In the small-business world, profit sharing is the new black. But one company, software training firm Agile Learning Labs, has taken it to the extreme.
Agile’s six-member team is paid the same share of the company's profits, regardless of title or role. Apparently, there are big advantages. First, since it impacts them directly and equally, all team members are constantly looking out for the bottom line. Everyone wants to do what they can to support the sales director, because it’s the customers who are paying for dinner that night. “Even those of us who would normally have no customer contact are more aware of our clients and their needs,” says Agile co-founder Chris Sims. “This helps the business.”
Digging in the dirt
Despite the increased loyalty, personal investment and productivity that profit sharing engenders in staff, the decision to move to this model was not made lightly. Every member of Agile’s team researched existing models and contributed ideas. The sales director based his concept on Eliyahu Goldratt’s theory of Throughput Accounting, and the novelist creative director wrote a narrative describing the company’s environment under a new profit sharing model a la Pat Lencioni.
Agile claims that the logistics of the chosen model are simple and elegant. Because his team was small, Sims wanted to avoid a structure that was too top-heavy and required loads of administrative time. Here’s how it works.
This system still pays out a low-end base salary to everyone–no change here. The profit share is calculated once per month and is paid as a bonus in the next pay period. The company has retained an accountant and HR firm to vet its practices and ensure that it is operating according to state and federal employment laws.
Not for the faint-hearted
For risk-averse individuals like me, however, profit sharing is a bit nerve-wracking. Sims admits that outcomes are variable. “When we start the month out, we can’t predict what the payout will be. In our few months' experience, it has ranged from fair to excellent. So far the average is acceptable, but there's always the possibility of a slump,” he says.
And what happens when the company gets bigger? How can everyone receive an equal share of profits when the firm grows to 100 or more employees? Fortunately for Agile, Sims has already thought that through. “We may restrict the model to the core team at some point, but right now we’re experimenting with extending it to some of our independent contractors and it’s working well,” Sims says. “We intend to revise our methods as we go.”
Getting down to business
If profit sharing sounds palatable to you, there are a few things you’ll want to consider. The U.S. Department of Labor recommends that you first decide whether to set up the plan yourself or to consult a professional or financial institution. Then, you will want to create a written document that outlines how the plan will work day-to-day, arrange a trust fund for the plan’s assets, develop a record-keeping system and provide plan information to participants.
Sims suggests figuring out the simplest model that could possibly work and give it a try, remembering that the primary benefit of profit sharing is a sense of shared investment in the health of the business–not the cash. “Once you have that kind of buy-in, where people feel like pulling together in lean times as much as they do celebrating the flush times, the cash will begin to take care of itself,” Sims says. “And don't make instituting a profit sharing plan a cumbersome project, because then it will either never happen or you'll design something no one can understand or administer.” Sounds like good advice!
Alexandra Levit is a former nationally-syndicated business and workplace columnist for The Wall Street Journal and the author of Blind Spots: The 10 Business Myths You Can’t Afford to Believe on Your New Path to Success. Money magazine’s Online Career Expert of the Year, she regularly speaks at organizations and conferences on issues facing modern employees.
Illustration by Russell Christian