What is an employee profit-sharing plan and what makes it work?

Across industries, business owners are struggling to retain their top talent or attract employees that stay with the organization for the long term. Traditional solutions, like increasing wages or offering more vacation time, haven't delivered the results. That leaves the door open for a different approach, like an employee profit-sharing plan.

How does an employee profit-sharing plan work?

Employee profit-sharing plans are business structures that allow employees to earn a share of the company's annual profits. Typically, the employer puts a percent of the profits into a savings account for employees each year. Some plans also allow for individual employee contributions, although this is optional.

Employers are required to create a formula that determines how much they will contribute to the plan each year. The profits are paid to a trustee that holds and manages the funds for the employees.

Why would I adopt an employee profit-sharing plan?

Through client conversations and presentations to industry groups, we have found a few core reasons why business leaders are looking into sharing ownership value and growth with their employees.

Here are some key reasons why companies are considering sharing employee ownership, and how it is helping them accelerate growth:

Retention and recruitment

Many industries have seen a large-scale struggle to retain good talent. Organizations that share business profits in the right way with the right employees have seen an improvement in retention because the individuals can see a benefit to the hard work they're putting in. If they continue to contribute and grow the business, they will be the direct beneficiary of the financial success.

This compensation model can also be used as a feature for your recruiting efforts. Let's say a job hunter is deciding between two organizations. The offers are similar, but one offers a profit-sharing plan. That could tip the scales and result in more hires for your organization.

And consider the message that a profit-sharing plan sends: this action demonstrates that owners care about their team, building loyalty in the process.

Retirement planning

Some businesses do not have a structure in place to allow for their employees to build retirement capital. Adopting a profit-sharing plan is a way to provide some retirement planning options to your employees. Ultimately, how the money is used is up to the employee, but many will save it for their retirement.

While other retirement plans can be enticing for employees, they don't offer the multiple benefits to employers. Business owners appreciate the flexibility they get from these plans.

Transparency 

Business owners are increasingly looking for ways to make more of their team members feel like owners, either by actual ownership or by cultivating an environment in which they feel and act like owners. In many cases, the owners want to structure actual ownership along these lines as well, strengthening the behavior that makes everyone involved win. The adage “a rising tide lifts all boats” becomes real for everyone, and growth accelerates.