Profit Sharing: A Tool for Employee Alignment or a Dangerous Precedent?

Mark recounts a recent conversation with a client in which she wanted to create a profit sharing arrangement with an employee who had previously only worked for a standard hourly rate. The idea was that the profit sharing would incentivize this employee to do a good job, since the better the product sold the more money she would make, thereby "aligning" her compensation more closely with the company's goals.

While in principle this is a good idea, Mark and Jesse both point out the dangerous precedent this kind of arrangement can create. For better or worse, hourly employees that receive extra compensation in the form of a profit share will come to expect that extra money. When it doesn't come, or the amount is less than normal, employees may be left wondering whether it was their fault, their work was not up to par, or perhaps the company is in trouble. At the very least, once some form of bonus compensation (whether it's an actual bonus or a profit share) is paid out regularly, it becomes difficult for a company to NOT pay it out going forward without upsetting or confusing employees. It's a precedent that is difficult to walk back in the event the company can no longer afford it.

However, the principle of the idea is still sound, and in the right situation it can be a great way to align employees and business partners with the interestd of the business.

Mark Butler, Virtual CFO

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