profit sharing
Our profit-sharing program is now eight years old, and I would characterize it as very successful.
Its benefits include:
More extra effort from team members.
An ownership mentality and shared responsibility approach within the company has lifted some of the pressure off of my shoulders as the owner. Instead of feeling like everything rests on me, the responsibility is now spread across the entire team.
Lower turnover. Key players stay; no key person has left the company since we started this program.
Families of team members tend to be more understanding of time and effort invested at work because their loved ones are sharing in the company’s financial success. It makes sense to them that their loved ones are spending extra time and mental energy on the business.
Empowering team members to live better now and in the future. This money buys cars, houses, educations, and contributes to retirement planning.
A good legacy for our leadership.
How to structure a successful profit-sharing plan
Here is how the plan is structured:
The goal: Share the profit that team members helped generate.
Eligibility: All employees, part-time or full-time, are eligible after working for one year with us.
Profit allocation: The target amount of company profit allocated is 15-35% depending on whether the company has the right amount of cash reserves to address issues and take advantage of opportunities.
Criteria for allocation: Years of service, annual compensation, and performance ratings—both annual review and key numbers performance, if their role affects key numbers.
Paid over three years: If they leave for any reason, they forfeit the unpaid portion.
Eligibility is revoked while on probation: If they are on probation in January when profit sharing is awarded, they do not receive an award.
Tax-deferred option: Team members can choose to have the payout allocated to a 401(k) as tax-deferred income with a company match of up to 3% of total compensation. They have two weeks to decide.
Navigate potential pitfalls
Two potential pitfalls include a breach of confidentiality and team members growing dependent on the extra money coming in from the profit-sharing plan:
1. The plan must remain 100% confidential
The worst possible scenario would be team members sharing their allocations with each other. A part-timer working one day a week will have a very different allocation than the CFO. Even people at the same level receive different amounts based on the formula. If a confidentially breach occurs, we will be forced to take drastic measures.
2. Bonus income is not guaranteed
We personally distribute the profit-sharing bonus certificates and worksheets. We have honest, transparent conversations with team members, reminding them not to rely on the profit-sharing payout as part of their regular salary. The payouts add up, especially over three years, and it could be easy to start relying on them. That’s why we consistently remind team members that it is a bonus, and not to depend on it as a guarantee.
Communicate the plan effectively
We have an annual all-team meeting where we share how the company performed relative to its goals and recognize outstanding examples of core values in action and great 5-star customer reviews. The last agenda item is about profit sharing.
I provide a general overview of the company’s profit performance, highlighting a few factors that impacted it both negatively and positively (focusing more on the positives). I also compare this year’s results with the previous year without sharing specific numbers. My CFO gives a brief presentation on the advantages of using the 401(k) option and encourages team members to designate some or all of their funds there. I conclude by focusing on the confidentiality piece. I also emphasize that while we are fortunate to have a profit-sharing payout this year, we cannot rely on it to be paid every year, because while we do all we can to remain profitable, it will not always be the case.
As you consider the idea of starting a profit-sharing plan in your company, achieving a consistent level of profitability is the hard part. Once you reach that point, I hope this how-to guide makes sharing your success with team members in a positive, motivating way the easy part.
Read more from Barry Raber
Barry Raber, Entrepreneur
Barry Raber is a serial entrepreneur, president of Carefree RV Storage, a 22-year member of the Entrepreneurs' Organization (EO), the founder of Business Property Trust, and an EO Portland Entrepreneur of the Year. He shares his successful business secrets at Real Simple Business.
