How does profit-sharing really work?
February 12, 2014 7:46 PM   Subscribe

I'm interviewing for a position which includes a profit sharing program, and it sounds like it's a major component of the compensation (as opposed to something nice on the side). What are some normal, reasonable terms of profit-sharing programs? How would I compare this against a normal salaried position, and how do I negotiate for the best terms?
posted by anonymous to Work & Money (12 answers total) 1 user marked this as a favorite
My experience with profit sharing is fairly narrow and very negative. In short, the company set a threshold such that only profits *above* that threshold would be shared with the employees. That threshold was unrealistic; we never met it, and no profit was ever actually shared.

I would be troubled to hear that a prospective employer intended to base a large fraction of my compensation on profit sharing, because profit usually depends on both chance and the work performance of many people, neither of which would I have any control over.
posted by jon1270 at 8:02 PM on February 12, 2014 [4 favorites]

It depends a LOT on the company and industry.

Big stable company that's been around for a while, is regularly profitable, and seems to be on a good track? Then count the profit sharing as a having reasonable likelihood of working out (not much downside, not much upside). When I worked for Unnamed Giant International Conglomerate, I treated their annual stock grants as something around 75% cash minus tax implications.

Small new company that's offering profit-sharing as a way of keeping costs down? In that case, count the options/stock/etc. as worth approximately zero. Virtually all companies in that situation don't make it. That's not a knock on management, etc., just an acknowledgement of the base rate.

Obviously there's a spectrum between those two ends, but it's really hard to put a finger on what your personal risk level is, how much you really know about the company's operation, how much direct influence you have on the profitability, program terms, etc. For me, an awful, awful lot of things have to be right for me to consider profit-sharing pieces as anything but zero dollar paper.
posted by introp at 8:09 PM on February 12, 2014 [2 favorites]

Profit sharing should be considered akin to a bonus, and not really part of your salary.

I worked for a small local grocery chain that has (had?) profit sharing; it was disbursed twice a year and was split up all complicated based on seniority and how much the company made. It usually worked out to be about an extra paycheck for most people working there (except the old-timers that started working at the company when it opened, they got a pretty hefty bundle each time). It was great, but it wasn't really ever enough to keep people there on that point alone.

The program has since been restructured and gutted, and now I'm told it only buys you a case of beer or two (again, unless you've worked there for like 10 years or something).

I guess I'd just echo that it really, really depends on the company, and rarely do they negotiate terms on profit sharing.
posted by furnace.heart at 8:25 PM on February 12, 2014

To negotiate you get the details and figure out what is the expected profit sharing bonus you'll receive, assuming you're talking bonuses and not a retirement profit sharing plan, since you said it's a big part of the pay. You don't get to change that. However, you can add the expected income to your base to figure out your real salary. If you don't like risk, knock half off the profit sharing to get a lower number. If the company can't show you a history of profit sharing plan payouts, count the profit sharing as zero. Ask for a base higher than what would make the total 'enough.'
posted by michaelh at 8:35 PM on February 12, 2014

I would step back and ask why is this company proposing this type of compensation package. I would be suspicious that maybe they have cash flow problems, doubts about their business model, or other challenges and uncertainties. Not necessarily, but definitely something that should be investigated.
posted by Dansaman at 9:04 PM on February 12, 2014 [3 favorites]

Always, always, always see how it's laid out because I know all of one company where they actually do it legitimately and people get decent sized chunks of change every now and again and everywhere else it's beer money or worse.

Usually the way I've seen it set up is:

They take a set portion of the net profits like 5 or 10% and that goes to employee profit-sharing

(If I may convey a Hollywood lesson to you, always get a chunk of the gross and never get the net, because there's never any net.)

Then usually that "fund" is broken into shares and you get more shares based on how long you work there. So a 10 year employee might have 100 shares and a 1 year employee might have 10 or something like that. So it's a distribution to the employees based on the percentage that each "share" represents.

My wife's company does profit sharing and dumps it right into her retirement, so it's a nice little bump every now and then but nothing I'd want to count on or nothing that'd convince me to take a significantly lower salary.
posted by Ghostride The Whip at 9:43 PM on February 12, 2014

I'll just list the profit-sharing components of a few offers I've seen. I won't name the companies or recipients, but these were all offered to people graduating in 2012 and 2013 with degrees in computer science.

- the company chooses at its discretion a number between zero and seven and pays every employee that many months' wages as a lump sum at the end of the year. In the year before this offer was made, that number was seven.

- the company grants to the individual employee some number of restricted stock units which essentially comes out to a call option on the company's stock, with the strike set at the price on your first day. So if the stock goes up you can convert your RSUs into the cash for the difference in price between the exercise date and your first day at work. It was actually a lot more complicated because the company was pre-IPO so there were only defined liquidity events and I never understood quite how the notional price of a share was determined, but those are probably details specific to the company.

- the company chooses completely at its own discretion to give each employee an additional lump sum at the end of the year. In practice, for low-level employees the end of year bonus was highly correlated with overall company profits.

- the company again chooses completely at its own discretion, but in practice for low-level employees the bonus correlated well with individual reviews while the bonuses for high-level employees correlated more with overall company profits.

- the company is divided into a few independent business units which each posts its own profit numbers, and some fraction of that profit is put into a bonus account. The bonus account is divided into some number of shares, and each employee in the unit is assigned a number of shares, and collects that much of the bonus account.
posted by d. z. wang at 10:15 PM on February 12, 2014

I would be suspicious. How much "profit" a company reports at the end of the year can be grossly manipulated via its choices in accounting practices to follow. I would ask to see the actual numbers on how much employees have actually been paid in profit sharing over the past few years. If this is a newly formed company just starting out with this payment scheme, I would steer clear.
posted by Jacqueline at 10:20 PM on February 12, 2014

I know of several well established companies that hand out some amount of shares (or call options) on fixed dates that turned out to be worth very significant amounts of money. These were major engineering firms or technology companies.

Notable here is that there was no way for the company itself to decide how much you were getting. You got 'x' amount of a clearly defined thing, and how much that was worth depended on the stock market - which is dependant on how the company itself did.

Profit sharing that's based on some kind of internal accounting - or net profits - that is much more dubious.
posted by Ashlyth at 12:35 AM on February 13, 2014

At my first job, there was something basically equivalent to a profit-sharing program, and it usually amounted to 10-15% of employees' salary every year.

What you want to do is make sure you understand both the terms of the actual program and the company's track record for profitability. If it's publicly traded, that's a matter of public record which you can figure out by using any finance website. If it's privately held, you'll need to ask to see the financials. They may not want to give them to you, for reasons unrelated to being sketchy about the compensation package, in which case you may just have to settle for information about the last five years' profit sharing results.
posted by valkyryn at 3:20 AM on February 13, 2014

I've had a profit sharing program that was directly tied into our RRSP contributions, and essentially matched them based on how the company did that year. If the company did crappy, the contributions were matched at 50%. If the company did amazing we got a 125% match, up to a maximum predetermined % of our salary. So if you contributed 5% of your paycheck to your RRSP, you would earn an extra 2.5-6.25% percent of your salary as an RRSP. Not something to sneeze at, but not something that really changed anyone's life either, especially since it was locked away in RRSP account that we couldn't get to until we left the company and/or retired. And since it was all the RRSP matching the company did, it wasn't really something I felt would make or break a job offer.
posted by cgg at 7:35 AM on February 13, 2014

Profit sharing is a land of contrasts.

Above there's stories about scammy and non-scammy places. The one place I worked at that had profit sharing was in the manufacturing area about 20 years ago. I was just there for the summer, and one had to be there full time for 6 months to be eligible. The place already paid unskilled entry level people about 3x minimum wage at that time to most of us on the line and almost always offered voluntary overtime on at least 10 hours Saturday if not another 10 on Sunday at 1.5x your normal rate. Voluntary was actually voluntary, some people never did overtime, and weren't "punished" by being stuck on the crappier tasks.

During one of the pre-work briefings, they announced that this weed would include the profit sharing for the quarter, and most of the people cheered, and it certainly wasn't a sarcastic "Yeah, right" cheer. I think a "share" was somewhere between $500-2000 that quarter. Those on the line at 6 months got a half share; I don't remember how long it took to get more, but I remember that one guy who'd been there 20 years said he had 2 shares.

Effectively, it allowed the company to pay everyone better than their already competitive rates, while allowing them scale back without needing to do lay offs if times were lean. The only way that I managed to get summer work was my dad worked as an engineer there. It wasn't Harley Davidson good, but it was good enough that they didn't have much employee churn.

If it's a new, unestablished company attempting to make the majority of it's pay as profit sharing, then it's probably just a way to get you to work for a pittance.

Unless it's a commpany that can say something like "our last decade we've always been postive for profit sharing, and here's historically how much it's been" look strongly at the base pay and don't consider the profit sharing when considering the job.
posted by nobeagle at 10:20 AM on February 13, 2014

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