Eliminate holiday bonuses: Discover the surprising benefits of profit sharing instead
It was the day of the employee Christmas party. That afternoon a business owner was trying to determine the Christmas bonus for each employee. They did not have a good year. However, the employees expected a check at the holiday party. To make matters worse, the employee who had been there the longest and got the biggest check last year, expected at least that much this year. Unfortunately, we determined that he had actually cost the company money this year.
There was no standard method to determine the holiday bonus. The employees felt entitled to the check. They didn’t care that the company didn’t have a profitable year. It was a tradition — a holiday gift they received in good years and bad.
Dollars given during holiday times are gifts. And, like this owner, they are generally determined, “by a throw of a dart” rather than some systematic process.
If your company has a profitable year, you should share a piece of the profits with employees who helped generate the profits. If your company had a loss, then no profit sharing is earned and no holiday bonus is earned, either.
When employees understand a method to determine profit sharing and how their job impacts the bottom line, they are much more willing to help generate those profits. When you keep them informed monthly or quarterly, they will know what the company profits are for that time period. They are not surprised at a small or large profit at the end of the year.
Distribute profit sharing after your year is closed. This usually means January or February. There are no checks distributed at a holiday event. Of course, the first year that you implement this program, you have to remind employees that the profit sharing checks are distributed after the year is closed and not to expect a holiday check.
Here is my profit sharing formula:
1. Determine the percentage of yearly profits that will be distributed to employees. My philosophy is not to distribute more than 25% to 30% of the profits. The remaining 75% need to be retained in the company for future growth, additional wages, other expenses, and, of course, your share as the owner.
2. To calculate each employee’s share: multiply their compensation by the number of years they have been employed by your company. You reward longevity.
3. Add the totals for all employees. That is the denominator of the equation.
4. To calculate a specific employee’s percentage, take his total and divide it into the total for the entire company.
Assume that your 2015 profits will be $100,000. You distribute 25% of the profits or $25,000 through the profit sharing plan.
Sue receives 150,000/520,000 or 28.8%. Her bonus is 28.8% of $25,000 or $7,200.
A question that contractors often ask me is, “Do I still need to give a bonus to a person who has been screwing up and in my opinion doesn’t deserve it?” The answer is yes. This structure is for everyone.
I’ve found that when you use this profit sharing plan year after year, by the third or fourth year you won’t have to fire non-productive people. Your employees will do it for you by making that person’s life so miserable that he or she quits. They understand that this person is affecting their profit sharing bonus negatively and want that person gone.
The other thing that I find is that you will attract better employees. People want to work for a company where their hard work is rewarded. It sets you apart from the competition.
A warning — make sure that you keep everyone informed each month. It’s important that everyone knows what is happening with profits. To keep all employees abreast of the financial profitability of the company, one company owner puts a thermometer in the break room. The top of the thermometer is the amount of profit that the company wants to generate each year. Every month the CFO adds the year to date profit on the thermometer. And, each employee knows his approximate percentage of that profit he earns so he can compute his estimated profit sharing monthly.
Another owner gives half the profit sharing bonus right before busy season starts. No one complains about having to work hard, how busy it is, or about the telephone ringing off the hook. They know that if they work hard and generate even more profit during the busy season that their check at the end of the year will be even larger.
If you’ve been giving holiday bonuses every year without a structured reason for those bonuses, then break the habit in 2017. Establish a profit sharing plan instead.