Should you provide a profit-sharing program to benefit your employees? If so, what should it look like?

These are the questions that Chip Griffin and Gini Dietrich explore on this week’s episode of the Agency Leadership Podcast.

The co-hosts start by discussing what profit-sharing is, then they explore the pros and cons of different approaches.

Automated Transcript

The following is an automatically generated transcript. Please listen to the audio to confirm accuracy.

CHIP 0:00
Hello and welcome to another episode of the agency leadership Podcast. I am Chip Griffin [and I am Gini Dietrich] and we’re here today to talk about profit sharing, profit sharing and profit sharing is something that tends to get people talking although I’m not sure that everybody is always on the same page with exactly what they mean when they say it, right? It’s it’s one of those those topics that can mean many different things to many different people.

GINI 0:26
Right? So what do you think of when you think of profit share, I think of, if their profits at the end of the year that you share them with your colleagues,

CHIP 0:37
so you’re a literalist, you like I am

GINI 0:39
and literalist. Yes,

CHIP 0:41
you believe that words have meaning

GINI 0:43
like I do as a communicator, I am appreciative of the words that have meaning.

CHIP 0:48
So I would agree with you. But before we sort of dive into our shared belief in the meaning Why don’t we touch a little bit on what other people might mean when they say profit sharing? I know this is a topic that’s come up recently in the spin sucks community. So I know it’s and it was clear from that discussion that the different people did perceive it differently. I mean, some people think of it is, you know, a 401k is a profit sharing. Yep. Which in its most literal sense, it is not. It is simply a retirement plan. There are different ways you can determine what contributions to put in. But it’s not it’s not necessarily a profit sharing plan. It may be a profit sharing vehicle of some sort, you know,

profit sharing can also mean discretionary bonuses. And I’m sure we’ll talk about that a little bit because, you know, there is a way to share profits where it’s not totally formulaic

there are like, it’s what are some other things that people might mean when they say, Hmm, those seem to me, the two big

GINI 1:46
or one K’s bonuses raises,

then, like there was a whole conversation about how I worked for an agency that would give us hams a ham, you know, there’s nothing wrong with him know if you’re vegetarian. Nothing wrong with that at all.

CHIP 2:07
Okay, we’re just we’re not going to go down that road.

GINI 2:11
Yeah, it was mostly bonuses raises and 401k is is where it netted out.

CHIP 2:18
Yeah, I think for foreign keys tend to be the one that that most people confuse in with in the mix here. And I think it’s really important understand that that profit sharing and retirement plans are not necessarily one in the same and in fact that they are in most cases not the same at all

GINI 2:33
correct. That said, we have about profit sharing program that is directed through our 401k. So if there are profits at the end of the year, you can divert that your, your percentage of the profit through your 401k. And yeah, you don’t get the the cash, but you also don’t get taxed, and you can save it for retirement. So we do direct it through our 401k that way. And, you know,

CHIP 2:56
I’ve seen over the course of my career and working with different agencies, a whole bunch of different methods of profit sharing. So let’s talk about some of the different models that we can think of just to get them out on the table. One is, you know, a straight profit share, where each, each employee has a certain number of points, or Phantom shares in the pot. And so let’s say, you know, there’s $100,000 in profit, that hundred thousand dollar pool would get divided up based on

the specifications for, you know, how many points or shares each individual has. So that’s totally formulaic, you know, in advance what percentage of the pie basically, you know, once you fend off attrition, and things like that, that may take place over the year, new hires. But essentially, you can sort of formulaically know exactly what you’re going to get. So that’s, that’s one model. Another model I’ve seen is where you do a percentage of the overall agency’s profits goes into a discretionary pool that then as part of the, the bonus process and handed out so you can argue whether that’s truly profit sharing or not, it is that the pool fluctuates based on profits, but it is not in that it, it is discretionary. So, you know, the agency could have a fantastic year, and you might get out of the pool, if your performance was not judged to be great. On the other hand, it may perform less well. And then, you know, you may end up performing better than the average bear in that scenario. So, there’s, there’s different ways to do it that way. So those are two. The third one is where it might be limited, just to senior leadership, where senior leadership might get a percentage of agency profits. And they may or may not, it may not be pooled, it may not necessarily, you know, be divided up amongst all the senior leaders that may just be okay. You know, as, as the CEO, you get 2%, or, you know, whatever numbers great, too. So, that’s, that’s another model, what are it Can you think of some other legacy, I mean, you’ve got your model, which is an interesting one, I think you touched on a little bit, but if you want to share more, you could

GINI 4:59
you it just goes through, and it is true profit sharing, however, you have to be, you have to participate in the 401k program, which not everybody in my team does. So that there’s a downfall from that perspective, so that if you know, we have a really good year, then you don’t get the extra. So it also encourages people to participate in the 401k program, which I think is

extremely smart of people to do. And so it was one of the things that we implemented to encourage that, because I think at the time we had, maybe

maybe 10% of our team was had was part of it was part of 401k.

So it’s not discretionary, from the perspective of do we do or not, if their profits, then their percentage, it is pooled, and then a percentage of it as goes into that, and then it’s divided up based on how much you you yourself are putting in. So if you put in 5%, then you get 5% of the pool. So we do it that way. So it not totally discretionary and it’s not, you know, a complete share of all the profits, because, of course, we do things like invest back into the company and provide raises and, you know, higher hiring and all those kinds of things. So, that’s how we handle it.

But, you know,

CHIP 6:15
so So in that case, just let’s pursue that just for a moment. So, do you decide in advance, what percentage of profits is going to go into that versus what you’re going to retain for investment? Or is that a decision that you make at the end of the year and say, okay, you know, we had 100,000 in profits, we’re gonna, we’re going to hand out 50 k of this and the other 50 k we’re going to Ambassador or what have you, I mean, how do you think about

GINI 6:38
that tried to new 20% in in previous years has, it’s gone a little bit higher, we have, I don’t think we’ve gotten more than 25%, and in some years, Great Recession, it’s gone significantly lower. So but which we aim for 20%

CHIP 6:52
Yeah, so you have sort of in mind a set percentage from the get go. Because in other cases, it may be that, you know, management towards the end of the year and says, okay, you know, this is we feel comfortable, you know, putting into the bonus pool, sort of looking ahead at things like cash flow, and, and all that sort of thing. And I think I think that’s one of the important things for agency owners in particular, to think about, as they’re putting together bonus programs, you know, think about it, particularly if you’re going to share details of it with your employees, which is, you know, one of the main reasons frankly, to do a profit sharing plan, right, you want you want to be transparent about it, because it theoretically invest some more in the agency. And we can talk about the truth or falsity of that in a moment. But your your your want to make sure that when you’re structuring it, if you’re going to tell the employees, this is our formula, think about what that looks like, you know, even if there’s a hiccup over the course of the year, have you given yourself enough flexibility to work with that, so that you don’t end up you know, inadvertently turning a positive into a negative by going to the employees at the end of the year and saying, hey, just just, you know, we foresee we’re going to lose this client early next year. So we’re not going to give you the percentage we said, so, you know, if you want to build flexibility into it, make sure that you do and that you communicate that so that the employees are on the same page, because there’s nothing worse from employee perspective than thinking, Hey, you know, we’re going to get this big share of the pie only to have the rug pulled out from under you at the end, it’s better not to have a carrot in front of you, right? If yes,

GINI 8:22
absolutely. So, you know,

CHIP 8:26
and I think that, that, that’s one of the things that I’ve seen a lot of agencies trip up on frankly, is, is not building in that flexibility. Because, particularly, you know, my view profit sharing tends to work better with established agencies with a track record where you, you know, that they tend to be a little bit more predictable. Now, no agency is fully predictable, but, you know, the, the longer you’ve been around and, and the more critical mass you have that the easier it is for you to sort of forecast, you know, whereas if you’re a small agency, you may have a lot greater difficulty in making those projects. So, in those cases, I would argue, you would want as much flexibility in your profit sharing as possible, because otherwise put yourself in, in bad shape. Because as we all know, you know, sometimes there’s a blip that may cause profits to spike, you know, over a short term project or something like that, that that’s not repeatable business, if you will. And so, you know, if you put yourself in the box of, Okay, I’ve got a handout, you know, some preset portion of that profit, I may put myself in a bad position for 2019. So, you know, make sure that that when you’re structuring these you think about those issues, it’s, it’s sort of like when we talk about legal documents, you know, think about you know, not when times are good when times are bad. Same thing with your profit sharing, think about, you know, the the oddities that might happen, and, you know, how you would feel about it at the, you know, in the future point in time.

GINI 9:50
And I also think the discretionary, guess bonuses, not true for profit sharing are usually received a little better, we try to do both, we have the profit, quote unquote, profit sharing through the 401k. And then we do discretionary bonuses based on perform individual and team performance. And those tend to be a little better received in the past, we’ve done things like cash, which I don’t love, because it’s taxed so high. So like, if I give you $1,000, you’re usually and get 500 bucks of it, which kind of sucks or we give expensive gifts that we that people wouldn’t necessarily buy for themselves, especially if they you know, if we gave him 500 bucks would they go Are we give them 1000 bucks when they go out and buy an iPad Pro for themselves? Probably not, they probably pay off a credit card or something. So we try to do some stuff like that, which tends to be really well received. But again, that’s all discretionary bonus type stuff, not profit sharing.

CHIP 10:46
Yeah, and I will say those, you know, those kinds of unique gifts can work very well, it is important to talk to your tax advisor because usually those are considered to be taxable income to the employee. So you want to make sure that you’re handling appropriately you know, which may mean that that you have to provide a true up payment so that the employee

doesn’t end up paying a percentage of the the gift in tax on their their next w two statements. So you but I agree with you, just from a from an employee morale standpoint, if done right. Those can be extremely well received, you know, but it is important to sort of think about it because you also want to make sure that you know, that that the gift you’re giving are not things that you think are cool, but that the employee will think

I’ve seen that as well where where employers or give something in the employees that will you know, I don’t want this I can him what what like like a hammer. Yeah, that would be that would be certainly the example that was shared in the discussion I’ve seen, I’ve seen some employers give out wine to nondrinkers

GINI 11:54
right,

CHIP 11:54
totally unintentional on their part. They just, you know, they don’t know their employees well enough to know, hey, that person as either not a drinker at all, or not a wine drinker? Which is, which is quite common that someone I’m not one of them. But you know, there are people who do not drink wine, they prefer beer,

I don’t say. But yeah, yeah. So, so make sure that that you, you, you think about those and, and it shouldn’t be a substitute for proper compensation. It’s really it should be, you know, an add on extra that you do just to get some some warm fuzzy is from your employees typically around the holidays?

GINI 12:27
Yes. So, yeah, I thought, you know, Greg Brooks had some interesting an interesting perspective about it in the spin sucks community. He said, you know, a mixture of objective based bonuses for managers and discretionary bonuses for lower level staff tend to work really well. But, you know, make sure that you have

draconian rules in place so, people don’t talk about their bonus comp because, you know, or you do it, you know, do the same across the board for everybody, that tends to also and cause morale issues. So, But to your point earlier, at the beginning of this there’s a difference between discretionary bonuses and probably aren’t

CHIP 13:06
and i think it’s it’s important that there be a some sort of discretionary bonus even if you have a formulaic one, because if you rely too heavy, too heavily on a formula, you can easily end up over under compensating somebody inadvertently. And, you know, you want to make sure, I mean, discretionary bonuses are a great tool to use as far as encouraging employees, encouraging retention and, and simply, frankly, rewarding extra effort. So, you know, you want to make sure that you have that as a tool in your toolkit. I’ve seen some agencies go where they just it’s totally formulaic. And I don’t think that is a good idea for all sorts of reasons.

GINI 13:45
Yeah, yeah. I mean, you’re going to have good years, and you’re gonna have bad years. And you’re exactly right, there could be a crazy blip in the middle of the year, because you had a really big project, that’s not a retainer that’s not coming back next year. And so yeah, there I think you have to be Yes, flexibility is a very good word in this case. And, you know,

CHIP 14:04
and I think, you know, probably on another show, we can go more in depth on the notion of transparency, that that that Greg has inadvertently raised, you know, from the flip side of right, keeping it secret. And I will tell you from experience, employees talk about compensation period in the story doesn’t matter what rules are, what those are, what culture you have in place, they talk about compensation. So, if you think that one employee doesn’t have some idea what another employee is making, you’re deluding yourself and frankly, you know, putting in place you know, harsh rules for disclosures. I I’m not a big fan of putting any kind of draconian policy in effect in your business, they tend to backfire and generate moral will then problems being solved. But

GINI 14:51
and you can’t really prevent it.

CHIP 14:53
No. Well, then there’s also the legal question of, of, you know, whether or not you truly can do that. But that’s, that’s a topic for another show, as well, you know, but it is, I think, you know, having these different tools at your disposal can be helpful. And I think that leads to what I alluded to earlier, when we talked when I talked about the truth or falsity of profit sharing, truly incentivizing employees. And, you know, from my perspective, I, I enjoy profit sharing as as part of a sort of setting the company culture. But I don’t necessarily view it as a direct incentive

GINI 15:32
and new never.

CHIP 15:34
But a lot of people I think, do confuse it in that way that, you know, if I put in profit sharing, that’s going to incentivize employees to go and I will tell you two things. First of all, company profit share agency profit sharing is just it’s too nebulous for to truly be a motivator. If you start getting into individual employee bonuses, profitability on projects, or, you know, their line of business within the agency, what have you, you know, those can have more of direct effect. But honestly, more often, I think they have a negative effect. Because people have a tendency to seek their bonus by whatever means necessary. I’m not talking about an ethical, but they will make decisions to maximize their own bonus, which may or may not be in the best interest of the business. So, you know, I think that a, the profit sharing doesn’t work as an incentive and be it shouldn’t work as an incentive

GINI 16:25
well, and it goes to Daniel Pink’s whole point in Drive, which is people when it comes down to it, once the basic necessities are covered. Money is not a motivator, never is

CHIP 16:35
I think that’s true for a large number of employees, I think there are certainly some who are,

GINI 16:41
I’m motivated by money. Yes,

CHIP 16:42
I am, as well, you know, we, we are on the other hand owners as opposed to employees. But nevertheless, I think, you know, that there are, there are any number of employees who are motivated by comp. But these days, you know, and as you’re thinking about compensation for your agency employees, there are so many different things that employees are interested in, they may be interested in extra days off or comp time, or, you know, the ability to have, you know, I mean, the company could put in a vacation allowance or something like that. So, it’s direct, there’s all sorts of creative ways that you can compensate employees today. And most of the research seems to suggest that particularly millennials, as much as they give us all who are older than millennials, heartburn at times, you know, they, they are interested in many things other than money in their compensation plans and value other things, even things like working from home, which obviously a virtual agency, that’s not as important now, because you get to do that every day. But if you’re in a traditional agency, you know, if you’re allowed to work from home one day a week, that can be a real incentive for employee. So I encourage all agency owners to think about their total compensation for employees across the board, not just financial, but everything that you’re doing for them. And think about how you can can, you know, maximize the return on your investment, because there are, you know, many things like allowing someone to work from home one day a week, that may cost you nothing, or very little, but in fact, yet dramatically improve the satisfaction of your employees does matter.

GINI 18:14
And you brought up vacation, and I will say, that even spoke posted in the community that they’re thinking about introducing a program next year with vacation fund. So it’s an employer match travel savings plan, where you, they’ll match what you put in, which is kind of a fabulous idea, I think, I don’t know, they she said, they’re just they just been exploring it. So haven’t implemented it yet. But you know, I have a team full of people who with wanderlust, and the the idea that I would be able to give them vacation and as a virtual organization, it’s really hard to get them to take vacation. So if we did something like that, I think it’s, it would be pretty compelling.

CHIP 18:53
Absolutely. And those of you know, those are the kinds of creative solutions that you can, you know, really changed the company culture with wells. Yeah, instead of just being that, you know, the, the boring cookie cutter agency, you know, you’re able to have something that stands out and makes people more loyal to you, and more interested in coming to work for you, if they don’t already. So, and, and ultimately, that’s what compensation is about, it’s about attracting and retaining top talent. So, you know, whether that’s with something like profit sharing, or something, you know, a little more creative, or you can even mix the two, you know, you could take a percentage of your profits and say, Okay, we’re going to put this into our vacation matching fund. Yeah, you know, those, yes, you know, you can combine them in different ways, obviously, you want to be careful to make things too complicated, because, you know, then the employees may not understand might not understand the compensation, you might box yourself in our pack, you might even confuse yourself. And

GINI 19:46
that has been known to happen,

CHIP 19:48
I’ve seen some people come up with these, you know, really complex schemes, and, you know, they backfire because, you know, even management can’t necessarily figure out what the number is that supposed to go, right. And, and part of that is, you know, just making sure that if you put together a plan like this, that, that, you know, you sketch out, even if it’s just for yourself internal guidelines, with good specificity in advance, you know, what you plan to do, you may only share a subset of those with employees, just to make it simpler, but I think, you know, making sure that you’ve sort of, you know, run the traps, and you say, okay, you know, it’s going to be a percentage is going to be based on cash or accrual accounting, or whatever, it’s going to be, you know, factor in whatever caches in the bank, in addition to whatever we made on paper, you know, there’s a lot of different things you can put in there. But if you spell it out better in advance, you know, you’ll be better prepared for it. Yeah. And you’ll end up with better results. Because ultimately, that’s, that’s really what you’re trying to achieve here. You’re not just willy nilly giving away profits, I hope?

GINI 20:46
I hope not.

CHIP 20:48
That would be a very bad idea.

GINI 20:50
It’s a very bad idea. Please don’t do that.

CHIP 20:52
It’s if you do that, you will not be listening to this podcast for very long because no longer being your executive. So

you’ll have no need to listen to Jenny and me,

which would make us very sad.

GINI 21:08
It would make us very sad. So please don’t do that.

CHIP 21:11
No, you know, I think, you know, when we’re when we’re talking about profit sharing, I think that, you know, the other thing you have to think about is, you know, going back to my point of being the Debbie Downer, you know, what happens in the bad years, you know, what, what is your plan for that year where you you barely turn a profit or Egads. You know, on paper, perhaps you don’t even make one. And this is obviously situation as an agency, you generally don’t want to find yourself in. So you tend not to think about it. But, you know, that is something that you want to think about. Because there are lean years for all of us, there are always, you know, unexpected challenges that have come up from time to time, there may be investments that we make in, you know, new hires to pursue new lines of business to grow the business or what have you, and that may have an impact. So, you know, think about how those things might impact because you don’t want to end up with, you know, small pool that it’s almost embarrassing, right, you know, they say, okay, we’re going to put aside 10% of profits. And, you know, your total profits are $10,000 and dollars, right. Well, yeah,

I was trying to be generous and using them in there.

Yeah, I mean, can you imagine taking that and dividing that up over the employee base? You know, it’s $1

GINI 22:19
for you, $1 for you, everyone.

CHIP 22:24
Yeah, I would advise against that,

I would, I would tell you that that is more likely to breed animosity from your employees than anything else. So

Unknown 22:35
yeah, don’t go

CHIP 22:36
down the path. But, but seriously, you know, I think, you know, everybody gets excited about these kinds of ideas when times are good. And they don’t, right? Yeah, what’s, what’s the flip side of it, because you want to make sure that whatever kind of planning, you’re doing it, it works

in both cases. And, frankly, you also want to think about it in those cases where, holy cow, I made a mammoth process this year, right? You know, for whatever reason, you know, something abnormal happened, you know, do I really still want to give 10% of that away, because, you know, if it’s not sustainable, I may be better off taking that and reinvesting in the business to give Stanley for the future. So, you know, it’s, there’s, there’s, as with everything else, it depends, there’s no one size fits all you need to think very carefully, though, about how these different plans pay out. And the other thing that you want to think about when you have these plans is timing. And traditionally, these are tied to calendar years, although some agencies operate on tax years, that may not be calendar, so they may skew it for that reason, but and sometimes there’ll be a lag, you know, you may do it on the calendar year, but not give the bonus until, say, February or March or things like that. But, you know, one of the things that you have to keep in mind is whatever kind of bonus program you have, whether that’s profit sharing or discretionary, it tends to have the effect of causing a delay in resignations and a spike.

GINI 24:03
Yes. And I was going right. So yeah,

CHIP 24:06
people if they know that, okay, our bonuses always come in the second week of February, guess what, yeah, nobody’s going to resign in January, right. Nope. However, you may have a spate of people who resigned in the second half of February. So it can have a real impact on you know, your hiring plans. And you need to be thinking about that, particularly if you’re an agency of any size, right? I mean, if you’re, if you’re a very small shop, that it’s much less likely to have an impact, it might, but you know, typically, you know, you’re, you have a better finger on the pulse of your team, if you’re, you know, a 10 person or under agency than perhaps if you’re, you know, 3040, 5060 people. And, and those are the cases where you can all of a sudden just see a bunch of departures right after you hand out bonuses, or people whose heart really isn’t in it anymore. sticking around, which, yep, so you know, that there are, there’s not an easy way around that one, though, because, ultimately, you know, most agencies or other businesses will have a bonus season, you can, if you want, you can get around it by just doing bonuses throughout the year, you know, there are some businesses that will give you an annual bonus, but pay it out over, you know, a couple of payments so that that

changes the behavior, but ultimately, all that really does is just delays departures again. I mean, it’s, you know, so whatever program you have, if you’re, if you’re doing annualized compensation like that, in any fashion, you know, you’re going to have those

hills and troughs to go through. So keep that in mind when you’re setting up these plans.

GINI 25:41
Yeah, and I think, you know, spacing it out or doing it a different times of the year makes sense. Of course, a lot of people will do it, a lot of business owners will do it at the end of the year to get the cash off the books, but spacing it out is really smart from that perspective, especially if you’re, you know, there aren’t other things that you’re doing, like letting people work from home, you know, one day a week, or other types of incentives where they’re just, I mean, I think we’ve all we all have friends who are like, yep, I’m holding out and I get that bonus, and then I’m out of here.

CHIP 26:08
Oh, absolutely. I mean, I’ve had that conversation with any number of people

over the years, I best of my recollection, I don’t think I ever found myself in that situation for variety of reasons. But, you know, certainly it’s the kind of thing I would have kept in mind. if, if, if that’s, you know, be foolish not to, you know, I mean, if you’re, if you’re looking to leave, and it’s January, and you know, that the payments coming in three or four weeks? Well, shoot, yeah, yeah, particularly, if you’re in a place where the bonuses are fairly large, it certainly can be a motivator to stick around and, you know, so, I mean, you could do these on a quarterly basis, I think that adds frankly, more headache than it’s worth to have to manage such a program that frequently you know, but that would spread it out enough that that very few people would make departure decisions, you know, based on it but i

GINI 26:56
right and i think it’s just all good food for thought. I mean, figure out what makes sense for you and work that way

CHIP 27:03
it’s it’s all about planning thinking ahead and thinking about the good times and the bad and if you do that, you will end up with a good profit sharing or other incentive compensation scheme I mean, scheme in the most positive

GINI 27:16
in the nicest way possible. Right.

CHIP 27:19
Well, hopefully this has been a profitable conversation for our listeners we’ve we’ve shared I hope, some profits with them in some fashion that a little bit to torture, they’re probably

GINI 27:32
but profit profit. Anyway,

CHIP 27:36
on that note, do you have anything else to add?

GINI 27:39
No, I think that I, I mean, some really good food for thought even this a couple of things that we haven’t thought through. So yeah, I think

CHIP 27:46
it’s certainly, you know, got my brain thinking. And I’m sure that we had a bunch of things we haven’t touched on. So if any listeners have any feedback, or follow ups or anything like that, feel free to drop us a line. We’re always interested in the feedback and so that will bring us to the end of this episode of the agency leadership podcast. Once again, I’m Chip Griffin,

GINI 28:05
and I’m Ginny Dietrich

CHIP 28:06
and it depends