How To Implement A Profit Sharing Plan
- How to implement a profit-sharing plan
- The 2 key questions to determine your profit sharing plan
- When to do profit sharing
- A Profit Sharing Matrix
Full transcript below:
How to motivate your team with money. Part 1 of our profit sharing series coming up right after this.
Welcome to the Chris LoCurto show where we discuss leadership and life and discover that business is what you do not who you are.
Welcome to the show folks. Hopefully you are enjoying your day wherever you are. We are having fun here in good old sunny Franklin Tennessee well a little bit sunny little overcast. Today we’re talking about how to use money to motivate your team. Now obviously if you’re a business owner this is going to speak directly to you. But for those of you that are leaders this is something that may be a discussion that you want to have inside of your leadership team. Might be something you ought to bring up but keep in mind that obviously if this is being paid out by an individual owner then it may be a touchy subject. If it is not if you, have the owner that is in a place where talking about things like profit sharing is doable…Great. Fantastic. That’s awesome. Just keep in mind at the end of the day this is one of the things that I always try and help team members to understand there is a world of difference if you’ve never owned a business.
I own four. I’ve run more many more than that. If you’ve never owned a business it is very difficult to understand what a business owner takes on. So this is this is my frontside caveat to to kind of give you some understanding or give you some things to think about as we talk through this. For those of you that are team members or leaders or not in a position to be giving of profits, to understand that when a person takes on the risk of owning a business everybody else gets to get paid and go home. So if you show up as a team member even if you do a stressful job tough job whatever you’re still getting paid and you’re still getting paid the salary. You’re still going home. You’re not carrying on the stress of having to make sure that everybody on the team gets paid next pay period.
You’re not taking on the stress of having to make sure that the rent payment the mortgage payment whatever all the utilities all the things that go into running a business those aren’t things that most team members take with them when they go home. Most team members never even have those struggles. Most team members don’t even really think about anything like that. But for a business owner that’s what do you think about all the time. Right. I Believe it was Zig that said only an entrepreneur can go from sheer exhilaration to sheer terror and back in the same 24 hours that’s what business ownership is like. It’s not the same as just showing up for the time period that you show up getting paid no matter what.
And being able to go home and not have to worry about whether or not the business is going to be operating a couple of months from now. Those are important things to understand because as we talk about something like profit sharing the worst thing if you want to make sure you never get paid profit sharing from your business owner. NEVER EVER EVER EVER EVER EVER EVER BE ENTITLED TO EVER. If you’re getting paid a salary to do your job guess what. You’re getting paid to do your job. Recognize that. So if a business owner wants to share their hard earned money as well that came along with their risk of running a business and they want to share that with you then praise God hallelujah. Enjoy that. Show them that you appreciate that right. Help them to understand that you recognize that this is coming out of their profits that it’s something more than just your salary.
So that’s an important caveat. As I get into this because a lot of business owners want to give their team members profit sharing but what they’ve discovered and it’s it’s usually because they’ve installed it incorrectly they’ve done it they haven’t done a great job they haven’t learned from somebody how to do this…and one of these days I’m going to teach this that you make a much bigger lesson out of this and teach it at one of the events. But for right now this is stuff that you can learn from this episode the next episode that will help you to take care of that now. But if you have installed profit sharing incorrectly then unfortunately what you end up with is frustration. Every time you you sign those profit sharing checks and you look at people and if they’re entitled or if it’s not motivating them then my gosh.
The last thing you want to do is give them more money. Right. It makes it incredibly frustrating so for you as a team member or leader. Understand that if you have somebody who’s willing to share the profits outside of your salary. My gosh never get entitled always let them know how much you appreciate that. I don’t care if you’ve been getting profit sharing for 7 years. Let them know that you appreciate that. Business owners, understand, if you do not do this correctly you will be frustrated if you don’t understand this whole concept. Well you will be frustrated. So there you go. There’s my front side caveat as we go into a two parter on profit sharing. So how do you use your money to motivate your team? You hear us talk about the importance of high levels of quality communication. Gaining perspective your job as a leaders to make your team successful not the other way around.
Root systems, seeing your team members as God’s kids, taking care of them. All of this stuff to have you know a bought in team to be a great leader to have great communication. All that kind of stuff. What role does money play in that? Well today is part one of our two part profit sharing podcast series. We’re talking about when to do profit sharing and how to reward your team members with profit sharing, and profit sharing matrix. Here’s my definition of the difference between profit sharing and other bonuses: profit sharing is what you do with your team because you want to bless them and prosper them for growing your business. Incentives are something you give out to individuals or teams for accomplishing a specific task. Bonuses are usually given out for a collective attained objective like grossing more than X amount of net profit. So they’re also given out to managers and executive staff for PNL and project accomplishments.
So we discovered that there needs to be a separate law. Years ago back when I was at Daves we discovered that there needs to be a separation between the term profit sharing and bonuses because people do not see them the same especially the different personality styles. So if you’re calling profit sharing a bonus then bonus is something they believe they deserve. So if I said to you “Hey team if you guys pulled together and we make an extra you know 50 sales out of this product that we’re putting together above what we’re already able to do then I’m going to give you guys a bonus of X dollars.” Well that’s expected. If we hit that number then I expect the bonus that’s that should be coming my way right because that’s what you said. Profit sharing is not the same thing profit sharing is saying if we have profit I’m going to take, which is my money because I started this thing or bought into this business or whatever the business owner, I’m deciding to take that profit and share some of that with you guys above and beyond because I want to because it’s my heart to.
That’s the difference. And if your team doesn’t understand this then unfortunately they could be in a place where they see profit sharing as something that is again an entitlement to them. And so we need to make sure that we’re doing this correctly. A question that I hear all the time and I get this. People ask a lot about how to do quality profit sharing and all that kind of fun stuff. And so again I need to someday put this together as a big lesson. I get a lot is, so should I implement profit sharing? And if so how do I do that? Well there are a few questions I always have before I answer that question. The first is this. Do you actually have profit. Do you have it? you would be amazed at how many owners or leaders have a huge heart and I want to share with their teams but it would be a total loss to themselves.
In other words they might not have much of a profit but they want to give their team some extra money some extra income that would come out of their own personal salary. This is not a good plan. How can you keep your doors open if you can’t keep food on your own table? Now trust me in this…if your team is earning a good wage they can do without profit sharing while you and the team work to get profits up. Simply put: You can’t give from what you do not have. Second question is “Why do you want to give profit sharing?” Is it because your team is doing such an amazing job that you want to share with them you want to take care of them because then they’ve done so great? Or is it fear based. Like if I don’t give I’ll lose my team.
If it’s the first great job leader that’s great thinking and you’re headed in the right direction. If it’s the latter and that’s what it takes to keep your team you’re never ever ever going to be able to do enough to keep them happy. Key point here to understand if you feel you have to give them profit sharing, more money than you’re already paying them to do the job that they’re doing, to keep them…then guess what. You’re never going to be able to do enough to keep them anyways. You’ll never do enough to keep them happy. What’s the next thing you’re going to give them so they don’t leave? What’s the next bonus? What’s the next add on? Right? So if you have to do it out of fear then I wouldn’t do it at all. We probably have a bad culture where people are just there for J.O.B. instead of there for something bigger than themselves.
Now if they’re there for profit sharing then they are just working a j.o.b. What you want are people who are on board because they realize that what your company has to offer is bigger than them. You’re looking for someone whose eyes light up anytime they’re talking about the position you’re putting them in. These are the people you share with…that’s how I hire. I will bypass greater talent that just sees the the position I have as a j.o.b. for somebody with less talent and I’ll spend money training them up because they’re passionate about what we do. Their eyes light up when we talk about the things that we do. So those are keys that you have to know before you ever start profit sharing and answer those questions. First “do we have profit?” and then “why do I want to give it?”
If you can answer those questions and you come up with great answers like yes we do. And because it’s the right thing to do because I don’t have an entitled team or I’m not doing it out of fear then great place to start. All right we’re going to talk about implementing profit sharing when we come back right after this.
All right we are back and we are talking about how to implement profit sharing, so we’ve answered the questions on the front side. We’ve got a really good idea of the difference between profit sharing and bonuses. Now we need to ask the question how do we implement it. Now there is a ton to implementing. I’m going to give you the absolute basics. This is something to make it easy for you since we’re doing this over a podcast as opposed to at an event which would be much more information.
This is something you can start right now by making sure you’ve got the right matrix on how you pay out your profit sharing. So to figure out how to reward your team members through a profit sharing program start by deciding what values are most important to you. Now for me, longevity is always going to be a very important value to me. If you’ve been with me a long time then there’s a reason. There’s a reason you haven’t been fired yet you must still be doing a great job. You must have grown over the years. If you’re still with me and I’ve been able to grow you you’ve been teachable and moldable…fantastic. That’s going to be something that I rank you on that’s something that is a great value to me because the longer somebody is with me there is a loyalty factor.
And again that shows me that they haven’t come and done the same exact thing over and over and over and over again for year after year because if they did if they weren’t growing then they aren’t going to still be with me. I’m going to keep pushing them to grow if they don’t grow. Then they’re not going to be able to stay because there’s somebody else who will take that role and do more to help change more lives. Right. So my expectation is that you’re always growing. So if you’ve been with us for awhile that means that you’re doing better than normal. So for me that’s one of the things that I’m going to base part of my profit sharing metrics on. I’m going to have that as a value. Another thing that I personally like to base profit sharing off of is your personal attitude.
How are you to work with? How do you treat team members how do you interact with customers if you interact with customers? Do you go out of your way to get things done? All of these things are going to be things that I rank you on. This is a big value to me. Right. So it’s not enough just to do your job well. It’s not enough just to accomplish your KRA. I expect that I’m paying for you to accomplish your KRAs what I want to see is what’s your personal attitude? How do you treat people? how do you treat the client? how do you treat the external clients? if you’re not doing a good job of taking care of people…if you’re not doing a good job of loving on people then you know that may be a problem. And for me another thing that I like to base in my Matrix on profit sharing is how well you do love people from, for me, from a Christian standpoint?
How do you treat people? What is your heart towards people? If you just see people as dollar signs or if you just see people as a necessary evil for you to get paid then that’s probably not going to get a good ranking on on profit sharing matrix right. I want to see that you love people well that you put them first that you take care of our clients. There’s nothing I love more than to watch my team when we have clients come in the building put them, first take care of them, solve problems for them, you know love on them. My team understands that a lot of times people coming in are coming in with struggles in their lives. A lot of times people coming in are coming in with no struggles in their lives. It doesn’t matter. They’re loving on the person themselves. And so for me that’s another value that I treat that even a little bit different than I do a personal attitude.
But those are things that are values to me. Another one is it could be if you have multiple departments inside of your business you can base it on profit. I’m never going to be somebody who wants you to set up silos. I don’t like silos. I don’t think that they work. They can’t work for a period of time. In the early days of setting up a business you can set up silos and watch some people compete and you’ll be very happy when you’re making money. You are not going to be happy when you have to tear those things down. It is not worth it. It is an incredibly difficult thing to do. So I don’t like to set up a silo so that’s not the same as setting up a department or division. You may have a division that’s focusing on something and they as a division are killing it and doing a great job because of the efforts that they’re putting forth and their net profits, their gross revs, all of these things their gross margins.
…however you want to base this may be looking better than another division that you have, which may be because of a fault of their own or may not be. It’s something to think about if you’ve got a team that is just working so well together. They’re absolutely killing it and because they’re killing it their profit is up? than that may be another value that you base your profit sharing on that you would include into your matrix. So think through it, those are just three or four things that I think through when I’m looking at profit sharing. The question I’m always asking myself…because this is my money, it’s mine. I’m the one who built this thing. I’m the one who didn’t take home pay checks. I’m the one who spent years pouring back into the business. This is mine. What am I going to do with it?
So whenever I look at that I always ask the question, “what do I value?” if I want to give extra money. What do I value? So ask yourself those questions you might come up with other things, you might come up with How they treat their tools. If you’ve got if you got team members and you’ve spent tons of money on tools and vehicles and all that kind of stuff then it could be that that’s a part of it whatever it is. Figure out those things that are values to you and then try and put a matrix to it. How can I put a number on this? Now you may have more or less values than we have. It just depends on your particular situation. I don’t have a problem if you based upon longevity and personal attitude.
Those are two great values as far as I’m concerned that you can base your metrics on. Either way each value needs to have a scale. Now it can be a 1 to 10 a 1 to 5 whatever whatever works for you, but assign numbers for those values. So figure out those values those things that are our values to you that you want to pay on and then make a matrix out of those. Now going to talk about those values and the numbers to put to them in just a second, but here’s another big piece I want you to understand: don’t pay out profit sharing. But for you put your savings aside before you put payback’s aside before. So some people will get to the bottom of their net profit and immediately take that number and pay out profit sharing and then they didn’t have enough money left over for other incredibly important things.
So for me I always look after the net profit I ask the questions “Do I need to save money for anything?” Now I have a tendency to spend a good amount of money on Christmas. That’s that’s something I like to spend a lot of money on. I usually get in here a big old 11 to 13 foot Christmas tree it’s decorated well we do a bunch of stuff I do gifts at that time. There’s a lot of money I spend in December so I have a tendency to save money throughout the year. I’ll put money aside money aside. Money aside doesn’t mean that I don’t have great net profit in December. I’m just really conscious of making sure that I have money whenever I’m going to have a month that I spend a lot of money in it. So whatever that could be. When we do our big events I usually spread that money out over months and make payments ahead of time.
But in the early days I was waiting and I would drop a big check at one time. So I would save save save save. So things to be thinking about. Do you have to save? Do you need a you know a sinking fund? Right? Do you have vehicles that are aging and you’re going to have to replace these things you’re going to have to replace? Figure out what those things are that you need to save money for. Put the money away. Save the money. But Chris I might have to pay taxes. Well listen you’re going to. And so what. Right. The other thing you need to have is retained earnings. You need to have a balance sheet that makes sense when it comes to the amount of money that you spend.
So for me one of the things I will say is you need to have six months of your expenses. Now listen this is the toughest thing for people to understand…to keep your doors open. So in other words if all sales stop right now what is it going to cost for you to stay open for the next six months? Keep in mind if all sales stop that means you’re not putting money into new products you’re not putting money into stock. You’re not spending all that kind of money. So that doesn’t get included. I had two gals running a concrete company one time they came up to me like “Chris that would be like two million dollars for six months” and I was like now you’re not buying any concrete because you’re not getting any concrete jobs.
Then they said, “oh OK. Well then it’s like 200,000.” That’s a big difference. So whatever that money is to run for six months to keep the doors open not buying extra stuff and all that. So these are all pieces that you need to know ahead of time… what am my savings going to be? Am I going to put money into things like Christmas parties, sinking funds, retained earnings, all of those things you need to be doing after you get to your net profit and before you pay out your profit sharing…otherwise you will find yourself giving away money that needed to be used for the business. That’s not smart. That’s not profit sharing right. Because eventually it’s going to turn around on you and you will have given out more than you saved. So get those numbers done. This is also before I will pay out profit sharing before manager bonuses.
OK so I’m going to pay a manager bonus or if I have somebody operating a PNL. Before I will give them a bonus, I’m going to go ahead and pay out that profit sharing because I’m going to take it as a percentage of that net profit whatever I think that I can give out, whatever I think is reasonable. I’m going to take that number out there and then I’ll pay out any other bonuses after that. There’s so much there’s so much information to this. There’s even more. I’m giving you the best I can here in a short period of time. So lastly for today’s show the matrix. Now you may have one or more or less values than we have and that’s perfectly fine. I don’t have a problem if you pay out on just longevity and personal attitude doesn’t matter to me.
But you need to put a number on everything. Every value has to have a value so that you can scale this bad boy. Now it can be a 1 to 10 it can be a 1 to 5. It’s really whatever works for you but assign some numbers to those values. And this becomes the matrix through which you distribute your profit. So for example if somebody’s got a score of eight for longevity and three for personal attitude and a two for departmental profit then their overall score is 13. So as I go through and list out all the people who are part of the profit sharing I dump in the amount of money into a matrix that I’ve got into an Excel spreadsheet that’s how I’d do all of this stuff. Those totals will drop out be multiplied against the personal number and it will show me how much money of the profit sharing that that gets.
So I know that sounds very difficult. I know that sounds very complicated and it’s going to take some time to mess around with those numbers. But that in its most simplistic form. If you can come up with some good numbers, then scale the daylights out of it so you can see what happens if you keep dumping in more money. Does that make sense? Look down the list of people. Does it make sense that Frank here is getting this dollar amount and Sarah is getting this dollar amount? If it doesn’t make sense you may have to make some adjustments maybe a scale of 1 to 10 doesn’t work as well as a scale of 1 to 6. So take a look at those things. For me, what I do is I actually just in my Excel I take their hire dates and today’s date- I’ve got it set up automatically.
It will subtract the time and give them a formula. So you know if you’ve been here over a year it gives you a 1. If you’ve been here two it gives you a two. It’s pretty simplistic. That’s something I do for the longevity. For the personal attitude, for me it’s on a scale of 1 to 5. Again you can do yours on whatever you want to whatever works out. So again I know it’s a lot we’re going to talk about more in the next episode next week. With this topic comes a lot of questions from leaders and here are some of the questions we’ll be covering next episode: How much to share and how much is too much? The ideal percentage? Best practices? The biggest benefits of profit sharing, and the best method of profit sharing when managing different departments or leaders across multiple departments.
So don’t miss the next episode. Hopefully this helps you today. As always take this information change your leadership, change your business, change your life, and join us on the next episode.