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So, you're looking for a new job and want to see what real benefits to employees look like in the shape of lucrative profit sharing plans. Or, perhaps you are running your own business and want to see how the other companies do it.
But first - a small refresher on what profit sharing is. Profit sharing is when an employer shares the company's profits with the employees.
There are many different types of profit sharing plans, but they all have the same goal: to retain employees, attract top talent, and motivate workers to work toward the company's goals.
This article will dive into seven real-world examples of profit sharing plans that have been implemented by successful businesses. It can be used to inspire you to set up your own plan as a business owner or help you decide whether you should join a new company based on employee benefits.
Let's look at seven companies that have been successfully implementing a profit sharing program for many years.
Procter & Gamble paved the way for other companies to also start offering profit sharing. Back in 1887, the founders of the company - William Procter and James Gamble - decided to motivate employees by sharing the company's profits with them.
Of course, the details of the plan have changed since then, but P&G remains one of the best companies in their industry to work for because of their bonus contribution to an employee's annual compensation.
P&G uses a set formula to calculate the amount of profit shared with employees. This formula considers:
Once the percentage is calculated, employees receive a cash bonus.
Walgreens has implemented a retirement plan (401(k) plan), which is a kind of deferred profit sharing plan, since employees only get to enjoy the financial rewards at a later stage.
The first Walgreens Retirement Savings Plan was adopted in 1990. It has been refined since then, and works as follows:
Employees can contribute a portion of their own salary to the plan, which is automatically deducted from their payroll each month. Walgreens then matches 100% of the first 4% that an employee contributes. IRS dollar limits apply.
Employees can also decide how the savings are invested, based on personal preferences or financial goals. To help, Walgreens offers a range of financial wellness tools and financial advisors through Fidelity Investments®.
Southwest Airlines uses a unique profit sharing plan to motivate employees.
In 1974, one year after the airline's founding, the company introduced its profit sharing program. What made it stand out at the time was that the entire company was part of the plan, not just a select group of staff members.
The formula used takes into account the net income of the company, which is then divided amongst staff based on the employee's base salary and hours worked.
Staff receive cash payouts as a percentage of their annual salary.
Apart from these payouts, Southwest Airlines also offers plenty of other employee benefits. These include health benefits, retirement savings, plenty of career growth opportunities, and competitive salaries.
That probably explains their incredibly low turnover rate of 5% per year.
You may only know Home Depot as a DIY mega-store. But this company has been offering their staff a lucrative profit sharing program for over 20 years.
Each year, Home Depot shares a portion of its profits with staff members (non-management) and associates. This cash bonus is part of their "Success Sharing" program.
Eligible employees who have worked at Home Depot for over 12 months will receive a bonus twice a year, based on their salary and number of hours worked.
Buffer has always been dedicated to its employees. In the first few years, the company struggled and even suffered a loss in 2016. But, once Buffer became profitable in 2017, the company implemented both a profit sharing program as well as a charitable donation program.
Depending on the annual profits, the company pools between 8% and 15% of the profits into the "Team Bonus" pool. 20% of the Team Bonus is donated to charities.
The remainder is paid to team members. Each team member receives a bonus based on the following calculations:
ConvertKit is yet another example of a company that values its staff and wants to share its success with team members. ConvertKit started rewarding employees for their work in 2016 when the company made its first profits.
ConvertKit is always considering its staff. For that reason, when it makes a profit, it ensures that there is at least enough money saved to cover three months' expenses. Money is also set aside for equity, taxes, and charity donations.
The remaining profits are placed in a pool which is then distributed to employees as part of a profit sharing plan.
Team members receive a twice-yearly cash bonus. Profit sharing contributions are calculated as follows:
Delta is yet another airline with a profit sharing plan.
The company is very transparent, and publically discloses the formula it uses to determine payouts to staff:
Each year, Delta pays out millions of dollars to employees across the US, with the majority of payouts to Georgia staff (where Delta is based). In 2023, the company's payouts exceeded $550 million.
Profit sharing plans hold many benefits for employees, apart from just some extra spending money.
When a company has a profit sharing program in place, an employee will earn more than his or her fixed wages - either as a cash bonus or contributions to retirement plans.
If payouts take the form of cash, employees can decide how to spend the money, including placing the additional funds in a savings account.
Alternatively, a deferred profit sharing plan allows the company to contribute directly to an employee's retirement plan, which provides some financial security to workers nearing retirement.
As discussed above, profit sharing plans reward employees with additional income if a company makes a profit.
The type of program is up to the business owner's discretion; however, these plans generally allow employees to earn more than their annual salary. This allows staff to set money aside in a savings account, or retirement plan, or to invest the additional income and start accumulating wealth.
Now that you have some examples of companies with profit sharing plans, you might be asking the question: "But why share your hard-earned profits with staff?"
Below we'll discuss the benefits of profit sharing for businesses.
If employees benefit directly when the company is successful, they will be more motivated to work hard to achieve shared business goals.
Profit sharing plans also give employees a sense of ownership as they consider the company's success as their own success, too.
This sense of ownership will instill loyalty in staff members, thereby retaining top talent, and reducing company turnover.
Motivated employees tend to want to work harder to achieve greater success. The employees' and company's interests are aligned, and team members want to work toward the company's goals.
This drives the company forward as the whole team works together cohesively.
Another factor affecting growth is hiring new staff. A company with a profit sharing plan is more likely to attract experienced employees who appreciate being valued by their employer.
By attracting and hiring the best in the recruitment pool, the company will continue to grow and outperform competitors.
Any contributions made by an employer to a 401(k) plan are tax deductible. That means that by sharing the company's profits with staff, the tax liability of the company is reduced.
Taking inspiration from other companies that have profit sharing programs is just the start. There are also certain factors that a business owner must take into consideration when offering a profit sharing plan to staff.
Profit sharing plans must adhere to all legal frameworks, such as the Employee Retirement Income Security Act (ERISA). All documents, reports, and fiduciary responsibilities must comply with this act.
The terms of the profit sharing plan must also be clearly communicated to employees. It is crucial that businesses are transparent in how contributions are calculated and when payouts are scheduled.
The plan must not discriminate against any group of people or individuals. For that reason, the eligibility criteria must be clearly stipulated so that employees are aware of the requirements. This criteria must offer equal opportunities for all staff members.
Lastly, it is important to keep the tax implications, as mentioned above, in mind. But, employees must also be aware of their own tax obligations - for example, taxes on tax-deferred retirement plans are only paid when the money is withdrawn.
Just because you have set up a profit sharing plan doesn't mean it is written in stone. Business owners must keep an eye on emerging trends and be informed about how other companies in their industry structure their plans.
As the workplace becomes more digital and technological, changes to a plan may be required, such as including remote employees or starting with time tracking to help with profit sharing calculations.
Employees should also be consulted on their views of the plan. It is possible that some staff members would prefer other employee benefits over profit sharing, such as health care, or working from home to cut back on fuel costs.
By making employees part of the process, business owners will strengthen the sense of ownership discussed earlier.
Finally, businesses should incorporate the latest technology into their profit sharing plans. There are automated tools that can deduct from payroll, perform calculations, and assist with distributions.
As mentioned, employers should use the latest technology to simplify their profit sharing plans. And nothing makes profit sharing quite as easy as the ShareWillow Profit Sharing Plan Template.
This free spreadsheet template and guide includes everything you need to get started with your profit sharing plan. It takes the headache out of planning, calculating, and distributing profits, giving you a transparent and efficient profit sharing solution.
The contribution limit for profit sharing plans varies annually and is subject to IRS guidelines. You should check the IRS website for yearly changes to these limits to ensure compliance and maximize benefits.
At the time of writing, the 2024 employee deferral limit for a 401(k) plan is $23,000.
When it comes to revenue sharing vs profit sharing, there are some distinct differences. Revenue sharing involves sharing a portion of the company's total revenue to partners, regardless of profits. In contrast, profit sharing is the sharing of only the profits, after expenses have been covered.
A profit sharing partner is usually someone in a partnership agreement that receives a predetermined percentage of the partnership's profits. The percentage of the profits received is based on the contribution level and the profit sharing agreement terms, and not a fixed salary or hourly wage.
This is a template for board consent approving a profit sharing plan.
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