Profit Sharing Compensation Question

[ivanjay205]

Hi everyone,

We have (5) "Teams" comprised of a Team Lead / Business Development Person and a support team for his/her business. We find it allows for much greater syngergy once we started growing beyond 15-20 people. We currently compensate each of the Team leads with a "Team Profit Sharing Bonus" where he/she earns a percentage of their team profit based on revenue - cost of goods sold - direct team expenses (payroll, travel, etc.). Overhead is a company expense not charged to the teams.

Currently we treat the bonuses paid out on this plan on a cash basis as in we take the expense and put it against the team when it is paid. One of the team leads asked if this is double dipping as he said shouldnt the bonuses not count against the team reducing our profit. My gut reaction was that is incorrect as in a profit sharing plan we have to cover all of the expenses, even his bonuses....

But I wanted to see if anyone had any other thoughts? should we exclude those bonuses from costs against the team or charge the team for them?

[RetiredMfr]

I agree with your Team lead. You said that you exclude overhead from the bonus calculation and this bonus should be considered overhead as well. The team members don't control the bonus expense, you do by how it is calculated. Otherwise, you end up lowering their bonus payment based upon how much of a bonus they should have earned, which is circular logic.

The whole idea of offering a bonus like this is to give the teams incentive to increase their profitability to the company. By "charging" them for the bonuses they earned, you are doing the exact opposite. If you feel you are giving too much money away, then you should alter the bonus plan itself - which shows again that this is an Overhead expense controlled by management.

[ivanjay205]

I agree with your Team lead. You said that you exclude overhead from the bonus calculation and this bonus should be considered overhead as well. The team members don't control the bonus expense, you do by how it is calculated. Otherwise, you end up lowering their bonus payment based upon how much of a bonus they should have earned, which is circular logic.

The whole idea of offering a bonus like this is to give the teams incentive to increase their profitability to the company. By "charging" them for the bonuses they earned, you are doing the exact opposite. If you feel you are giving too much money away, then you should alter the bonus plan itself - which shows again that this is an Overhead expense controlled by management.

We did end up making this modification and of course everyone is happy and we believe it is fair and equitable.... While on the subject thoughts on a true company wide profit sharing plan? We have the same situation with 2 higher level people that are on a net net bottom line profit sharing plan company wide. The earnings are paid out over 6 months in the following year. Currently, those payouts go against future earnings because it reduces the companies profit picture by those bonus payments.

[RetiredMfr]

In this case, I think you are okay including those bonus payments in the year's expenses since the earnings are paid out the following year. I had a similar plan and my employees did not object to including the bonus cost in the expenses of the company. We were a seasonal business so I had to pay 1/2 at the end of the first and second quarter to maintain our cashflow.

Since this plan is based on the whole company instead of an individual team, the expense should be taken into account on a company-wide basis.

[ivanjay205]

In this case, I think you are okay including those bonus payments in the year's expenses since the earnings are paid out the following year. I had a similar plan and my employees did not object to including the bonus cost in the expenses of the company. We were a seasonal business so I had to pay 1/2 at the end of the first and second quarter to maintain our cashflow.

Since this plan is based on the whole company instead of an individual team, the expense should be taken into account on a company-wide basis.

Just to clarify I mean the profit sharing bonuses paid to those executives not the team leads. The team leads get compensated on their own team profit and their bonuses earned do not get held against them. Those bonuses do go against the bottom line company profit, agreed there.

For the executive on profit sharing. He gets a bottom line share of the total profit of the company. It is paid out over 6 months following the close. Should those payouts be held against his future earnings? So for example lets say for easy math the company does $1,000,000 in profit and it is 10% in 2020 and the same in 2021.

That means $100,000 in profit share bonus. When we pay that out in 2021, do we count it against the $1,000,000 in profit (so in reality he gets paid on $900,000) or do we exclude that as a cost and pay out on the $1,000,000 again

[RetiredMfr]

I would pay it out on the $900k. That is the bottom line profit of the company.

[ivanjay205]

I would pay it out on the $900k. That is the bottom line profit of the company.

Thanks for the responses!