Why Your Profit Sharing Program Isn’t Working and What You Can Do About It

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Jim cares about his employees; he knows all of them by name. Business is booming, and he wants his team to share in the financial success. To accomplish this, he develops a profit sharing program, giving employees a cut of the loot at the end of the year. When he announces the program, he gets a standing ovation. After the announcement, Jim sits back in his office, taking comfort in the fact that he’s done everything he can to align his team’s financial success with that of the company.

Jim and his team successfully launch several new products, but one day Jim realizes the low-hanging fruit has all been picked. The next product will take several years and a lot of money to develop. He calls a meeting to make a decision on whether or not to proceed. His executives line a long boardroom table. Jim brings the meeting to order and outlines the issue. He asks for ideas. A heated debate starts. Jim loves when his team has productive disagreements, but after a few minutes, Jim realizes the conversation is revolving only around profit. The company’s core values stare down at him from a plaque on the wall. Jim wonders if his team wants what’s best for the company, or if are they just thinking about their share of the profits?

The comfort Jim previously felt after assembling his team vanishes. He feels he is the only one who really cares about the company as a whole. He adjourns the meeting abruptly and without consensus. He returns to his office and shuts the door. Now he has to make the decision by himself…alone. For several minutes, he feels anger towards his executive team, but then he realizes this is all his fault. He created this tangled web of economic incentives using a handbook of business best practices. In doing so, he had the arrogance to think that he could foresee every situation. Clearly it is a fool who thinks he can predict the future, but this mistake snuck up on Jim camouflaged in magnanimity. He unintentionally distracted his team with the promise of cash.

By definition, incentives incentivize us to get to a certain, specific outcome. But the world is too complex to predict what problems we will face or what situations will arise. Creating economic incentives is a losing battle. We will always be one step behind the next unforeseen dilemma, and as a result, so will our incentive programs.

Despite what we are taught, economic incentives do more harm than good in most jobs. Monetary rewards distract from the powerful intrinsic motivators. Dan Pink calls pay a hygiene factor, meaning, like hygiene, it can only be a bad thing; it can never be good. Have you ever been complimented on your deodorant? With that in mind, a better strategy is to keep money off of the minds of your employees. That way you can truly encourage every single one of your team members to think and act like the CEO. Under these conditions, the scene at the beginning of this article starts to look far different. If none of the executives are thinking about their pay, you can rest assured they are much more likely to be motivated by the intrinsic drive we humans have to be successful.

I would encourage you to be humble. Understand that you cannot predict the future, so don’t try to implement a system that assumes you can. Try and take pay off the table. The best way I have found to do this is just a simple base salary. It’s not perfect, and it’s not exciting. But that’s the point. There are no windfalls tied to certain events, however you have the flexibility to reward your team for thinking and acting like the CEO. If you can do it, so can your team. Just make sure you don’t get in their way.