If you want to grow your business, a team of rock stars is a must. You know, people who act and think like owners and who are in it for more than just a J-O-B.
But with so many businesses fighting for top talent, you definitely need a competitive compensation plan to attract (and keep) the best of the best. Sure, compensation isn’t everything, but we’d be fools to say it’s not a core piece to building an awesome team.
That’s why Dave and Sharon Ramsey introduced a profit-sharing plan at Ramsey Solutions—to share the wins (and the losses) as a team.
A profit-sharing plan does just what it says—shares the profits. Along with a meaningful mission statement and core values, profit sharing encourages team members to feel a sense of ownership—it helps them fight for the company, not just their position.
If done poorly, however, team members can start to take profit sharing for granted. We’ll show you from experience how to set up a profit-sharing plan that shows your appreciation and empowers your team to act like owners.
What Is a Profit-Sharing Plan?
A profit-sharing plan takes a percentage of the company’s profits and shares it with the team on top of their compensation plan. It’s a great way to give your team extra money without creating entitlement because it’s directly tied to their hustle.
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The more they hustle, the greater the pool of profits to share.
What to Do Before You Start a Profit-Sharing Plan
This may seem obvious, but your business needs to be making a profit (consistently!) if you want to create a profit-sharing plan. Generosity is admirable, but you need to be in the black and also have a few other things in place before you set up a profit-sharing plan.
Check these things off your list before you get started:
- Have a working budget.
You have to know your numbers to know if you can actually afford to share as much money as you’d like to. So, get your business on a budget and follow it. Otherwise, a profit-sharing plan could cash starve your business and do more harm than help. Tell your money where it goes instead of wondering where it went—get on a budget!
- Pay yourself a living wage every month.
This is a nonnegotiable, people. Do not set up a profit-sharing plan if you’re not able to pay yourself a living wage from your business. Period!
- Set aside three to six months of retained earnings.
This is your rainy day fund—three to six months of operating expenses (all the money you need to perform the basic functions, like make payroll and keep the lights on) set aside for the business. If an expensive piece of equipment went kaput, you wouldn’t want to have to pull your team’s profit-sharing checks to pay for its replacement.
- Get on a plan to crush your business debt.
Debt is a thief! It leaves your business vulnerable to catastrophe and steals from your future. You need a plan to pay off your business debt, and you need to work that plan, before you set up a profit-sharing plan.
- Run the numbers.
Finally, take a look at three different scenarios—a really slim month, a month where you make what you expect to make, and one where you crush it and your cup runneth over. Would the percentage you chose to share be enough to make an emotional difference in each of those scenarios? Or in other words, would your team really feel the ups and downs? If the amount they’d get in the “crushed it” scenario is still pretty small, probably not. In that case, you might as well just treat the team to lunch with that extra money every month, instead of rolling out a profit-sharing plan.
How Do You Set Up a Profit-Sharing Plan?
Let’s be real. There are some ways that this can go terribly wrong, and they’re usually tied back to poor communication or not knowing what you can actually afford to share. So, you’ve got to run the numbers first. But if you get it right—and you can, even if you have to make some adjustments along the way—you’ll really fire up your team.
Here’s how to create a profit-sharing plan:
- Decide on the percentage you’d like to share.
The percentage of profits you share is completely up to you. Remember, this is money you’re choosing to share. If you’re paying your team at or above market value (and you should be!), then profit sharing is just icing on the cake.
- Decide who qualifies for profit sharing.
Most people who have some level of ambition want to see their wins at work translate to their paycheck. Unfortunately, not everyone can work on commission. Dave always says he’d put the receptionist on straight commission if he could figure out a way. But profit sharing is great way to incentivize the work of administrative and support roles—people who aren’t closing a deal, but who probably put in a lot of work to get the salesperson and the client at the same table.
- Think through your communication plan.
Every profit-sharing check should come with an explanation. For example, at Ramsey Solutions, Chief Financial Operator Mark Floyd gathers the staff together and compares what was made in a given month to what was made the same month last year. He often talks through any factors that may have negatively or positively affected the numbers as well. Then he reminds everyone where profits come from. He always says, “Profits happen when revenue goes up and expenses go down—we’re all self-employed.” Make that your new mantra! Remind your staff that it’s a team effort and something that you, the business owner, are choosing to share.
A quick word of caution: Don’t roll out a profit-sharing plan and then change your mind. You’ll have a revolt! Really think this through and run the numbers before you decide to move forward.
How Do You Calculate Profit Sharing?
We developed a formula—with a few bumps and bruises along the way—at Ramsey Solutions to figure out how to share the profits with everyone. We calculated the percentage each team member gets using three things: the number of years they’ve been with the company (50% of the weight), the profitability of their specific area (17%), and their performance (33%).
Play around with the factors you value (what gets rewarded is what gets repeated) and different percentages. Remember, it’s okay to make adjustments along the way if you need to in order to get it right. As our team has grown, we’ve adjusted the formula to more fairly benefit team members who have been with us the longest.
A word about seniority—the longer a team member has been with a company, the harder they are to replace. But we don’t keep people who don’t work hard. So, for us, it’s less about seniority and more about compensating for the level of experience they’ve acquired over the years.
Benefits of Profit Sharing
- Two words: Self-employed mentality. When done right, sharing the profits motivates higher performance because team members feel like they are partners in your company.
- A profit-sharing plan encourages teamwork because every single area of the business affects profits. People are empowered to not only do better work in their specific area, but also to help each other reach a higher standard—because they know that’s what will make the company a success.
- Unlike a 401(k) or other benefit plan, profit sharing rises and falls with the company’s profitability. So, you’re not obligated to pay out a fixed amount, which can be really helpful if your business experiences a slower season.
Risks of Setting Up Profit Sharing
- Your team’s pay moves up or down together—which can be frustrating for some people if one area is dragging their heels and the other is on fire.
- You have to be open about the business’s finances and that may not be something you’re comfortable with.
- Profit sharing can lead to greedy team members if it’s not connected to a meaningful mission and a mind to serve the customer. Without those things, people can be tempted to make a sale that isn’t actually in the customer’s best interest, just to add to their bottom line.
- When money goes up and down, so does morale. If you aren’t paying your team at market value, then a bad stride could lead to drastic changes in pay and a downward shift in morale.
What Is the Average Percentage of Profit-Sharing Plans?
Solid research about profit sharing isn’t available, but we estimate that most businesses participating in profit sharing probably give the people on their team who qualify up to 10%. Of course, the percentage is spread among the pool, so choose a percentage that is large enough to be felt but also makes sense for your bottom line.
Alternatives to Profit Sharing
If you’re not quite ready to roll out a profit-sharing plan, that’s okay. There are still other ways you can reward and inspire your team—and show them the money!
- Give a monetary reward for achieving a company-wide milestone.
Maybe you don’t have an official profit-sharing plan, but you can still share some of the profits from a big milestone that the team worked hard to achieve. Just remember to communicate where this money comes from and that it’s something you’re choosing to share.
- Fund education or professional training.
People with stimulated minds make better, more creative and more passionate team members. Online training, college courses and workshops can not only give your team members more confidence and a sense of appreciation, but can also help their performance.
- Give a “100-dollar-handshake.”
If a team member crushes a goal, surprise them with a $100 or a gift card—something that says thanks for owning your role and crushing it!
- Add an office perk.
Does your team want comfier office chairs or a cappuccino machine? Link an office upgrade to a goal—it’ll give them something to hustle toward.
Don’t forget, the purpose of sharing profits is to get everyone feeling like a self-employed entrepreneurial partner. It’s a great way to say “I appreciate you”—because most people keep score of how they’re performing with money.
Profit sharing is just one way you can push yourself to pay your team members how you would want to be paid. But remember, before you can even think about sharing the profits, your business needs to be in a good place financially—meaning no debt! Imagine not having that weight on your shoulders on top of everything else you need to work on. Believe it or not, you can run your business debt-free. Check out The EntreLeader’s Guide to Running a Business Debt-Free to learn how real business owners got out of debt—and how you can too!