Dear BAKERY,

I am considering setting up a profit-sharing program for my staff. What percentage of independent business do this? Are there some general guidelines, pros, cons, etc I should be considering?

Love,
Generous Girl

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Hi Generous Girl,

We’re so happy that you have considered a profit-sharing program for your staff. It’s a wonderful way to motivate staff members. Sharing the wealth will create more employee loyalty and even comfort. When the employees know that some money comes to them at the end of the year (or whenever) based on the company’s profitability, they are more likely to work harder and really feel vested in the success of the company. These are all pros of profit sharing.

When it comes to independent businesses, there are not too many very small indie businesses going in this direction but that doesn’t mean they shouldn’t. Once you get big enough to have a number of employees, it’s certainly a more serious consideration. In fact, I think your staff will be very excited.

Profit sharing is a broad term that can cover anything from 401k programs to stock options. One of the plans I think would be most effective in a small business is to offer employees performance-based incentives such as cash bonuses or a sliver of the profit pie at the end of the year. These allow you to be more flexible and creative, whereas a standard plan like a 401k is very standardized and rigid.

Here is how we think you should get started:

- First, research the traditional profit sharing plans available and if you want to go with something more standard, meet with a qualified professional.

- Second, structure your plan based on your objectives and what you think your employees will best respond to. If you’re looking to motivate, structure the plan around incentives. Also, take a look at who will benefit from the plan — everyone or a select few?

- Third, communicate and follow through. Make sure your employees truly understand the plan and how they can be successful. Also, listen to their questions and concerns and make changes based on their needs as well as your own. Don’t be afraid!

Well, we hope that this was helpful to those of you considering a profit-sharing plan in your own small business.

Love,
BAKERY

Further reading:
- Is Profit Sharing Right for Your Business?
- Should You Start a Profit Sharing Plan?
- Department of Labor Profit Sharing Plans Information