Profit Sharing in Canada:
The Complete Guide to Designing and Implementing Plans that Really Work
Author: David E. Tyson
Publisher: John Wiley & Sons, 1996
Recent articles in business publications have addressed trends in employee compensation. The notable trend in recent years has been to “variable-pay” packages. This means that compensation is not “fixed”, but rooted to performance in some fashion, whether that be individual attainment or company-wide attainment.
Experts in “H.R.” (Human Resources) say that individual pay-for-performance plans are tricky because they tend to be “soft” and unpredictable. Such plans typically are closely linked to employee performance reviews. While sound in theory, often these are not efficacious in practice because managers conducting the reviews tend to avoid the conflict that arises from a negative assessment. Instead, employees receive a rosy or satisfactory review, which is followed by a poor bonus. Also, strong performance doesn’t always result in a great bonus because the company overall may not be doing very well. As a result, bonus systems are a constant source of dissatisfaction to both employees and employers.
Profit-sharing programs are increasingly popular in Corporate Canada. One advantage of this approach is that it takes the “soft” aspect out of the equation because each employee’s entitlement arises from some kind of formula, rather than manager evaluation. David Tyson has written a definitive book on Canadian-grown profit-sharing plans.
This book is an excellent place to start if you are contemplating introduction of such a program.
Some thoughts from the book:
- Plans are either “cash” or “deferred”
- To be meaningful, the profit-share component of overall compensation must be at least 2-5%
- Good communication of the workings of the program is essential to its success
- Employees must trust the integrity of management
- The best plans are not simply a means of giving away money, but also engender a sense of employee involvement in the success of the firm
- Base compensation itself must be competitive within the industry
- In a recent survey, approximately one half of Canadian plans are determined as some percentage of company pre-tax profit. The rest either use different base formulas (20%), are discretionary (15%) or other (17%). For the first group, the pot is typically 10-20% of company profit.
- 80% of plans are paid out annually, typically 3-4 months after year-end
- One to two years of service is typically required before a new employees can participate in the plan.
- Individual entitlement can be driven by either base salary level, years of service, seniority, merit or some combination. Some plans take the “Three Musketeers” approach. Only 9% of plans incorporate individual merit in the formula.
Want more information? See our article: Building a Company Profit Sharing Plan from the Ground Up