What is profit sharing and how to use it strategically
Updated: Jul 5, 2022
Employee engagement and sense of ownership are trending topics, and it's not for nothing. This Gallup survey quantifies the impact we intuitively feel: employee engagement at work causes productivity to rise by 21%, profitability by 22% and customer retention by 10%. It also causes absenteeism to drop by 37%, employee turnover by 25% and work accidents by 48%. Who would ignore such benefits?
Engagement is one of the consequences of ownership, which is a much desired feature for both companies and employees. It would be delusional, however, for the employee to maintain the sense of ownership if the compensation doesn't match that posture. This is what happens at many companies and, as a consequence, there is a disconnection between the perception of effort and what is provided in return for these efforts.
Many people will take a salary below the market average if they have a chance to have “skin in the game”, in other words, a chance of taking part in the company's risks and achievements. At my company, for instance, an employee in an executive position who began to take part in the profit sharing has taken the initiative of traveling by bus instead of airplane and also of staying at R$20-per-night AirBNBs instead of much more expensive hotels. Besides feeling much more alive and clearly more motivated, he can now tell stories about his AirBNB adventures.
Profit sharing comes in as a strategic bridge to that.
What is profit sharing?
Profit sharing is a kind of variable compensation which is connected to the company's profits in a designated period for distribution and within the range of pre-established operational results. In other words, it is a compensation strategy in which companies split a part of their profits with their employees.
Benefits of profit sharing
The great benefit of profit sharing is that it allows for employees to feel like an active part of the business, and to become more aware of the consequences of their efforts to the results. This has a positive influence on the employee's feeling of belonging and on their motivation, which causes greater levels of engagement at work, commitment to results and, as a consequence, greater productivity.
The incentive makes the results of one's actions more tangible to each employee and allows for the company to value them. It is known, however, that achieving results is a consequence of the collaboration among people and among different areas, as opposed to an individual effort. The more collaborative the environment is, the more clearly noticeable that relation will be. In that sense, linking Profit Sharing only to individual goals, fostering only self-improvement, would be the same as to sabotage the collaboration among people. What to do then?
How to promote strategic profit sharing
We know it's really important to have a strategic compensation proposal, as well as to keep it coherent to all changes that have been happening in the nature of the work. Then, Profit Sharing must also be a strategic practice. That means the program must have a purpose and make use of means that allow for that purpose.
If your purpose while implementing this incentive at your company is to promote autonomy, sense of belonging, ownership, to raise levels of engagement and collaboration among the employees, we have the right means for you to achieve these results: Team-Set Salaries (TSS).
TSS is a compensation method implemented by Percival. Through it, the team sets how much of the Profit Sharing each person must make, according to how much has been delivered to the company through their work. All that in accordance with the Profit Sharing budget. As a consequence, the process becomes much more collaborative and fair than simply setting the same Profit Sharing rate for every employee, regardless of each one's individual contribution. If, on the one hand, compensation is a means for employees to feel acknowledged and valued by the company, the perception of unfair compensation is, on the other hand, a great cause for demotivation and, consequently, a rising employee turnover rate.
If you're interested in promoting the perception of fairness to Profit Sharing at your company and make your employees more satisfied, get to know how Percival can help you by booking a chat with us.