How to create a profit-sharing plan

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.

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. 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

What is profit sharing? Two types of plans

There are two different types of a profit sharing plan you can put in place in your business: deferred or cash.

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.

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.

Another option is stock ownership plans (ESOPs). 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.

The benefits of profit sharing

how to start profit sharing

The payouts from an 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.

how does profit sharing work

How profit sharing helps your company long-term

company practicing profit sharing

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 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

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 employees. 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.

what is a profit sharing plan

Getting started

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. 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.