Profit $haring

The hippies have taken over the loft, someone call McCarthy!

The term ‘profit sharing’ keeps most old school capitalists up at night. After all, most business owners sink their time, effort, and money into a new venture in order to generate wealth. Plain and simple. Aren’t employees already receiving a salary? And benefits? And isn’t that enough?

Maybe, maybe not. The competition to attract and retain not only top talent, but also capable employees is rapidly heating up. During a project for one of our clients which involved restructuring a business unit in preparation to spin it off into a separate entity, I had the profit-sharing discussion with the owner. Traditional thinking holds that an owner who engages in profit sharing has a few screws loose. And certainly at first, this particular business owner thought that I had a few screws loose for even suggesting that profit sharing be a part of the new entity’s operating plan.

But there’s a method to the madness in this case. And it boils down to the scarcity of top talent in areas adjacent to the GTA. Toronto is in essence a massive vortex, sucking all of the top (and often, mediocre) talent from the areas which surround it. Because the GTA is home to a plethora of mid and large cap corporations, the invested capital within Toronto is very high. With high investments in capital come increased investments in people, who ultimately are the ones that protect and grow pools of capital. As any small business owner intuitively knows; the Googles, McDonalds’, Hewlett-Packards’ and Coca-Colas of the world have training and recruiting budgets alone that completely dwarf the entire operating budget of even the most successful SME.

Of course, if you want to retain an essential employee you can always throw a higher salary their way. But with this strategy, the threat still exists that a large cap MNC with deep pockets will just top your offer and lure that key employee away. When employees aren’t engaged or emotionally invested, there’s little incentive to stick around other than the paycheque. This is where profit sharing can play a key role in the growth and success of an SME. Employees who are part owners are engaged and motivated in a way that even the best fringe benefits package simply can’t create. Not only does this tie the employee directly into the health of your bottom line, it also gets employees thinking like managers- about how they can increase productivity and profitability. After all, they’re incentivized to do so- the bigger the bottom line of the firm, the bigger their profit sharing bonus.

If this is the case, why don’t large corporations just set up profit sharing plans too? Some do. But, corporations are owned by shareholder groups- in the case of publicly traded corporations, there are often thousands of shareholders. Convincing these investors, whose sole motivations are often an increase in share price and/or the regular issuance of dividends, is difficult. If you owned a thousand shares in Company XYZ, would you be so quick to vote yes to a profit-sharing proposal that would immediately eat up 10-15% of your short-term profits? (remember that speculative investors are only interested in holding a company’s equity until the share price jumps enough that they can turn a quick profit by selling their shares on the stock exchange) A simple scenario, granted, but to the average investor this is an important consideration.

To the hardcore capitalist who’s made it this far without having a stroke- there’s actually a profit incentive to assign a fixed percentage of your net profits to a profit sharing plan. If you assign 10% of your net profits to a profit sharing plan, there’s a very real likelihood that the growth on your 90% of the pie which can be attributed to enhanced employee engagement and motivation will actually be bigger than the original 10% which you ceded. It’s just like investing in the business by buying a new piece of equipment which enhances productivity- except with profit sharing, you’re investing in your people’s productivity. And ultimately, they’re the ones making you the money.

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