Should I Offer Profit Sharing With My Employees? In a Word – No.
WARNING: This article contains some tough questions, some tough realities, and some tough love.
What feels good, gets employers accolades, and has no impact on employee performance? Profit sharing. It’s the management fad that never dies.
But it has nothing to do with business.
It does have a lot to do with the emotions of business owners.
When people come to me and ask if they should offer profit sharing, my answer is always the same: No. Sorry, I know it sounds like a good idea, but no.
The decision to offer profit sharing often hearkens back to a core tenant of leadership — we decide with emotion and justify with logic.
Time after time, leaders come to me in one of these three emotional states when they’re considering this benefit:
- Guilt and shame. We’ve made so much money! It’s wild — our profits have exceeded what I ever thought I’d make, what my dad made, what my grandparents made. I made profits in excess of 10x what my highest-paid employee made. But what if someone finds out? They’ll all be mad and demand raises. I never expected to make this much/don’t deserve this much/it’s unfair that I made this much.
- Misguided hope. We’re really struggling as a company. I don’t think people are aligned with my vision — it’s like everybody is working in a silo and they’re all focused on themselves. I think that if I offer profit sharing, everybody will be aligned to do what’s best for the company!
- White knight. The Fine People of My Company have led us to these Tremendous Results. And thus, I, the White Knight, Keeper of Happiness, Joybringer of My Company dictate that I will Give Unto the People a Profit Sharing! I shall post about it on LinkedIn. I shall post about it on Slack. I shall receive my Just and Due Accolades and Rewards for this great beneficence.
From any of these starting points, business owners then proceed to justify up, down, left, right, and sideways why it’s a good idea. But fundamentally, it’s all based on a feeling.
And that’s exactly where you should start — identify the feeling that’s driving you to think profit sharing is a good idea. Once you know which of the three you are, the next step is to serve yourself a dose of reality.
There are two critical pieces of reality that are imperative to absorb before continuing down this nonsense path to giving away money.
Profit sharing does not change employee behavior. For example, if I’m one of 50 employees in a company, I contribute 2% of the output of the company. Sure, the widgets I produce matter, but if I work 10% harder, how does that actually impact the company profit?
The truth is that few employees even understand what profit is, how it works, or where it comes from. They get the gist of it: We sell things for more than we spend making them. But beyond that — how what they do impacts this mysterious “profit” number — they have no idea.
This Inc. article does a great job of outlining the problem: Most employees who have access to profit sharing have no actual incentive to help the company earn that profit. They just show up to work, and then the bonus shows up in their paycheck.
“No doubt, they enjoy getting the money. They may even be grateful for it. But they aren’t likely to think or act differently because of it or to be greatly motivated by it.” – Jack Stack, via Inc.
Employers often make this worse by sharing profits only at the end of the year.
Here’s why it doesn’t work: Imagine it’s January 15th. Now go buy Christmas presents for everybody and tell them all “Christmas is coming in 340 days! Are you excited yet?” How weird does that feel? No one cares, and they certainly aren’t going to start a countdown to the day they can open that gift. And yet that’s what we’re doing when we imagine someone is capable of caring about an end-of-year bonus when it’s 340 days away.
Business is a game. It has winners and losers. (Frankly, there are way more losers.) If your company is highly profitable, what you do is legal, and you run your company ethically and treat your people well, you win.
And if you’re a winner, good job! You made a big pile of money — but it’s not yours. It belongs to the company. Hear me out on this. I own a company, but the company itself is a thing, and I’m responsible for the thing. If it’s the end of the year and I’ve got a big pile of cash in the bank, my responsibility is to say, “What’s the best use of these funds for the company?”
The answer is always to either save it or invest it, but profit sharing is the opposite because it’s a one-way street. Once you give that money away, it’s gone. If you have a bad year next year, you can’t get it back to use for a rainy day.
I’ve seen countless companies have banner years, give away tons of money, and go bankrupt a year or two later when the supply chain shifts, or a weather event happens, or the economy turns and they have no savings. Past performance is not a guarantee of future results. Your bank account doesn’t start over at $0 every January 1st. If you made a bunch of money, great.
But then ask yourself, what does the company need? Then do that thing.
How to do profit sharing right
If you’re still here, and you still think profit sharing is something you want to do, then let’s talk about some ways to make sure it benefits you, your business, and your workforce.
- Base your payout on real impacts that employees can see. Performance-based bonuses only impact behavior for employees who see a specific and direct response to their activities. (If I make more sales, I get more money.) If an individual doesn’t see how their personal effort contributes to the outcome, they have no incentive to earn it — this is how you end up with an English teacher in Japan who quit his job on the spot because his bonus was cut in half. Proceed with caution, however, because executives and managers who have money tied to performance can fall into the trap of narrow, short-term thinking vs. looking for the big ideas.
- Consider a true bonus program vs. a profit share. This type of program includes four elements: clear goals, frequent feedback, the opportunity to work toward goals as a group, and goals that require some effort. You can read more about this idea here. (Thanks again, 20-year-old Inc. article that’s still brilliant.)
- Gamify it. You know how motivated you are to get that level-up badge for your favorite phone game? People who are invested are willing to do the work, even when no one is watching.
- Issue the bonus close to the event. The closer, the better. Employees who receive a bonus in Q4 are really not likely to remember what they did in Q1 to earn it. Especially if you want to impact behavior, immediate reward helps employees make the connection.
The bottom line here, in my opinion, is that profit sharing is not something you should do. If you’re determined, however, do what you can to make sure your employees are motivated to really earn it.