Best Practices in HR

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Dave Rietsema
  July 12, 2019

Should Your Company Offer Profit Sharing?

It’s important to reward your employees for a job well done. It’s common for companies to offer year-end bonuses to their employees for this reason. Many employees come to rely on them as a part of their salary. However, offering bonuses can become problematic during an economic downturn.

If your company cannot offer the usual bonus to employees, they may feel under-valued even if they’ve been working hard. Profit sharing is an alternative option that ties rewards to the year’s profits. Is profit sharing a good solution for your company?

The Pros

Recession Survival

Profit sharing can help your company weather economic downturns while still providing rewards to employees. Employees may expect bonuses to be the same every year, regardless of how well the company did that year. With profit sharing, employees expect their share to be variable and won’t feel undervalued if they receive less in a poor economy.

Investment in the Company

When employees receive a share of the profits, they also feel that they have a greater stake in the company. Employees are more satisfied when they know that they’ll share in the profits. Offering profit sharing instead of bonuses directly ties employee pay into the health of the company. Employees who are more invested in the company instead of just their own jobs can be more productive.

Employee Incentives

The more profits the company receives, the more employees receive in bonus pay. Employees may be motivated to work harder so that the company receives more profit.

Profit sharing can also affect your company’s culture. Employees may feel that they are working towards a common goal. Their hard work doesn’t just benefit the company’s bottom line but benefits them directly as well. Employees may also hold each other accountable for staying on task. Slacking coworkers would affect their own share of the profits.

Flexible Plans

Profit sharing can be as flexible as necessary to meet your company’s needs. Different levels of employees can receive different percentages of the profits. For example, upper management can receive higher amounts compared to entry-level employees. The highest-level employees may have up to 50% of their salaries come from profit sharing while lower-level employees may receive 1-2%.

The Cons

Not all employees may be able to see how their contributions affect the company’s bottom line. Upper management may regularly make decisions that affect the company’s profit and will know how they affect profit. Lower-level employees may not be as motivated to work hard if they don’t feel that their work is contributing to the company’s profits.

Profit sharing is also not tied to performance, so some employees may view their share of the profits as an entitlement rather than a reward. This could result in especially lower-level employees failing to improve their performance or productivity.

Making Profit Sharing Work

It’s essential that all employees understand how the profit sharing plan works. Employees who don’t understand how their jobs contribute to profits may be less motivated to improve performance or productivity.

Are you looking for a HRIS solution that can help manage payroll and financial incentives? Let us help you find the best software for your company. Visit our vendor match page to get started.