Small Business Development Center

What to Do with All That Excess Cash

What to Do with All That Excess Cash

Engaging Employees through Bonuses

To paraphrase John Dunne, no business owner is an island.

If you own a successful business, some credit is likely due to a fantastic employee or, even better, a bevy of fantastic employees.

Let’s say one such amazing employee has hit the wage ceiling, but you still want to recognize her efforts. Or maybe you’re about to hire a new employee you just know will be amazing and you wish to leave room for flexibility in salary.

Cash profit sharing plans, in which companies distribute a predetermined amount of profits directly to one or more employees, can be a powerful incentive for fostering employee identification with the success of the company.

They are becoming an increasingly popular offering: as part of its National Compensation Survey, the U.S. Bureau of Labor Statistics (BLS) collects data on cash profit sharing bonus payments to employees; data for 2017 indicated that 6 percent of all private industry workers had access to such bonuses.

As opposed to retirement profit sharing plans, cash profit sharing plans are generally given to employees either in the form of a regular bonus check or as an addition to the employee’s base salary, similar to a sales commission. Unlike retirement profit sharing, cash profit sharing bonuses are counted towards the employee’s taxable income.

Cash profit sharing plans can boost employee motivation, provide an employee loyalty incentive, and encourage employees’ understanding of how their work affects company performance; further, they are distributed at the discretion of the owner.

Below is a step-by-step process for implementing a cash profit sharing plan:

Determine the objective. The chosen objective should reflect the behavior or activity desired from the employee; for instance, to increase profits or encourage employee retention.

Set bonus targets. This step should be a close collaboration between the company owner and the employee, who will work together to draft a plan that caters to both the company’s specific needs and the employee’s unique contribution to the business. The target bonus may be tied to either company financial results or individual goals. Examples of company financial results include specific revenue or profit goals, such as a 5% increase to net income, while examples of individual goals include years of service or customer satisfaction.

Establish a baseline. To preserve owner’s equity, formulate a starting point based on the owner’s desired baseline take-home income and limit cash profit sharing to profits above that figure. If the company’s owner decides he wants to take a $100,000 baseline take-home income, for example, a percent of profits above that figure may be distributed to eligible employees.

Choose a cash profit sharing figure. The typical cash profit sharing range, whether tied to company financial performance or individual goals, is from 5 to 15 percent of pre-tax profits; as noted above in step 3, the owner’s desired baseline take-home income may be deducted from the total.

Decide whether to institute a vesting period. Vesting periods, which require employees to work a certain length of time to become fully eligible for a benefit, can encourage employee retention. If a vesting period makes sense for your business, clearly outline the length requirement at the start of employment.

Define the allocation date. Incentive plans may be allocated on an annual, quarterly, or monthly basis. Bonuses tied to company financial performance are typically paid annually, when the numbers are actually calculated; however, more frequent incentive calculations may produce greater short-term results. If an annual allocation makes the most sense for your business, the amount may still be distributed on a quarterly basis to serve as a more immediate reminder of the benefits of the program.

Institute a review date. Cash profit sharing plans need not—and should not—be set in stone. Establish a concrete date, typically once per year around the start of the fourth quarter, to review the plan and modify it as necessary to reflect any changes. If the plan is revised, make sure there is ample time to alert the employee to the changes before they take effect.

Develop a written plan. Ensure that the plan clearly outlines the basic terms, who is eligible, how the bonus is calculated, and length of employment requirements. It should also note the rules for unusual situations, such as the employee going on leave, becoming disabled, or leaving the company prior to the allocation date.

If a cash profit sharing plan is not the best-suited bonus structure for your company, numerous alternatives exist:

Gain sharing. Most suited to manufacturing industries, gain sharing is designed to award productivity and product quality; bonuses are granted for statistical improvements in those areas.

Spot bonus. As the name suggests, these informal awards are distributed on-the-spot for accomplishments that merit special recognition.

Non-cash bonus. Generally presented in the form of a framed certificate or trophy given at special ceremonies, execution of these awards is key: they should be appropriate to the occasion and, when executed well, will be coveted by employees.

Sign-on bonus. A one-time incentive for joining the company, sign-on bonuses typically serve to create goodwill and buy out any compensation left on the table from a former employer.

Milestone bonus. This bonus is earmarked for the achievement of a specific goal or completion of a certain project, and can be used to encourage employees to meet deadlines.

Referral bonus. Finding qualified employees can be a difficult task; referral bonuses enlist current workers in the search for talent, reducing or eliminating the need to hire recruiters.

Retention bonus. If a company is going through a merger or acquisition, or has a project that must be completed, retention bonuses may be offered under these unique circumstances to ensure continuity.

Holiday bonus. The most common of all of the bonuses outlined, a holiday bonus can be a small gift or more significant cash payout recognizing hard work throughout the year.

No matter what bonus plan is chosen, it pays to remember that engaged employees are productive employees!


Authored by: Janis Vander Ploeg-Wolfe