My company is well known for its “generous” profit-sharing plan. In fact, we even won a Custom Home Pacesetter Award for it a few years ago. The dirty little secret is that we don’t actually have a profit sharing plan. (My accountant loves to drive this home to me at every opportunity.)
There are unintended consequences of well-intentioned actions in every part of business, as in life, but nowhere are they more obvious and frustrating than in employee compensation plans. Several times, I’ve handed out what seemed like a huge amount of money only to be met with resentment because “it sure seemed to me that the company was doing better than this!”
I remember the prima-donna framing crew (now alumni) that had mandatory paid sit-down breaks and long lunches because our open-book management report showed that the company wasn’t making much profit on trim labor compared to framing labor. But probably the most painful one was the young builder who recently told me that he had adopted a written profit sharing plan but had never shown enough of a profit to actually have any left to share, and now people felt betrayed and were leaving his company.
So I don’t have a profit-sharing plan.
I have a disbursement-sharing plan.
in which I distribute $40 for every $60 that Beth and I take home beyond our hourly wage. And it is “undefined” to the extent that I choose how much each employee receives based on my own assessment of their contributions to the company culture. And in years past, when profits were elusive but the team was pulling together well, I borrowed money from the bank to fund my “profit-sharing plan.” (This makes my accountant turn red in the face and twitch uncontrollably.)
The goal of a good employee compensation plan is to optimize the profitability of the group by encouraging efficiency, diligence, skill improvement, and teamwork. When it’s done right, the workers in the field will push themselves to weed out mediocrity and improve customer service. When done wrong, it can create a culture of entitlement, competitiveness, and resentment. The unintended consequences are always a single misstep away, but all the more so when your company is perceived as “holding itself to a higher standard.”
I say no to End-of-Year Profit Sharing for several reasons. For one, the profitability of the company is subject to interpretation and manipulation, it is not a simple and provable number. The way I post expenses using accrual, percent completion, cash or GAAP (Generically Accepted Accounting Principles – yuck) accounting will yield different assessments of my profitability. I may delay or accelerate collections or expenses at the end of December to change my profit and tax picture. I may prefer to hold on to retained earnings to strengthen the company as we head into a slow period rather than distribute taxable profits to myself or my crew. At New Years I may be just too busy to take the time to do end-of-year accounting right away but the crew still need to be rewarded for their efforts.
So my decision about the total disbursement amount is based not on the profitability of the company but on the amount I feel is safe to distribute based on my assessment of the financial health of the company looking forward as far as I can see based on the information at hand It’s tempered by my assessment of the performance of the team as a whole but the 60/40 ratio is fixed, if there’s enough for me there’s enough to share. Regardless of how I figure it, the best time to disburse an end-of-year bonus is well before the end of the year.
I give Thanksgiving bonuses.
The kind of people I want to have in my company are bighearted people who want nothing more than to provide for their loved ones as best they are able. To these folks, the holiday season is a time when they are tempted to overextend themselves to give to their families. I give them their bonuses before the holiday season so that they will know what they have to spend and be less likely to have regrets come January. This also makes them more likely to praise the company at family and social gatherings, and just telling all their friends and relations how much they are appreciated at work makes them more likely to carry a positive attitude in their daily work ethic when January comes around. That positive attitude is what I’m hoping to cultivate and it, along with smart estimates and business systems, are what will result in a profitable year and healthy profit sharing checks.
I don’t give Christmas bonuses because, in the big picture, Thanksgiving bonuses yield a higher return on investment for my company. And it feels right to me; I get to show thanks to them for pulling together and helping achieve another profitable year, and they get to feel thankful for having a team that appreciates them. A win-win proposition all around.