What are your thoughts on a business with a profit-sharing plan?

[Razly]

Profit sharing - Wikipedia, the free encyclopedia

[SatvikBeri]

People really overestimate the impact of different payment plans on how productive a business is, and how they affect employees. The truth is, different payment structures have a very small impact on employee productivity.

A profit-sharing plan is a good symbolic gesture, but much more important is that the founders instill a sense of a higher goal by making the company's goals clear and explaining the impact of what employees are doing. Just a sustained explanation of why what the employee is doing matters can raise productivity by 250%. In contrast, most pay structure changes/raises tend to have a very short-term effect.

I can't find the study, but if I find it later I'll link to it.

[SnerpGoodWord]

Depends on the profit sharing plan.

Giving the employees an extra $1000 if you have a good quarter does nothing for productivity, but it will hurt morale when you have a bad quarter and don't pay. Bad plan.

Giving your trading floor a 25% profit incentive (and no loss penalty) on large trading accounts will cause them to produce massive swings and volatility in the account, maximizing the value of their freeroll on the profit incentive. Bad plan.

Giving your brokerage floor or sales force a substantial commission for everything they sell can make them sell like crack-fueled monkeys. Good plan.

So it all depends.

[Razly]

People really overestimate the impact of different payment plans on how productive a business is, and how they affect employees. The truth is, different payment structures have a very small impact on employee productivity.

A profit-sharing plan is a good symbolic gesture, but much more important is that the founders instill a sense of a higher goal by making the company's goals clear and explaining the impact of what employees are doing. Just a sustained explanation of why what the employee is doing matters can raise productivity by 250%. In contrast, most pay structure changes/raises tend to have a very short-term effect.

I can't find the study, but if I find it later I'll link to it.

But surely if an employee is getting a share of the profits, it'll give them a greater sense of responsiblity in the company and with their personal income, if the employees pay will go up with the success of the company, wouldn't that give them more motivation to put in 200%? I mean, isn't money the reason most people work to begin with?

[SnerpGoodWord]

Originally Posted by Razly

But surely if an employee is getting a share of the profits, it'll give them a greater sense of responsiblity in the company and with their personal income, if the employees pay will go up with the success of the company, wouldn't that give them more motivation to put in 200%? I mean, isn't money the reason most people work to begin with?

It's like training dogs - positive feedback works great, but it has to be immediate and worthwhile. With profit incentives you also have to police them for moral hazards where variance is confused with profits.

[Orionjoel]

I think the place that this theory falls down is that, at the end of the day while employees might know that they are going to get a share of the profit, this on a day to day basis means nothing to them.

An employee working in a factory putting together the companies product, does not know what the raw materials cost, and does not know how much the company sells this product for to each different client. More importantly though he does not know what all the other fixed costs of the business are.

So one day he gets told he will receive part of 20% of the profit split between all employees. How does he really work this into his mindset working for the company. He knows nothing about what he can do to help improve that profit except work harder. But when he works harder he does not know just how that is improving what he will get. Eventually though because these plans usually only pay out at the end of the year, he loses sight of that and does not think about how it benefits him or not, and just works as always, without thinking about it.

No matter the way you look at it, unless the bonus is tied to an individuals performance and reminded about frequently the plan will not have the full impact that it could, leaving the company really no better off.

Joel

[pjhaggerty]

I was under the impression that most businesses that offer such a plan have such low employee involvement that they end up cancelling them. I.e. most employees don't actually want this type of plan, they'd prefer a wage, which is why they're employees, not contractors, and not self employed.