How to Make a Revenue Sharing Plan

You don't have to be an economist to know that inflation is crazy, supply chain issues are confusing, and the job market is just plain weird. You may feel the tension around you especially if you are running a small business.

Trying to compete for top talent and keeping your team happy and motivated can feel somewhere between discouraging and downright impossible. But here's the thing: If you want to grow your business, you need a rock-star team. And to attract and retain rock stars, you need a competitive compensation plan. Things like a motivating mission and a great company culture are important too, but we'd be at a loss to say that compensation is not a core part of building and maintaining an amazing team.

But don't worry. Competitive compensation doesn't mean you have to give up wage increases you can't afford the next time the market shifts. But that may mean you need to find creative ways to motivate your team to care about your business as much as they do theirs. Profit-sharing plans can be a clever way to share a company's wins (and losses) as a team.

Key takeaways

• A profit-sharing plan takes a percentage of the company's profits and divides it with the team on top of their regular compensation plan.
• You don't want to start a revenue-sharing plan until you have had profits for at least a few years in a row—otherwise the plan could backfire.
• If you're unprofitable, you don't have to give a revenue sharing plan.
• The company decides how much to share, who is eligible, when they are eligible and how to communicate those benefits to the team.
• Done right, profit-sharing plans promote an entrepreneurial mentality.

Understanding Revenue Sharing: What Is a Revenue Sharing Plan?

Profit-sharing plans take a percentage of your company's profits and share it with your team on top of their regular compensation plan. It's a great way to give your team some extra cash without making a living because it's directly tied to their busy schedule.

Profits occur when revenue goes up and costs go down. Help your team remember to work like they are all self employed. The more they rush, the bigger the shareable pool of profits becomes.

What to Do Before You Start a Profit Sharing Plan

This may seem obvious, but you'll be ready to create a revenue-sharing plan when your business is consistently making profits (plus a few other things listed below).

Check these things off your list before getting started:

• Have a working budget. You have to know your number to know how much money you can afford to part with. When you get your business on a limited budget (and stick to it), you're telling your money where to go instead of wondering where it went. And if you don't have a budget ahead of time, a revenue-sharing plan can leave your business strapped for cash and do more harm than help.
• Pay yourself a living wage on a monthly basis. This is an absolute must. Pay yourself a living wage from your business first, then create a revenue sharing plan. Period.
• Set aside three to six months of retained profit. It's your rainy day fund. Set aside all the money you need to carry out your basic operating functions (like making payroll and turning on the lights) for three to six months. With a buffer like that, if expensive equipment breaks, you don't have to pull your team's revenue-sharing check to pay for a replacement.
• Get a plan to destroy your business debt. Debt is a thief. It steals from your future and leaves your business wide open for financial catastrophe. Paying off debt, on the other hand. . . Now that's a smart way to secure your business from theft.

Relate Article : How To Be Debt-Free Inwards 2023!

• Run the numbers. Finally, look at three different scenarios—a very slim month, a month in which you achieve what you hoped for, and a month in which you crush and exceed your goals. Is the percentage of profits you choose to share enough to make an emotional difference in each of those scenarios? In other words, will your team feel the ups and downs? If the amount they get in the "crushed" scenario is still small enough, you might be able to treat your team to lunch with that extra cash every month. Keep building your company culture and growing your bottom line until you're ready to roll out a profit-sharing plan that makes a difference in the lives of your team members.

How Do You Create a Revenue Sharing Plan (and How Do Profit Sharing Plans Work)?

Let's be real. There are some right ways to create a revenue sharing plan and some very wrong ways. Usually, a bad launch is tied to poor communication or not knowing what you're capable of sharing. So, let's look at how to create a profit-sharing plan that moves your team:

• Determine the percentage you want to share. The percentage of profits you share is completely up to you. Remember, this is money that you choose to share. If you pay your team at or above market value (and you should), then profit sharing is just the icing on the cake.
• Decide who qualifies for benefit sharing and when. Most people who have some level of ambition want to see their triumphs at work translate to their paycheck. Profit-sharing is a great way to motivate the work of administrative and support roles people who don't make deals on commission, but who may be doing just as much work to get salespeople and clients at the same table. And you may want to wait until they've been on your team for at least a year before they qualify. This gives the new team member something to look forward to make sure their first year goes well (and they are a purebred, not a donkey).
• Think over your communications plan. Each revenue sharing check must be accompanied by an explanation. This might mean rounding up your staff each month and comparing what your company made that month to what it made the same month last year. Then, you can talk about the factors that might influence the numbers negatively or positively and finish by reminding your team where the profits come from. Profits occur when revenues rise and costs fall. Care about your work like you are self-employed! Now there is a spell worth promoting! When your staff truly understands that making a profit is a team effort and something their business owners choose to share, they can keep their eyes on the prize while you get credit for work you appreciate. Talk about a bang for your buck!

Caution: Don't launch a profit sharing plan and then decide to change your mind. Really think about this and run the numbers before you start handing out cash.

How Do You Calculate Revenue Sharing?

Developing the right formula for your business requires some trial and error. But here's one method to consider calculate the percentage earned by each team member using three items: their number of years with the company (50% of the weight), their specific area profitability (17%), and performance (33%).

Play around with different percentages and points that you value (what gets the prize will repeat). Remember, it's OK to make adjustments to do it right.

Here's something to keep in mind about seniority: Typically, the longer a team member has been with a company, the more difficult they will be to replace. Because of this, you don't want to retain people who aren't working hard. Thus, seniority should be less about the time spent on the job and more about the level of experience gained over the years.

Pros and Cons of Profit Sharing

Great team members have to be rewarded with money. As simple as that. But you must set up incentives that deliver legitimate results for your team and business. Remember, you don't want your revenue-sharing plan to backfire. With that in mind, let's look at some of the benefits and risks of profit-sharing.

Pros of Profit Sharing:

• The biggest benefit of profit-sharing is that it encourages an entrepreneurial mentality. Sharing the company's profits the right way will motivate your team to work harder and smarter. When team members feel like partners, they act like partners and bring vision and results like entrepreneurs and owners who care about their business.
• Revenue sharing plans encourage teamwork. Every area of business affects profits. When your team truly understands this reality, they will make sure their specific area is successful and then go above and beyond to help others succeed too. One team, one dream.
• Revenue sharing goes up and down with company profitability. Unlike 401(k) or other benefits plans, revenue-sharing plans are directly affected by how your business performs. It is a powerful motivator and unifier whether your business is booming or slower. And in those slower seasons, you aren't obligated to pay a fixed amount until profits return.
• You can change the amount of your contribution annually based on your business goals. Maybe you need to put more aside to invest in a build or upgrade or you want to show your team extra love for a job well done. Increase or decrease your contribution to suit the goals.
• Sharing your profits is a great way to say thank you (and a great way to build a more positive, morale-boosting culture!)

Profit Sharing Cons:

• Bad employees will benefit from it. Everyone included in your business revenue-sharing plan is entitled to benefit (or lose) the same benefits together—so you may stay on top of your team. An enthusiastic team member can become frustrated if co-workers with less passion reap the same financial benefits as them.
• You should be open about your business finances. If you're serious about wanting your team to share an entrepreneurial mentality, you're going to have to show them the good, the bad, the highs and lows. It might not be something you're comfortable with, but it comes with profit-sharing territory.
• Profit sharing can lead to greedy team members. It's sad but true. If you don't make the connection between your profits and your business mission and service clear, anyone on your team could be tempted to make a sale or cut corners that aren't really in the best interest of the customer—only to compound their losses. line. Integrity and purpose are the two best friends for the results. They help your team members keep the perspective right.
• If done badly, profit-sharing can be taken for granted or considered as a right. That's why talking about the DNA of your profit-sharing plan, setting the right amount for it, and timing it well are all so important.
• When money goes up and down, enthusiasm can too. All the more reasons to get really good at sharing frequently and directly with your team about what's happening in your business and how they can influence it.

Pro tip: If you're not paying your team at market value, address that issue first before you work on a profit-sharing plan Otherwise, if profits and profit-sharing payouts tank, so will your team’s morale.

Related Article: 5 Tips for Mastering Money Management and Achieving Your Financial Goals

Alternatives to Profit Sharing

If you're not quite ready to roll out a profit-sharing plan, that's OK. There are other ways you can reward and inspire your team.

• Give a monetary reward for achieving a company- wide milestone. Say, for example, you hit a certain number of new clients or achieve a customer engagement goal and want to celebrate the win with a bonus. Just be sure to communicate where the money is coming from and that's something you choose to share.
• Fund education or professional training. People with inspired thoughts make team members better and more passionate. Online training, college courses and workshops can give your team members more confidence in their abilities, more appreciation for their company, and new skills to enhance their performance.
• Give a $100 handshake. If a team member crushes a goal, surprise them with $100 in cash or a gift card something unexpected that thanks them for owning their role and doing exceptional work.
• Add an office perk. Does your team want comfier office chairs or a fancy cappuccino machine ? Link an office upgrade to a goal it will give them something to hustle for.

What’s Next: Hear From Top Experts on How to Build a Stronger Team

Remember that the purpose of sharing profits is to build, reward and keep a team of rock stars. It's one way to put your money where your mouth is. But before you think about sharing the profits, be sure you've got the support and resources you need to win. You can learn more about how to grow your business and build a stronger team by listening to The Entrepreneurial Podcast. It is full of business insights from today's top leadership and personal growth experts.

Frequently Asked Questions

What's the average percentage for profit sharing plans?

This is up to you and what works for your company, but a great place to start is giving 10% of your profits to qualifying team members. Of course, that percentage is spread among them, so choose a percentage that's big enough that they'll feel it but also makes sense for your bottom line. You may also discover that sharing profits monthly will help your team feel the perk more than they would a quarterly bonus.

How is a profit-sharing plan different from a traditional 401(k)?

First, let's clarify the plans you can offer. You can set up a stand-alone profit-sharing plan, a standalone 401(k) plan, or a profit-sharing plan combined with a 401(k)-retirement plan. With those options in mind, you're ready to tackle some details so you understand the differences:

• With a stand-alone profit-sharing plan, your team members do not contribute anything. This plan is only for you to share a percentage of your company's profits with your team.
• With a traditional 401(k) plan, your team members can contribute to their retirement savings with your company matching their savings up to a certain wage percentage.
• With a combined profit-sharing and 401(k) retirement plan, your team members can contribute to their retirement accounts, and on top of that, you can contribute to their retirement accounts based on your profit. But instead of a match, you choose how much (if anything) to contribute every year.

Who can offer a profit-sharing plan?

No matter the size of your company or its status as a for-profit or not-for-profit, you can offer a profit-sharing plan. Of course, you need to be consistently profitable in order to make it a benefit that's worth your time and one that allows your team to see the value of it.

Pro tip: Read the IRS flyer Profit Sharing Plans for Small Businesses to learn more about how a profit-sharing plan works.

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