Profit sharing represents an incentive plan introduced by businesses which includes direct or indirect payments to employees in addition to their monthly salaries and bonuses. Even though most companies rely on allotment of shares, direct forms of stimulation (cash, for example) can also be implemented.
Profit sharing at Vivify Ideas
At the beginning of 2016, we had announced a profit-sharing plan which was set in motion in January of 2017. Our profit sharing plan meant that 28% of the company’s monthly profit is divided among employees. Employees’ shares are determined by their coefficients which are calculated on the basis of their length of service.
- Full coefficient of 1 — employees with more than 18 months of service;
- Coefficient of 0.6 — employees with 12–18 months of service;
- Coefficient of 0.3 — employees with 6–12 months of service.
The purpose of profit sharing?
Depending on how it’s being put into practice, a well-constructed profit-sharing plan should always come with a myriad of positive consequences.
Let’s name a few:
- Profit sharing has a direct impact on employees’ earnings. What it does is, it creates a causal relationship between the work that is being put in and the amount of money that is going to be received for that amount of work. To put it more simply — How much you make depends on how much your work!
- Profit sharing increases group cohesiveness. Employees get much more interested and involved in the company’s growth process, they tend to identify with it, as well as adopt the same collective goals that are at the forefront of the company’s practices.
- Long live the principle of equity. Everyone deserves a just rewarding system, and profit sharing provides exactly that. Our idea is — Collective engagement on a particular project should always be followed by a sharing of that project’s benefits.
Profit sharing is a part of the open financial policy package that we decided to implement in January of 2017. Employees now have a complete insight into the company’s financial policies, how much profit is being made, what the funds are being spent on, etc. Apart from introducing profit sharing, this financial package also included the creation of:
- An operational fund — Controlled by the employees and aimed towards satisfying our company’s needs. This fund covers conferences, team buildings, equipment, office maintenance and other expenses.
- A social fund — Created with a purpose of leaving a positive impact on the society through supporting different kinds of charity campaigns and social activities.
For example — Huawei
Huawei, a Chinese telecommunications equipment company sets a perfect example for how a profit-sharing practice can lead to invaluable results. Employee Stock Ownership Plan (ESOP), designed by the company’s founder Ren Zhengfei, turned out to be a perfect solution for minimizing unequal wealth distribution within a privately owned company. Ren, as the founder, holds only 1.4% of the company’s share capital, whereas the rest is held by more than 80.000 employees. One of the basic Ren’s premises was — If your employees own the company, they are more likely to act in an entrepreneurial way, meaning they are going to initiate more projects that could subsequently bring them additional profit. Values such as equality and harmony are embedded in the company’s financial philosophy, bringing its employees greater job satisfaction, a stronger sense of belonging, as well as a firm sense of autonomy.
By the end of 2017, we will have a clear set of results on just how profit sharing influenced our business, employees’ dedication and productivity.