Profit sharing enables you to share your success with the people who power your business. This can work to your business's advantage, engaging and motivating your employees. However, connecting your workers to your company's success can have its downsides, bringing negatives that could hit your bottom line. It's important to consider the pros and cons before you implement a profit-sharing program.
Employees with profit-share options connect with their employers in a different way than those who earn regular salaries. If you offer this incentive, you directly link employees to the success of your company on a financial level -- if they help you make a profit, they earn a reward. Acknowledging the importance of the work they do by giving a tangible benefit may increase their loyalty to your company and their levels of job satisfaction.
Adding profit sharing to your benefits package could help you improve employee retention rates, saving money on recruitment and training. Apart from keeping people happier in their roles, the extra money may dissuade them from looking for other jobs. You can also use profit share to your advantage if you want to retain key people but cannot or do not want to increase their base salaries. Provided your company does well, you can offer the incentive of additional earnings without committing to increasing their salaries.
Sharing a proportion of profits among all your employees may have a positive effect on their efficiency, their motivation and their productivity. Employees without a stake in results may be content to do their jobs at a minimum level of efficiency. Add profit share to the mix and employees have a vested interest in the success of the company. They have a financial stake in business performance and may be more motivated to work toward your business goals and to boost profits.
If employees focus solely on profits, your business may suffer. This may be a problem if they work toward making the greatest profit at the expense of other key business drivers such as quality. For example, if your sales teams solely push products with the highest profit margins, rather than focusing on what is best for the customer, you could lose repeat business and your market reputation might suffer.
Once employees receive profit share, they may feel entitled to earning the extra money. If you don't make profits in a period, they may become unmotivated. Over time, you may also lose productivity gains, as employees may not maintain initial motivation once the novelty of the system wears off. You may also have problems with perceptions of inequality. For example, a hard-working employee may be resentful of others if he feels that they work less hard but receive the same share of profits. If you use scaled profit sharing, some employees may feel undervalued or may perceive the system as being unfairly weighted.
Setting up a profit-sharing program may not bring significant upfront costs, but you must still factor in long-term time, labor and administrative costs. Committing to giving away a share of your profits also reduces your disposable investment income. This may be an issue if you want to reinvest profits into your business, as you'll have less money with which to do so. Also, if your company has a lean period, you can't hide this fact from your employees. You've made them focus on profits, so they are more likely to notice if things aren't going well. This could unsettle and demotivate them and, in extreme cases, encourage them to look for other jobs.