Eighty-one per cent of SMEs cite staff recruitment and retention as a major barrier to growth [1], so if you're looking to build a successful business, it's important to do all you can to ensure your staff stay happy and motivated.
Sharing your company profits with employees can create a stronger workplace culture, with everyone working towards a shared goal of increasing profits. That could make it easier for you to attract and keep the most talented workers in your business.
In this article, we will explain how profit-sharing schemes can help you to attract new talent, increase productivity and build better staff retention.
How do profit-sharing schemes work?
A profit-sharing scheme is a type of employee compensation. Companies calculate their profits over the financial year, and then give a percentage of that money to their employees. Profit sharing can be paid directly to employees each quarter or year, or it might be paid in a lump sum at retirement. In some cases, profit sharing is paid as shares in a company.
Profit sharing is part of the culture at the digital agency Candour. In the early days of the business, it was a way to attract highly experienced and qualified executives when the company couldn’t afford to pay market-rate salaries. More recently, it’s an important part of the benefits package for all employees who have completed their probationary period. Employees receive a quarterly bonus in their pay packet, which is directly linked to the company’s profits in the previous quarter.
What are the main types of profit-sharing scheme?
The main types of profit-sharing schemes are:
Pro-rata
In this scenario, everyone receives a share of profits that is calculated based on their salary. For example, if the rate was set at 1%, someone earning £20,000 would receive a profit share payment of £200 per year; while someone earning £100,000 would receive £1,000.
Noncomparable
This type of profit share scheme might offer different rates of profit share to different groups of employees. For example, full-time workers might receive a higher rate than part-time workers.
Age-weighted
In this model, age and salary are considered when calculating profit share. An age-weighted profit-sharing scheme will allocate a higher percentage of shared contributions to older employees. This is based on the logic that they have less time to save. In the UK, this should only be done with expert advice to avoid the risk of age discrimination.
Choosing the right profit sharing scheme for your employees
When choosing a profit share model, think about what will most benefit your employees, says Ceri Gillett, a business coach specialising in advising female-led companies. “If you’re approaching this from scratch, explain to your employees and ask them what resonates," she says.
"It’s supposed to be a benefit for employees, so it should be designed in consultation.”
This was the approach taken at Candour. “We are really transparent about how the scheme works, and we make changes based on our people," says Mark Williams-Cook, Candour's co-founder.
"With the recent cost-of-living crisis, we used surveys to ask people whether they wanted annual or quarterly payments, and based on that feedback, we’re making quarterly payments to help people manage their budgets.
"Having that regular communication also means being upfront about if we’ve had a very expensive quarter, so people know that their payment next quarter might be lower, and why.”
What are the benefits of profit sharing?
Since implementing a company-wide profit-sharing scheme, Candour has seen much lower staff churn compared to industry averages. Employee satisfaction rates, measured by regular surveys, are also much higher. “Our sector tends to see a lot of job churn but in the five years since we’ve introduced profit sharing, I think only two people have left for other jobs,” says Williams-Cook.
Running a profit-sharing scheme can help your company’s performance as more engaged employees tend to be more loyal, efficient and productive, says Gillet. “We are seeing profit sharing more and more often in the SME and start-up space because newer companies can really incentivise a team to work towards a common goal and drive profits if employees see the financial benefits of success,” she says.
What's more, Gillet says, "when people feel like they are involved and valued, you’ll see retention increase, which is great for everyone.”
If you're considering a profit-sharing scheme, or want to find another way to reward your employees, an alternative could be to use American Express Membership Rewards® points to show your appreciation. Each £1 you spend using an eligible Business Card earns you 1 Membership Rewards point that you can redeem with hundreds of retailers on employee perks¹.
Are there any downsides to profit sharing?
One of the most commonly-cited downsides of employee profit sharing is that schemes can be costly and complex to set up. “Remember you will have extra costs involved to establish, administer and continually monitor the profit share, often creating extra work,” says Gillet. “If the scheme isn’t monitored, then it may become ineffective over time.”
Williams-Cook has advised other businesses in his industry on setting up profit-sharing schemes and says the process was straightforward.
Candour was able to set up its pro-rata profit-sharing scheme in a few weeks, and, according to Williams-Cook, running costs are minimal. Although the first senior executives were paid a percentage of total profits, today workers receive a share of a total profit share fund, based on their salary. All the company’s employees are invited to join the scheme after completing their probationary period.
“We worked with an accountant and an HR consultant to set up the service, and make sure we were compliant with the regulations around tax, and that we didn’t do anything that could be seen as discriminating against younger or more junior employees,” says Williams-Cook.
“After that, we use a simple Google sheet calculation that gives the correct figures to our accounting software each quarter, and ensures the bonus is reflected in payroll.”
Weighting contributions can be tricky, adds Gillet, because there is a risk that if younger, junior employees make a significant contribution but don’t receive what they see as a ‘fair’ profit share, they may feel undervalued.
1. Membership Rewards points are earned on every full £1 spent and charged, per transaction. Terms and conditions apply.
Sources:
[1] Gatsby Foundation, The Education Landscape: A Guide for Employers
