A couple of years we introduced profit-sharing within the company, however until very recently was rather subjective & unpredictable.
This year as I am less and less involved in deciding the amounts I thought that would help to bring some transparency to the process for both managers & employees.
Since I took inspiration from several companies that shared their way of doing things, all listed here: https://twitter.com/hnshah/status/1074843192825065473, I thought it would help to share what we came up with, the full guidelines are listed below and are correct at the date of publishing this post:
“Eligibility
- All employees & key contractors that worked with us for >1 year.
- Owners with more than 10% ownership who are also working in the company are excluded.
In brief
Every year we distribute between 5- 12% of our net profit to the team, and on purpose, this is not based on salary, which reflects already the market rates.
Determination of Profit Share
- The overall percentage is based on the previous year’s performance. (it’s closer to 12% if we grow profit & revenue faster than the market and closer to 5% if we decline)
- Individual amounts consider tenure, performance, and team performance.
- The maximum for one person is capped at 30% of yearly earnings.
- Any excess may be carried over, redistributed, or donated, depending on the situation.
How it is calculated?
We take X% of the net profit, we look at the total number of people, the multiplier for everyone, we add up the multipliers and divide the profit share by the total nr of units, and we come up with a base, for example, for 2020, the base was $2,500.
Multiplier Determination
- Tenure: Scaled between -0.5 (for 1 year) to 0.5 (for 10 years).
- Team Performance: Ranges from -0.5 to 0.5, based on the gap between media/product profits.
- Individual Performance vs. Expected Performance: Rated between 0 to 3, assessed by the manager.
It is important to understand the expected performance part, let’s share an example :
Warren joined the company 1 year ago as a software engineer and had a $25/hour rate. His performance was great and we have increased his hourly rate to $35 and the performance multiplier was 2.5 since he did much more than expected.
Next year, considering his performance being the same, he would get a 1x multiplier, because due to the hourly rate increase, the expectations were different and he was performing as expected.
While it may be counter-intuitive, I would expect most of the time individual performance multiple to be close to 1.
Payment Timeline
Payments are usually made in January, post-finalization of the previous year’s profits.
Examples
- Media team profit: 300k; Product team profit: 200k.
Meet Jaideep who has worked with us for 3 years in the support team, he performed as expected.
The year was a good one, we decided on a 10% profit share, we calculated the multiplier for everyone, we added them up and the total was 50, we divided the share by 50 and we got 50k/50 = 1k as a base.
Jaideep then would get: 1k x (1 (his performance) -0.2 (his tenure) – 0.1 (products team contribution) = 700$
if Jaideep would have been in the media team: 1k x (1 -0.2 + 0.1) = $900
If Jaideep had been with 7 years with us, and in the products team: 1k x (1+0.2 -0.1) = $1100.
If Jaideep would have done a great job, much better than expected: 1k x (2 -0.2 -0.1) = $1700.
If Jaideep was in the media team, did a great job, and was with us for 10 years: 1k x (2 +0.5 +0.1) = $2600.
Disclaimer
The amounts we are calculating & would pay out are what the company is paying, what you’ll get would be influenced by the taxes you’re required to pay.
It’s important to view the compensation from this program as a genuine bonus, rather than a reliable or budgetable income. The profit-driven nature of this program means that the payouts to employees can vary significantly from year to year, or may not occur at all.
Please note that this Program is open-ended, without a predetermined conclusion. However, the company maintains the flexibility to modify or discontinue it at any point.