Profit sharing/shares given to key leaders?

[BrendonTW]

Hey folks,

We've been in business for about 6 years. I have a great group of people working for me. A few of them have been with me for a long time, and once since the beginning. The one who has been with me since the beginning has incredibly loyalty and commitment to helping our company grow, though he has a bachelors in business administration and could seek employment elsewhere at a bigger company with a better starting salary. He doesn't want to do that though because he is intrigued by being somewhere that he can help create the culture.

He is an hourly employee currently and probably will be for a bit longer - though hopefully not too much longer. He will be the first salaried when he does go on salary. Being that he is so committed to growing the company and the culture I would like to give him a part in the business. He's not going to be purchasing a part because I'm not interested in a partnership really. I would like to give him a portion of the profits once we hit a certain amount. We are currently working on paying off our business debt and will grow debt free from then on.

I would like to say that once the debt is paid off and we hit X amount is net profits, you will begin receiving X percent of the profits per quarter.

For example, I could say at 100k net per year you will receive 1.25 percent of the profits per quarter.

Quarter 1 we net 25,000 he gets $312.50
Quarter 2 we net 18,000 he gets $0
Quarter 3 we net 40,000 he gets $500.00
Quarter 4 we net 35,000 he gets $427.50

My questions are:
Is this a good idea?
Should I do profit sharing or should I actually give him a percentage of the company for maximum reward/reinforcement?
How much should I give?
If I do profit sharing, does my example work? At the end of the year do I need to also give him the unpaid portion of $18,000 from Q2 since we ended up netting $118,000? Or should it just be calculated per quarter? Maybe I should make it 1.25 percent of each quarters net over 25k?

Thanks for all the advice!

[Freelancier]

My take is that you should set aside X% of yearly profits for bonus pool and reward all your employees based on contribution from that pool. This is even before you pay off the debt (because I look at debt as just being a way to finance a business and just another expense and not some anvil over my business' head that prevents me from rewarding the people who are helping me make more money).

[turboguy]

I would avoid giving him a share of the business. We started a profit sharing program two years ago. In my case we have 10-12 employees. We have a graduated scale. If we don't make 100 grand there is no profit sharing. If we make 100-200 grand they split up 10 percent of the profit. If we make 200,001-300,000 they get 15 percent spit between them and over 300 grand they get 20% which is the top fee. We also prorate it according to their earnings. In other words we total the salaries paid and divide by the pay that employee got. In other words someone making 50 grand would get twice as much as someone making 25 grand. That sort of rewards my long term workers and if someone is part time or just started it makes it more fair to the existing workers. We do it in one check right before Christmas.

[BrendonTW]

Thanks a bunch for your replies. It's good to hear how other small businesses do it. We run between 8-12 employees depending on the season.

[jamesray50]

If it was me, I'd go with a bonus. Or maybe start a 401K plan or SEP, with employer contributions. Or maybe a cafeteria plan with a couple options. There are lots of ways to reward employees with benefits. Just make sure whatever you decide you offer it to everyone who is eligible.