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How to work out a profit-share arrangement with your employees

How to work out a profit-share arrangement with your employees

Profit sharing can be a great way to ensure your employees are invested in the success of your business. It can also result in increased productivity, innovation and profits, along with reduced turnover. We look at the basics of a profit-sharing arrangement and explore some key factors to keep in mind.

Define success

Before introducing a profit-sharing scheme, you should first identify the factors that are most important to the success of the business then make sure employees understand why they matter. These could include superior customer service, a low product defect rate and few or no customer complaints. Linking them with specific performance targets will help ensure that profits are distributed fairly.

Balance immediate and long-term rewards

There’s no question that profit sharing can encourage employees to work harder and smarter. But it also matters how and when the profits are distributed. Pay too soon (or all at once) and they may decide to ‘take the money and run’. Make them wait and they could feel that their efforts aren’t valued by the company’s owners.

To keep employees motivated, consider distributing profits on an ongoing basis throughout the year. These short-term rewards could take the form of monthly or quarterly bonuses or commissions, calculated in accordance with how well your employees perform against KPIs.

Share or dividend-based profit sharing can also work well, especially if you have a small or medium-sized business where employees are directly contributing to its success. These employee share schemes (ESS) can be the best option for owners of startup businesses that aren’t yet profitable, but are still in need of top-quality talent.

Know your tax obligations

If you are planning to introduce an ESS-based profit-sharing program, you’ll need to be aware of the tax implications. If selling shares to employees below their market value, for example, the difference (or ‘discount’) will be taxed. Depending on circumstances, this tax can be levied upfront or deferred. Capital gains tax may also apply. The ATO can advise in regards to your profit-sharing obligations.

Employees have the right to expect a fair rate of pay regardless of the company’s profits, so such a scheme should never be used to justify a low base rate. When implemented appropriately, however, profit sharing can be an excellent way to get your employees on board with the vision and goals of the business.

Profit sharing is one way to motivate your staff to contribute to the overall success of your business. Learn about other ways to engage your workforce.

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