Profit Sharing. A simple concept, but one that comes with a lot of misconceptions. With this blog, we are hoping to clear some of them up for you.
In theory, profit sharing is a no brainer. By allowing employees to reap the benefits of the success of the company, you will see happier, more interested, more loyal, and more motivated employees. Additionally, in the US, tax breaks have helped support profit sharing and share ownership. Whether you are considering stock options, direct cash and bonus options, or deferred compensation, there are many things to consider - as each provides its own advantages.
For starters, let's address some of the most common misconceptions surrounding profit sharing.
- Does it actually work when it comes to boosting productivity?
The National Bureau of Economic Research undertook a massive study with companies using profit sharing techniques to find out why they started, what they expected, and what they actually achieved (click here to read the full study). The study concluded that profit sharing plans do work, when combined with supportive management. Profit sharing is often linked to a sense of equality and a higher personal vested interest in the company. Additionally, studies have shown that productivity is raised to a higher level when the employees are offered the opportunity to share in the profit margin.
- Won't profit sharing result in employees free-riding?
Study after study have shown that workers who belong to a profit sharing company tend to align themselves more strongly with the company than those employees who are on fixed income contracts. Additionally, they tend to work harder, because many times participants informally audit their coworkers and encourage those who are not as effective to raise their effort levels.
- Most workers won't want their earnings to fluctuate based on things that may have nothing to do with their performance.
When approaching profit sharing with employees, many view it is more of a gift exchange with the company. By offering them something, such as shares or bonuses, the worker reciprocates by offering additional effort. These exchanges increase perceptions of fairness and appreciation, and often lead to higher levels of commitment and loyalty. Additionally, those who are hesitant typically change their views after hearing about the benefits that other coworkers have received.
Now let's take a look at the different profit sharing strategies.
Performance based incentives
These are typically done with direct and cash bonuses. Each employees is paid based on levels of company wide performance. Often times the amount given to each employee is adjusted based on their position within the company. Higher compensated, highly motivated, and long-term employees tend to receive a higher bonus than others. There is also a strategy called Gain Sharing, which offers bonuses based on the performance of the work groups, rather than the company as a whole. This strategy measures performance in productivity or cost saving, and the individual groups are able to benefit, even if other groups do not.
There is also the option of the use of profit-sharing within the company’s retirement plan, where the employer contributes through a 401(k) and/or a deferred compensation plan. Although studies have shown that contributing to a deferred compensation plan is less effective due to the lack of immediate gratification for the employees, the use of profit-sharing within a 401(k) has become more and more popular over the years. Both options allow the employer to avoid FICA on these contributions, and specifically with a 401(k), there are many options available to customize a discretionary profit-sharing contribution to favor owners and key employees, much like the flexibility found in direct and cash bonuses. Through a 401(k), employees have the ability to not only receive the benefit quicker than deferred compensation, but actually have the ability to manage those assets with how they see fit.
Lastly, there is the stock option, which allows employees to purchase shares of the company. Stock options must be offered as a bonus to certain employees as an added benefit. If the option is available to all employees equally, then it simply becomes a perk. The down side is that they do little to engender loyalty, create tax liability for the employees, and employees see not benefit until the stock option has been exercised - which most smaller companies don't ever do.
Finding the right profit sharing plan for your company is important. To discuss implementing, the benefits, and potential drawbacks of each, we recommend reaching out and talking with one of our advisors.
For more information on our custom approach and to discover your pharmacy's optimal plan, click here to download our company census tool or contact us by emailing email@example.com or call Tyler Campbell at 843-720-3756.