Both can motivate employees.
Many businesses look to reward their teams and keep the company moving forward with profit sharing or bonuses.
Both can help bring team loyalty and a sense of value, as well as improve company performance.
We’re bringing you the ins and outs of how bonuses and profit sharing can work for you and your team.
Bonuses
Bonuses are extra compensation for work done, paid in addition to a regular salary or earned income. They are considered compensation when part of an employment relationship or when they are associated with work completed, and thus are taxable. It’s good to remind employees of the tax bracket a bonus may fall into when you share the total amount with them, so they know to expect less when they receive it, after taxes are taken out.
Bonuses can be given out based on a pre-established formula, such as if an employee reached a threshold of sales or saved the company a certain amount of money.
They can also be given out without a structured plan. Many companies give a standard one week of pay per employee, or a percentage that scales up for higher levels of management. Research shows that eight percent of a salary can be a motivating bonus for employees. It can be helpful to figure out a total dollar amount or percentage of profits to put toward bonuses before divvying them out to your team.
Bonuses can be a great option if the company is thriving and making a regular profit. However, if your company has cycles of high profit years followed by dips, it may not be the best plan. Many companies give out a bonus every year, often around Christmas. Over time, employees may come to expect a bonus without understanding the importance of the company’s profit status that year.
Profit Sharing
Profit sharing is a preset arrangement between an employer and employee(s). The main difference from a bonus is that profit sharing means a company must first make a profit before it gives out rewards from it. Profit sharing also more often takes forms other than cash.
Profit sharing can be done through stocks, bonds, or a cash payment. Sometimes the latter can be in the form of a retirement plan instead of an immediate payment, which may make it tax deductible.
A profit-sharing plan can have eligibility requirements, such as working for your company for a certain period of time before being able to receive that benefit. You could also consider a vesting schedule over a few years to both spread out what an employee could take with them if they leave and encourage loyalty. Profit sharing plans are usually set up with more guidelines and details than bonuses and are less subjective. They can be based on longevity, salary level, sales closed or other business metrics.
If you decide on a profit-sharing, be sure it’s documented with a written plan, a trust if you need one for the plan’s assets, and with regular record keeping. An accountant should take care of these details for you.
A profit-sharing plan can help you attract employees and may set you apart from your competitors. Such a plan can also inspire your team to examine processes and find ways to improve quality, helping to increase efficiencies and streamline operations to help the company reach the best results, thereby increasing the profits available for sharing.
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Whether you choose a bonus system or profit-sharing plan, both options may include further costs to you, the employer, such as payroll-related taxes, liability insurance and/or workers compensation insurance counting those dollars.
Exploring a bonus structure or profit-sharing plan can be a way to build your team more tightly, reward hardworking employees, and set you apart as an employer.
