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Profit Sharing model

LadyM

Can anyone share a good profit-sharing model that you have liked? Would love to hear from an owner and from someone who has worked in the firm and has been part of the sharing model.

 
Oct 25, 21 6:17 pm
proto

i'm guessing this crowd doesn't have many owners of mid/large firms

(i'm a 2-person shop myself)

Oct 26, 21 11:29 am  · 
3  · 
z1111

I am only familiar with the more profit the owner(s) share(s) with the employees the less money the
owner(s) have model.

Oct 26, 21 11:40 am  · 
1  · 

We're a 12 person firm and we're about to offer stock options / profit sharing.

Oct 26, 21 1:45 pm  · 
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z1111

To be clear I don't think that is the best way to run a business. I was never given a share of the profits even though I provided a lot of the value.
I never had the opportunity to work for am employee owed business. I would have if I did.

Oct 26, 21 4:16 pm  · 
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z1111

*an*, *owned"

Oct 26, 21 4:18 pm  · 
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I'm curious if the stock options will be actual profit sharing or just a way to get us invested in the company and an infusion of cash.

Oct 27, 21 2:30 pm  · 
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mightyaa

Should note I ran a 15 person firm. I learned/mentored under my father though who ran a 60 person architectural firm in Denver with another branch 20 person firm in CA (as well as a couple unstaffed 'ghost' firms in WY and NM). So he passed along a ton of business knowledge. The firm I'm currently with is about 10k employees worldwide with our branch floating around 50 (though I'm not behind the curtains much and it isn't a architecture specific firm).

Oct 27, 21 5:23 pm  · 
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Good to know. I think you replied to the wrong part of the conversation though. 

 Still, 10,000 staff, whew!

Oct 27, 21 5:26 pm  · 
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mightyaa

lol... it was the "not many here are owners" part I saw. I'm also curious how well stock options work out; particularly on a firm your size since theoretically, you might be on the board and get to take part in determining firm direction at those corporate shareholder meetings :P.

Oct 27, 21 5:32 pm  · 
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Ah!  The formatting of this forum sure can be confusing.  :P

I doubt my part on the board would determine anything. The share of stock you own weights your vote. One of the partners has over 50% of the shares. My vote wouldn't count for much with my pittance of stock I'd be offered to buy - and that's a good thing. Still it's a great sign of trust.

Oct 27, 21 5:37 pm  · 
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mightyaa

True; while not controlling stock, it does however theoretically give you a voice and a seat at the table. Depends on their corporation rules. So like I was 55% owner. That also meant I was chairman of the board and we had annual stockholder meetings (my sister and I) taking official minutes. And each year I voted myself to continue being Principal of the firm. And lol, because it was a family firm, my sister would every now and again vote no claiming she was older and should be principal. Robert's rules of Order then would require we open it up for discussion where we'd proceed to slam each other's qualifications (like her red hair meant she had no soul). My Mom and Dad also held board positions... So anyway, you might have your voice put into the corporate minutes for the articles of incorporation. :P

Oct 27, 21 6:13 pm  · 
3  · 
mightyaa

Oh... and if it's stock. That also means if you leave, the stock has to be valued and paid out. Ditto for the transfer of stock (it'll have a book value). It can't be arbitrary either; our accountant had to figure out the value of the shares; the firm has assets like equipment, etc. as well as earning and growth potential (harder to value).

Oct 27, 21 6:16 pm  · 
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tduds

Not an owner so I can only speak from an employee perspective but my current firm and the firm I was previously at are employee-owned, and that was a large factor in my decision to work at both. Instead of (or in some cases in addition to) a discretionary profit-share, we get a proportional dividend. That literal sense of ownership extends into quality of work / effort, in my experience.

Oct 26, 21 11:41 am  · 
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Non Sequitur

I have a profit % share as part of my employment contract but I'm fairly new to this and signed the agreement a few months shy of covid appocalypse... so, I don't really have a good view on the model on a typical year.  I can, however, extract that in a good year, my small profit share can surpass easily 20% of my regular salary.

What I give up in exchange for that chunk of cash is any sort of overtime compensation, which is fine, because I try very hard to limit my hours to 40/week... and try to make the same recommendations to the staff with $/hr for OT.



Oct 26, 21 11:43 am  · 
1  · 

What about non voting stock that has to be sold back at the original buying price?

Oct 28, 21 7:16 pm  · 
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mightyaa

It’s been awhile. We created a custom spreadsheet. Basically we’d update it at end of year.

So we’d decide how much to hold out for bonuses, SEP (retirement) contributions, and how much would be needed to float the first quarter in the following year.

First step was how much to carry over to the next year to essentially float the first quarter. Often, the books had that leave the corporate checkbook and go to me as a “risk bonus”, then go back on the books Jan 1 as a personal loan (with interest) to the firm like an investor.

Second step was setting the retirement fund contribution; it was a percent of salary for everyone enrolled.

Third step was set aside for profit sharing. We set stockholder salaries very low (like PA level). So hopefully the firm did well enough, that with the profit share, we’d make a principal level salary. Example; my salary was $60k, so we'd shoot for another $60k in profitsharing for me to bump my pay to $120k. This got modified to ensure there was plenty left for the bonuses. So if the firm did bad, I did bad. Should also note if there were large personal expenses, we could do a early profit share or pay back part of my loan (described below) to make ends meet.

Last step was bonus. Unless it was a really rough year, we set aside 15% of the payroll for bonus. That was a complex spreadsheet. We had values that would be rated on a 0-10 scale; like profitability, proficiency, effort, how easily replaced, growth, etc. with a salary variable multiplier to scale it appropriately (also had a backcheck to ensure we weren’t lower than 10% of their salary for the lower wage employees like admin so we could bump it). The end of which cranked out what percent of the overall they’d get. Note; owners are also employees too, but it's also based on the $60k salary of mine.

All this resulted in me having somewhat complex personal taxes. I’d have the “risk bonus,” year end bonus, profit share, and salary on income statements as well as taxes on things like personal use of corporate vehicles that show as another bonus and investment income from the loans. You’ll want an accountant.

Oct 26, 21 12:37 pm  · 
4  · 
mightyaa

my edit didn't take. Should also lolz note your W-2 will be insane. Like showing you made $300k because it won't reflect the huge six digit loan you put back into the company. We did it this way because at the time, my personal taxes would be less than the corporate tax.

Oct 26, 21 12:47 pm  · 
1  · 
proto

thanks for sharing all that

Oct 26, 21 1:08 pm  · 
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mightyaa

All of it is about passing a sniff test in an audit… So it doesn’t look like you wanted a personal watercraft, and just cut yourself a check from the company account; you must keep corporate and private separated to avoid personal liability. It’s backup for ‘why the check was in this amount and issued to you’ and that you used it to by that yacht was your personal choice what to do with that bonus… lol, and the smart ones make the yacht a corporate vehicle and use it for primarily corporate use; entertainment, travel, meetings, hotel rates, lolz.

Oct 26, 21 3:42 pm  · 
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RJ87

Corporate write offs are something most people don't fully understand / utilize. Not paying an extra 30% on cars, gas, boats, planes, etc.

A $2 item costs $2 instead of $2.30.

Oct 26, 21 3:59 pm  · 
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Wood Guy

My former employer was a C-corp residential design/build firm. At the end of the year my boss would take 10% of net profits and divide it up among the employees, using a secret formula based on hourly rates and how long we had worked there. Probably not what you meant by profit-sharing but it was low-tech and worked reasonably well, aside from employees being disgruntled when the boss' "investments" into the company (i.e., starting a cabinet shop) wiped out the profits we had all worked hard to achieve. 

Oct 26, 21 1:28 pm  · 
2  · 
betonbrut

I work for a large employee owned general contractor and that version of profit sharing is based on stock ownership. Basically, the board of directors makes 2 decisions at the end of the year based on performance; adjust the stock price and set the dividend amount per stock. It is a bit more complicated than that... but at a high level it is one way to structure proportional profit sharing.
I have never been a shareholder at an architecture office, but the ones I have worked for had a handful of shareholders that had access to the net profit at the end of the year. This was like 4-10 shareholders (not all equal shareholders) in a 50-100 person office. The cost of becoming a shareholder was different at different firms, some had a very low cost of entry and thus when you left or retired, a small amount of money was paid out to you. Others acted more like an investment, so larger upfront buy-in or phased buy-in and then when you left/retired, a larger payment was due.
Not sure there is a right or wrong structure to all this, but you should be thoughtful about how it all is set up and in the end, it is about incentivizing folks. What that means is up to you!

Oct 26, 21 1:43 pm  · 
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RJ87

We've always had a very healthy bonus system at our office (17 people). In plentiful years the bonuses go up, in lean years they go down. The owner has always felt strongly about giving fairly large yearly bonuses rather than frequent raises, because it gives the option to reduce costs in bad years without firing people / handing out pay cuts. Two years or so we started receiving "profit share" deposits to our 401k plans yearly around tax season. But it's just a way for the owner to reduce his tax hit when depositing heavily into his 401k plan, he quite literally saves money by giving us money.

I tend to subscribe to the idea that bonuses & profit sharing models are extra funds that come directly out of the owners pocket. We're paid a salary to do our jobs. True profit sharing models are strange to me, I don't know why you would ever do it as an owner.

Oct 26, 21 2:08 pm  · 
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tduds

Personally I believe in giving employees an ownership stake in the product of their labor. But that's because I'm a dirty socialist.

Oct 26, 21 4:00 pm  · 
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RJ87

I grew up hearing my dad, who owned a small business, say "I don't get paid, I just keep what's left." So I think that's influenced my way of thinking over the years. If you want to be a part of ownership that's fine go start a business or buy into one willing to have you. But don't ask me to get paid & also keep part of what's left. Ownership is feast or famine, that's the risk.

But to each their own, it's just my way of thinking about it.

Oct 26, 21 4:09 pm  · 
1  · 
tduds

To clarify: I don't mean to insinuate that my preference is "the right way", just that it's my preference.

Oct 26, 21 4:12 pm  · 
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RJ87

How dare we be civil, that's not how we're supposed to internet.

Oct 26, 21 4:15 pm  · 
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burgerbarn

I do like a co-op model where employees own the company they collectively build up (essentially dissolve needless hierarchy). More risk, more reward, all are equally vested in long-term success and that includes hiring and general welfare of everyone. 

Simply sharing profits means little besides more money. Do workers have a say or stake in the decisions or are they still pretty much still captive employees as anywhere else? A lot of these employee-owned systems seem to be set up like private stock distribution.

Oct 26, 21 4:22 pm  · 
5  · 
square.

agreed with the coop model- in a discipline such as architecture, one that requires many hands to deliver the end product, it's a no brainier. on the flip side, if i'm simply given the same check every week, and have no say in either the projects we choose to do, or the project i want to work on, or how i work on them, and at the end of the day i get little to no credit for my involvement (in the public realm), why should i invest anymore than is simply necessary to get the job done?

in other words, i'm "invested" as much as i'm paid to be.

Oct 28, 21 2:15 pm  · 
1  · 
LadyM

Great comments. My firm is 12 people firm, I believe to keep good employees that have good acumen for business also I need to change my model to profit sharing. Also, by offering a good profit-sharing model I feel I can offer employees a bit lower than industry salary with hefty compensation from the profit pool.  So on a good year, they will make much better than industry salary and on a bad year, they are sure to have a job with a reasonable income. 

I agree account clarity has to be there for transparency and employee confidence. Our financial team is strong and they have created amazing business intelligence dashboards for us which allows us to have clear visibility on profitability of each project, each project team,  down to the profitability of an individual employee at any given point in time.

My initial question was just about profit sharing (not shareholding) but I believe at some point in a companies growth part this needs to be entertained.  The model I am currently refining and hoping to implement by the start of next year gives a very clear path to employees on how to grow and the growth path to becoming shareholders ultimately if they so desire. By the way, I am taking a lot of advice from the large and small law firms which are very similar to our architecture industry. 

Oct 28, 21 4:14 am  · 
1  · 
Wood Guy

You might consider setting up a B-corp, aka employee-owned. I know the founders of a few firms who have done this: https://www.southmountain.com/who-we-are/the-company/

https://www.revisionenergy.com/we-are-a-certified-b-corp/

Oct 28, 21 8:26 am  · 
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burgerbarn

One thing I'd say is if you are offering less than market salary or try to play that work-hard-earn-more game, don't expect everyone to stay in bad times. You listed a ton of analytics-driven keywords that just sound overbearing and turn employees into numbers. Which kind of makes this whole thing a moot endeavor as it's more in line with adjusting salary expectations than giving employees additional benefits.

 Profit-sharing should be something on top, not to compensate for a lower base. What is reasonable income to you may not be for someone else who worked hard but didn't reap the rewards due to firm management. If I was applying, that'd be my view.

Oct 28, 21 12:16 pm  · 
3  · 
z1111

Agree 100% with burgerbarn. That would be a huge red flag. You will get exactly 0% loyalty. Imo this is not a way to create a cohesive team.

Oct 28, 21 2:30 pm  · 
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reallynotmyname

You might have some limited success recruiting upper and mid level people who understand financials. Entry level noobs will always go for the biggest salary offer.

Oct 29, 21 2:09 pm  · 
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LadyM wrote:

“Great comments. My firm is 12 people firm, I believe to keep good employees that have good acumen for business also I need to change my model to profit sharing. Also, by offering a good profit-sharing model I feel I can offer employees a bit lower than industry salary with hefty compensation from the profit pool.  So on a good year, they will make much better than industry salary and on a bad year, they are sure to have a job with a reasonable income. “

You will not be able to keep or attract good team members with this type of pay structure.  Architects are NOT salespeople   While our talent and skills can attract clients we’re not going to be able to bring in work when the economy has a downturn. 

LadyM wrote:

“I agree account clarity has to be there for transparency and employee confidence. Our financial team is strong and they have created amazing business intelligence dashboards for us which allows us to have clear visibility on profitability of each project, each project team,  down to the profitability of an individual employee at any given point in time.”

This isn’t anything new.  Standard accounting software allow team members to do this.  While it’s important for individual team members to know where they are in terms of billable hours on a project it’s asinine to have them concerned about their profitability.  That is the concern of the project managers and owners. 


LadyM wrote:

“My initial question was just about profit sharing (not shareholding) but I believe at some point in a companies growth part this needs to be entertained.  The model I am currently refining and hoping to implement by the start of next year gives a very clear path to employees on how to grow and the growth path to becoming shareholders ultimately if they so desire. By the way, I am taking a lot of advice from the large and small law firms which are very similar to our architecture industry.” 

This is a good idea.  Personal ownership and profit sharing of a company will be more of a positive impact than profit sharing alone. 

Oct 28, 21 1:56 pm  · 
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