How to set up a profit sharing plan

A good PSP should be easy to understand, versatile, and reward people for over-delivery.

Resist the urge to overcomplicate it. The harder your plan is to remember, the less effective it will be.

Here are the basics. 

1. Pick the goal you want to chase

“Show me the incentives and I’ll show you the outcomes.”

That perfectly describes profit sharing plans. 

If you’ve aligned your business goals and your profit sharing plan, you’ll get results. But if you’re incentivizing the wrong thing — say, incentivizing profits when you’re chasing growth — then it will come back to bite you.

Example PSP objectives could be:

2. Choose your model

While you can set up a PSP with incentives like stock, options, or retirement contributions, I recommend small businesses stick to cash. It’s a lot simpler.

The most common PSP structures are:

Then, decide how you’ll distribute it:

(If you’re introducing different weights, the math starts getting a little crunchier — we’ve got a PSP Calculator tool in Scalepath for that.)

3. Define the rules

Specify clear criteria that determine which employees are eligible to participate. Consider factors like job role, tenure, and full-time/part-time status.

In general, senior-level employees are more motivated by (and value) PSPs than entry-level or part-time employees.

4. Inform/educate eligible employees

Make sure everybody understands the program, how it works, and why you’re implementing it. 

Give them a chance to ask questions and clarify.

5. Evaluate and adjust

Keep an eye out for employee feedback. Act on constructive suggestions to improve the plan.

If few people are on track to earn the PSP, find out why.

A final word of advice

Talk to your lawyer and accountant whenever you’re doing anything with pay.

Each type of PSP has its legal and tax implications, so make sure you’re up to speed ahead of time.