Profit Share

[samuel5]

Hi all

Not sure if any of you offer this but thinking about giving my staff a share of the company profits on top of their wages but can't get my head around the structure of it.

Say the company made 500K profit, and 20% of it went into the profit share pot, how would it be distributed with say 1 employee on £20K per yer and another on 35K per year?
It needs to be worked out based on their salary as it cant just be divided equally.

And do you pay them in one lump sum or split the bonus over 12 months to prevent staff just hanging on to the bonus and then leaving?

Thanks

Sam

 

[STDFR33]

If you give them monthly bonuses, what would you do if the company made losses in the last 3 months, wiping the entire years profits?

You could pay it after year end, paid in one lump sum and pro data for length of service. You could even write it into the contracts that bonuses are not paid until you’ve done X months of service.

There’s a number of ways to calculate the bonus. You mention doing it based on gross salary, which would be a simple enough calculation.

 

[Mr D]

Must it be based on their pay?

Profit share I have been paid in the past was a one off payment and pretty sure it was divided based on number of staff.
Yes people can leave immediately after it - so what? Just means they have no chance of any profit share next year. Not as if you are paying them for future work they then avoid doing. Staff leave for multiple reasons - would have to be a BIG payout to cause them to leave because of the profit share!

It's a method of rewarding and a method of encouraging staff to stay with the company. Use it accordingly.

 

[samuel5]

There’s a number of ways to calculate the bonus. You mention doing it based on gross salary, which would be a simple enough calculation.

So what is the calculation then please, my maths is bad?

 

[arnydnxluk]

Never been employed or an employer (well, other than employing myself in my own company) but this sounds like a typical bonus to me, although based on company performance rather than individual performance.

A share based on salary seems straightforward:

( (employee salary) / (sum of all salaries) ) x total value of profit share

For example:

• £100,000 profit share
• £30,000 salary
• £1,000,000 sum of all salaries

(£30,000 / £1,000,000 = 0.03) x £100,000 = £3,000 bonus

The more difficult part would surely be the tax implications?

 

[samuel5]

Must it be based on their pay?

Profit share I have been paid in the past was a one off payment and pretty sure it was divided based on number of staff.
Yes people can leave immediately after it - so what? Just means they have no chance of any profit share next year. Not as if you are paying them for future work they then avoid doing. Staff leave for multiple reasons - would have to be a BIG payout to cause them to leave because of the profit share!

It's a method of rewarding and a method of encouraging staff to stay with the company. Use it accordingly.

It has to be based on their salary, no offence to the junior admin guy but he would not be entitled to the same bonus as the eccomerce manager!

 

[samuel5]

Never been employed or an employer (well, other than employing myself in my own company) but this sounds like a typical bonus to me, although based on company performance rather than individual performance.

A share based on salary seems straightforward:

( (employee salary) / (sum of all salaries) ) x total value of profit share

For example:

• £100,000 profit share
• £30,000 salary
• £1,000,000 sum of all salaries

(£30,000 / £1,000,000 = 0.03) x £100,000 = £3,000 bonus

The more difficult part would surely be the tax implications?

That’s the calculation in looking for, thank you!

 

[Mr D]

It has to be based on their salary, no offence to the junior admin guy but he would not be entitled to the same bonus as the eccomerce manager!

Of course not.

However the question was not about a bonus but profit share.

By all means have a bonus. Does not need to be related to profit.

 

[STDFR33]

The more difficult part would surely be the tax implications?

The bonus is taxable and goes through PAYE.

 

[Chris Ashdown]

Do not take the route of issuing shares in the company

 

[Financial-Modeller]

It needs to be worked out based on their salary as it cant just be divided equally.

Why not?

Lots of companies pay salary for doing the job, then a bonus that might comprise an element for company performance over which they have no control individually, and/or a completely discretionary element based on individual performance.

Surely one aspect of offering to pay bonuses is that you want staff to go the extra mile to earn it.

 

[Mr D]

Why not?

Lots of companies pay salary for doing the job, then a bonus that might comprise an element for company performance over which they have no control individually, and/or a completely discretionary element based on individual performance.

Surely one aspect of offering to pay bonuses is that you want staff to go the extra mile to earn it.

And bonuses can be despite the business making a loss.

People often use profit related pay and bonus interchangeably.

 

[STDFR33]

A well known charity has profits based on attendance.

 

[Mr D]

A well known charity has profits based on attendance.

Can think of several dozen like that.

 

[LanceUk]

If you are doing profit share, you would have to consider the time element as well.. You could lose or at least p!$$ off employees if the new kid on the block that arrived 3 months ago got the same entitlement as the employees all year - without taking this into account, the new kid on the block is getting full reward for only providing 1/4 of value.

 

[SillyBill]

Just be wary of putting it into contracts in my experience. If you do things informally at least you can't be later on be held ransom to it when circumstances change. And you can be as generous (or not) as you like.

By all means do it formally but you may end up like I did in one company where after many years I couldn't keep up with all the bonuses (pretty much all agreed prior to my time) and it definitely damaged the company as I had to unravel it. You have to get the balance right. Staff loyalty is good but having zero staff turnover in a lot of positions isn't. You get no new ideas into the business and things can become very stale. Make things too attractive and you will end up where I did with a stagnant skill base, people holding onto retirement for years when the passion has long since gone, younger people (the future) leaving as they can't earn anywhere near those with 20+ years service (but doing the same job).

We had a long term employee bonus (extra 2 weeks pay at Xmas). Various add-ons for skills such as FLT licenses. A generous profit share scheme. Extra holidays for various time served. Better pensions for older contracts. Sometimes you just create more entitlement the more you do.

My philosophy is to just pay people a decent wage for the job at hand. We do a good pension contribution and 25 days holiday. All the other stuff I've been there and done it and wouldn't go back. Just my take.

 

[MBE2017]

Paying a bonus annually can help with staff retention, plus it increases the perceived value, being a larger figure. How to split it is down to yourself, if it is to reward individual effort then as a percentage based on salary. If to reward based on the companies and team success, then a fixed figure for everyone works better IMO.

The individuals are rewarded for their jobs by different salaries, a bonus can be the same fixed figure, for everyone regardless of salary. Depends on what you are looking to achieve by giving it in the first place.

 

[SillyBill]

If you are doing profit share, you would have to consider the time element as well.. You could lose or at least p!$$ off employees if the new kid on the block that arrived 3 months ago got the same entitlement as the employees all year - without taking this into account, the new kid on the block is getting full reward for only providing 1/4 of value.

Pay your good staff more than the going rate. It is that simple. You don't need any complexity in a remuneration package to do that. You can very easily obtain national average figures for job titles in seconds online, put 10-20% on top if you want to keep them and then make their job as comfortable as possible. Ignore the top performers for a moment within a company and consider what a profit share does for the rest: bonus schemes invariably lead (in my experience) to the "bottom half" of employees (remember 50% of all people nationally in the workplace are technically "below average) sticking around that you'd not be fussed over at all if they left. It is these people that have less options in opportunities and thus you may simply be setting up a system that means they will never leave. And invariably the longer they are around the harder and more expensive it is to remove. Good people always have options, profit share or not, less good people don't. Pay people a great wage in the 1st place, give them autonomy and responsibility and your risks of losing them are minimal. We have never had a problem in retaining our best staff but we've had a lot of problems with no positions opening up where we wanted a little turnover for the health of the business; the benefits being so disproportionate to the local market meant is was never going to happen.