Share and share alike
“We remain competitive by paying less than our competitors”, is a joke that tends to make me wince. The psychologists would have you believe that behind every joke there is a kernel of truth and most of us in business would recognise the pressure of trying to find a margin – any margin. Cost control and cash flow are the twin guardians of corporate stability but costs are not just economic, they can be human as well and in a competitive world a disaffected, uninspired, insipid workforce can be as detrimental to the success of a business as any bad debt or lost contract.
Which is why I was so delighted to read Sharing Profits and Power, a paper recently published by the Institute for Public Policy Research (IPPR), a left of centre political think tank, which sets out how profit-sharing could strengthen the British economy, increase productivity and reduce inequality. The Institute’s ambitious vision adds to the growing debate around the diversification of business models and reward structures within the UK.
As counterintuitive as it sounds, the cost of not sharing profits could be as bad (if not worse) as not making any profits at all. For many businesses a company-wide profit-sharing arrangement can be an attractive, efficient and effective way to galvanise their workforce and boost productivity. At Brodies we have been emphasising for some time now the virtues of implementing and operating a profit-sharing plan, and I am continually amazed that something so simple and straightforward should be so consistently overlooked.
We are all in this together
Profit-sharing works like this. Eligible employees are rewarded with an additional amount of money on top of their salary. These additional sums are based on the collective performance of all of the company’s employees and are usually paid out to all staff. Profit-sharing is a collective reward structure to reward collective performance. By contrast, a traditional bonus structure tends to pay out variable rewards based on individual or group performance.
Profit-sharing plans usually pay out annually and are normally cash-based, as cash is considered to have more of a direct motivational impact on employees. As a percentage of pay, between 2% and 5% is a fairly typical payment range but of course it can be higher. The implementation of profit sharing models can also vary: an employer can simply allocate a percentage of the employee’s pay; or, more typically, a percentage of the employee’s pay can be allocated based on service, rewarding loyalty with participation. The methods of calculating profit-sharing plans also vary and flexibility or Board discretion over payouts can be built-in.
Because profit-sharing payments are linked to the performance of the business as a whole there needs to be profits to be shared – profit-sharing plans are self-financing – that is the magic. A proportion of the company’s profits or a specified amount is designated for staff distribution. The success of the company is enhanced across the pay scale and the workforce as a whole is emboldened to drive the company forward and share in further rewards, together.
Dealing with the doubters
As averred by the IPPR, there are many perceived and potential advantages to profit-sharing. By implementing a profit-sharing arrangement an employer is in principle acknowledging that every employee contributes to the company’s success. In turn, it is argued, this can increase employee engagement, focus, loyalty and commitment. Sharing more of the company’s profits can also encourage cooperation with and between management and employees, discouraging an ‘us-and-them’ culture and making it less likely for employees to feel alienated. As a result of all of this, profit-sharing has the potential to boost motivation, generate higher productivity, lower staff absence rates and make the company a more attractive place to work for the best people in the given market.
Critics suggest caution, however. Profit-sharing models have the potential to lower individual incentive or encourage some employees to ‘free ride’ on the tenacity of their colleagues, they say. Proponents counter by arguing that in fact profit-sharing encourages employees to push their colleagues to meet their responsibilities in making the company a collective success. Sceptics maintain that the extra sums distributed in a profit-sharing plan can in time be taken for granted by employees, undermining many of the perceived advantages. Advocates understand that a well structured and flexible profit-sharing plan can easily mitigate this concern. Lastly, the mechanistic nature of introducing profit-sharing is also often stated as a drawback, but with guidance and professional advice this complexity need not be a barrier.
A competitive advantage
In Scotland over 90% of private sector enterprises are SMEs and the scope for profit-sharing is potentially huge, given how well suited individually tailored plans can be for such moderately sized companies. At Brodies we recently helped a growing software and data management company based in Aberdeen to implement a profit-sharing plan and we are currently working with a number of other companies on their needs and aspirations. In tight, difficult or competitive markets where the battle for talent can be hard-fought, profit-sharing can be a powerful tool for increasing staff retention and nurturing loyalty. For companies struck down by poor employee productivity, profit-sharing can be a virtuous path to recovery.
By Nigel Watson, Partner and Head of Employee Benefits at Brodies LLP, assisted by Ben Macpherson, Trainee Solicitor at Brodies LLP.