How to create employee loyalty through incentives

You’re all in for your business. You’ve arranged your life around your company, and for you, success is the only option. You’ll do whatever it takes for your brand to thrive, but how many of your employees would say the same thing?

In order for your business to succeed and be sustainable, you have to create a team of employees that treat the company like their own. You do this by creating a culture that encourages collaboration and innovation.

But if you truly want to create a team that will stick by your side through thick and thin, then it’s time to think about a profit-sharing plan.

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What is profit sharing?

Profit Sharing, Defined

Profit sharing; noun: A system in which the people who work for a company receive a direct share of the profits based on the company’s annual or quarterly earnings.

Profit sharing is a form of an incentivized compensation program for your employees. It increases loyalty and leads to raving fan employees because they understand that by providing the ultimate customer experience, their paychecks will grow.

How does profit sharing work?

You can legally share the money your business earns with your employees through a profit-sharing plan. Along with a team of financial advisors or your human resources department, you decide how to divide up your company’s profits. 

There are a number of different options when it comes to developing a profit-sharing plan and you can customize your approach to your company structure and goals for the program. Profit sharing can be an excellent way to incentivize your team to work harder, stay longer and focus on developing an innovative culture at your business. Employees will also be more invested in the company’s long-term strategy because success will mean a boost in their salary and/or bonuses.

what is profit sharing

The benefits of profit sharing

The benefits of profit sharing can be tremendous for everyone involved. One of the best things about profit sharing through a plan like an Employee Stock Ownership Plan (ESOP) is that people at every level of your company can participate and you get to decide how big of a share they’re earning. Another thing to consider is the tax benefits for business owners that come along with ESOPs. If you’re running an S-status corporation that’s participating in an ESOP, up to 35% of the funds could be eligible for federal tax exemption, meaning a large portion of your company’s profits could avoid taxes – saving you money and building trust within your corporation.

Part of being an incredible CEO or leader is recognizing all the moving pieces that came together for your dream to become a reality. By offering a profit-sharing plan at your business, you’re giving your employees a sense of ownership. You’re inviting them to see a viable, long-term future with your company and giving them the incentives to stay on board. This can create stronger connections, increase loyalty and encourage your team to work harder, which are vital to building a team that works.

Having passionate employees who are invested in the success of your business needs to be a top goal of any business owner. Those who are successful understand that their employees also have career goals and that they need incentives to stay at their current companies. A profit-sharing plan is an ideal way to give them the career security and growth they seek. This naturally attracts a higher caliber of employee – the type of employee you need to be successful.

In order to find that person, you have to be willing to create a space that empowers them. What are some of your best hiring practices? Are you asking the right questions such as how potential candidates see themselves fitting into your company over the next five, 10 or even 20 years? Hiring and keeping on an incredible team starts with talent, but ends with offering incentives like a profit-sharing plan.

The more passionate someone is about their job, the more likely they are to give you their best solutions. When you have raving fans inside your office, their energy and work is felt by those looking to buy your product and service, meaning you’re on your way to building loyal customers.

Profit sharing: An overview

how to start profit sharing

Profit sharing is considered a variable payment plan where leadership decides what percentage of annual profits are put into a pool of money to share with employees. In some cases, the pool will only be shared with executives or managers. Once the group of employees who will receive the benefits is chosen, a formula for distribution is used to divide the money between them. This formula varies from company to company depending on the plan they are using and their unique situations.

The goal of profit sharing is to help key employees save for retirement. The amount given to the employees is discretionary, meaning the company can decide from year to year how much they want to contribute. If a profit is not made during a given year, leadership does not have to make contributions to the plan.

What is a profit-sharing plan?

Profit-sharing plans are different from other retirement plans like 401(k) plans because employees do not put any of their own money into the plan. Many employers offer a profit-sharing plan in addition to traditional 401(k)s.

There are different types of profit-sharing plans you can use to incentivize and reward your employees. These plans fall into two types: deferred or cash.

how does profit sharing work

Types of profit-sharing plans

Deferred profit-sharing plan

company practicing profit sharing

A deferred profit-sharing plan is a retirement plan for your employees. You contribute a portion of your company’s profits to the plan pre-tax. Employees do not contribute to the plan and are only taxed on the proceeds when they withdraw funds. In these types of plans, contributions are usually made to a tax-deferred retirement account and participants can take distributions penalty-free after they reach the age of 59 ½. In some cases, employees can also take loans from these accounts before retirement. For those who leave the company before retirement age, they can transfer their assets into a Rollover IRA.

These types of profit-sharing plans are a good way to encourage employees to stay with you long-term as you are adding to their future needs and their savings will build the longer they work for you.

Cash profit-sharing plan

A cash profit-sharing plan involves paying a portion of profits directly to your employees that is taxed as regular income. It is not tax-sheltered and employees do not have to use the extra money as an investment or retirement vehicle. This is a good incentive for younger employees who would prefer having more cash now to buy homes or start a family and who haven’t yet started thinking much about retirement.

If the above two types of profit-sharing plans don’t fit your needs, you can consider another option: an employee stock ownership plan (ESOP). This provides workers with a portion of the company’s profits through stock ownership and allows them to be a partial owner of the company without ever having to invest their own earnings in the business. This can reward hard-working employees who have shown loyalty and who you see as current or future leaders.

what is a profit sharing plan

Getting started with a profit-sharing plan

company working on profit sharing

If you’ve decided that a profit-sharing plan is right for your company, it’s time to look at making a plan that checks off as many of your goal boxes as possible. Creating the right type of profit-sharing plan for your company is all about knowing what excites and engages your team and what works best for your finances.

Work with a team of advisors to determine the percentage of your company’s profits you’re willing to offer employees through a profit-sharing plan. Do you want to distribute money as cash that is taxed or do you want to put the money into deferred retirement vehicles that are not taxed? Then, figure out how you want to distribute the money: Do you want to have shares scalable based on salary or by role in the company? Then, draw up documents that finalize your plan and have your employees sign any legal paperwork.

How to utilize a profit-sharing plan

You can choose the profit-sharing plan that best suits your needs and how to set it up. The Department of Labor requires that you set up an official strategy with documentation to put a profit-sharing plan in place. You must submit:

• A written plan

• A trust for the plan’s assets

• An official record-keeping system

• A way to provide eligible employees plan information

Though these plans can be flexible, you are required to keep strict records, maintain proper legal documents and only make changes with the proper oversight.

When you invest in your employees’ happiness, it will turn into positive results and growth for your business. Discover additional ways to take your business to the next level by attending Business Mastery with Tony Robbins.

Create a profit-sharing plan that excites your team

Investing in your employees’ happiness will turn positive results for you and your business in the long run. Discover the secrets to cultivating your winning edge with Tony Robbins’ Seven Forces content series.