Implementing Profit Sharing: Driving Employee Engagement and Financial Performance
The speed at which the world is changing around us is increasing. In turn, companies need at least to adjust themselves to this speed, or better still, to tap into their competitive advantage by being ahead of the change curve. Now, your particular business will likely face a different set of challenges than the next business, but there is one common factor in all businesses that equips them with their ability to change - and that is the quality, mindset and commitment of the people in the business, including yourself.
While the world changes around us, how we manage our company is 100% up to how the people manage this change. And what we know as a definite truth is that many brains are greater than one. We cannot over-emphasis the need for the ‘whole’ of the company’s brainpower to be contributing to a better business and a better tomorrow.
The Holy Grail in business strategy comes down to creating a business that both effectively differentiates itself and adds value to the business and its customers. For some companies, an engaged workforce may be that differentiation, for others the engaged workforce will simply be the enabler of that differentiation.
How does your business stand out in terms of attracting and retaining top talent while maintaining consistent financial growth? Profit sharing has emerged as a compelling strategy, aligning employee interests with company success. This article delves into the benefits of profit sharing, highlighting inspiring real-world examples and presenting actionable insights to implement effective profit-sharing initiatives. We will explore how profit sharing can boost employee engagement, enhance financial performance, and foster an overall positive company culture.
The Power of Profit Sharing - A Recap:
Profit sharing is a method of distributing a portion of a company's profits among its employees. This approach incentivises employees to work towards the company's financial success, as their efforts directly impact both their earnings and intrinsic reward mechanisms.
Profit sharing offers several advantages, including:
1. Boosting Employee Motivation
Employees with a direct stake in the company’s success (profitability) are more motivated to excel in their roles, leading to increased productivity and dedication.
2. Enhancing Employee Engagement
Profit sharing fosters a sense of ownership and teamwork, encouraging employees to align their efforts with the company's goals. The antithesis of this is individualism at the expense of teamwork, often encouraged via individual reward mechanisms, such as bonuses and commissions. Companies that practise profit share may still have individual reward mechanisms but these are managed to ensure they do not outcompete those of team reward.
Related Article: An Introduction to Open Book Management
3. Improving Financial Performance
Companies with profit-sharing programmes often experience improved financial results over time, as employees actively contribute to the bottom line. There is however a prerequisite for this to occur, and that is a broad financial knowledge of how the business finances work, and in particular how an individual's contribution directly relates to overall company performance.
The above are three compelling reasons to consider introducing a profit-share-like structure in your business. So you could at this point be thinking to yourself how you would go about introducing this in your business.
4. Customisable Profit Share Structures
Sukuma, a leading business software, offers prebuilt profit share structures that can be tailored to meet specific business needs, ensuring equitable distribution of profits among employees. Making use of specialist software when using profit share makes sense as there are usually unforeseen complexities when managing such a scheme in a business.
Some factors to consider in a profit share scheme include:
- How the scheme is managed with new or existing employees
- What the criteria are for paying out when a specific profit target is achieved
- How to cater for business performance that is typically seasonal
- How to manage the scheme when the performance of the year ahead is uncertain
- How to manage any payouts if early in the year the performance is uncharacteristically high
- What the real definition of an employee in your scheme is
- How to cater for ensuring the company’s cash flow and cash reserves, especially for high-growth companies
Read more: Your Free Access to Sukuma & 360s
Profit Sharing is Not
From personal experience, I have found that there is a widespread misunderstanding about what profit share is really about. So to address this point, let’s confirm what profit share is not.
1. Profit share may have some altruistic values but this is mostly a consequence rather than a driver.
The driver is to improve business performance. For most businesses, this will be to improve net profitability, however depending on the exact needs of the business at the time this could also be to improve revenue, overall culture, operating efficiency etc.
2. Profit share is not just for employees.
From a legal perspective, an employee is someone who is employed by the business. However, these schemes are designed to reward human behaviour for delivering value to a company. So do not restrict your thinking just to employees: you can extend your scheme to subcontractors as well.
3. Profit share is not just for management.
To be effective you need to involve all ‘workers’ who are contributing to the success of the business.
4. Profit share is not based on any socialist ideology.
If anything, it’s rooted in capitalism.
Real-World Success Stories
Because there is no exact definition of what profit share is, it’s equally impossible to know how many companies are following this management practice. Equally, of the many that are running with profit share, they are also not reporting this anywhere in public records.
Profit share is being successfully run in both micro businesses and large corporations, some of these companies you know of. These include:
1. Semco Partners
Brazilian conglomerate Semco Partners redefined its organisational structure, empowering employees with significant decision-making authority. Through profit sharing, employees became active contributors to the company's financial performance. The result was a more engaged and innovative workforce, driving growth and adaptability in an ever-changing market. (worth reading up on this company, a fascinating and successful approach to an open-book type structure.)
Online retailer Zappos attributes its exceptional customer service to its profit-sharing programme. By providing all employees with a stake in the company's profits, Zappos motivates its workforce to go above and beyond in delivering top-notch customer experiences. This commitment to customer satisfaction has contributed to Zappos' sustained financial success.
The well-known coffeehouse chain offers a profit-sharing plan to all eligible employees. The amount of profit sharing that employees receive is based on the company's overall performance and their individual performance.
4. Publix Super Markets
This is an employee-owned company that operates grocery stores in the Southeastern United States. Employees are eligible to participate in the company's profit-sharing plan after one year of employment.
Netflix is a streaming media company that offers a profit-sharing plan to all full-time employees. The amount of profit sharing that employees receive is based on the company's overall performance.
Practical Steps to Implement Profit Sharing
To effectively implement profit sharing in your organisation, consider the following actionable steps:
1. Align your Business Strategy
As highlighted previously, your business strategy is about committing to differentiating your company while adding value to the business and its customers. Some of the critical components in your strategy include your Value and Commitments, your longer-term Goals, and your Purpose statements need to align with Profit Share (this is critical!).
2. Educate to Improve Financial Literacy
If you ask your employees to guess some of your current financial metrics (net profit, revenue, total labour cost, contribution margin), you may be surprised at how far they are off the mark. Training needs to be undertaken at the appropriate level to match your audience. You do not need your accountant to perform this: in fact, it’s best carried out by the business owner or financial controller with an emphasis towards management and not traditional compliance accounting.
3. Communicate Transparently
Transparent and inclusive communication is key to gaining employee buy-in for any profit-sharing program. Clearly explain the programme's benefits and objectives to inspire participation and commitment.
4. Make it Fun, Make it Competitive
By including profit share in your quarterly and yearly themes, you will by default also be setting up opportunities to celebrate successes. By creating a competitive culture you will naturally be also creating the desire for everyone to be striving to do or to achieve more. Just ensure that this competitive mindset is team-based, i.e. “What do we as individuals and teams need to do to better the numbers?” And when the company misses the targets (below the target profit levels), introduces some sacrifices that do not have a negative connotation. E.g. We take an ice bath, or we volunteer to do river cleanup etc.
5. Monitor and Evaluate
Regularly assess the impact of profit sharing on employee engagement and on overall financial performance. Use data-driven insights to make necessary adjustments to ensure the programme's effectiveness. The financial numbers need to be incorporated into your employee Development Reviews, team and company-wide meetings as well as 90-day plans and general company communication.
6. Quarterly Structure
It’s safest for the company to pay the profit share portion after a full year has been completed. But this safety comes at the expense of keeping your staff engaged in the scheme. The ideal timing of any profit share is to make regular quarterly based payments.
7. Utilize Sukuma's Expertise
Leverage Sukuma's customisable profit share structures to design a plan that suits your company's specific needs. Drawing from real-world best practices, Sukuma can help you implement a profit-sharing initiative that drives success.
8. Prepare Before Implementing
This point is a reminder. Profit share will fail unless the preparation has been completed prior to its implementation.
9. Success Breeds Success
The fastest uptake your company will have with profit share will be when it is introduced and there is a high likelihood of the minimum profit levels being achieved. This does not mean that you only start profit-sharing in the good times, rather that you set the initial profit targets at a level where payouts are more achievable and the company also benefits.
Read more: Setting Goals for Success
Profit sharing is a powerful tool that can further develop your organisation's employee engagement, financial performance, and company culture. It is not a quick-fix, short-term strategy to be used to fix poor employee engagement or poor company culture.
Drawing inspiration from real-world success stories and leveraging the expertise of platforms like Sukuma, businesses can embark on a journey of shared success and sustainable growth.
By adopting profit-sharing initiatives like Semco Partners and Zappos, and incorporating the insights outlined in this article, your organization can achieve a motivated and engaged workforce, driving both financial prosperity and a positive workplace culture. Embrace profit sharing and unlock the full potential of your business!
Business Coach & Advisor
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