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 not only succeed but also be sustainable, you have to create a team of employees who are raving fans of your business. You do this by creating a culture that encourages collaboration and innovation.

But if you truly want to create a team who 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. A profit-sharing plan can be an excellent way to incentivize your team into working harder, staying longer and focusing 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 payouts from an employee stock owners plan (ESOP) or other type of profit-sharing plan can be tremendous for everyone involved. One of the best things about profit sharing through ESOPs 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 should 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.

Disadvantages of a profit-sharing plan

how to start profit sharing

When taking a closer look at how profit sharing works and how it can improve your business, we also need to look at the flipside. There are some downsides to profit sharing that you need to be aware of before you make the decision to move forward.

If you put a profit-sharing plan in place using the common method of distributing it as a percentage of annual pay, you will be giving much more to your long-term employees and upper management who already have higher paychecks. That means if your reason for using profit sharing is to encourage newer or younger employees to remain loyal and innovate, your plan could backfire.

Another disadvantage of a profit-sharing plan is that employees usually get compensated as a percentage of profits of the company. That means that their individual contributions to the success of the company aren’t necessarily recognized. If there are certain team members who aren’t pulling their weight yet are still getting the same bonuses as your rock stars, it could breed resentment. This can hurt you in your attempts to keep great employees happy and engaged and could reward those employees who are taking advantage of others and generally adding to a toxic organizational culture.

 

how does profit sharing work

Ready to take advantage of all the benefits of a profit-sharing plan? Here is more about the types of plans and how they work.

What is a profit-sharing plan?

A profit sharing plan is simply a way to pay out a portion of profits from your company to your employees. As we mentioned before, 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.

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. This is 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 the pros of a profit-sharing plan outweigh the cons, 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.

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.