Guest Column: Profit Sharing: The Greatest Incentive of All

Years ago, I read a short article in an in-flight magazine. It ignited my career and changed my life.

The small publishing company I had started was about three years old; we had no capital and we were losing money every month. The article I happened to see was about a Swiss hotel that had been losing money, as well. The building was run down and employee morale was low.

The owners had interviewed a potential new manager, who said if he was hired for the job, he would implement one simple formula: A third of the profits would be plowed back into the hotel for renovation, one-third would go to the owners, and one-third would go to the employees.

The owners objected at first, but the prospective manager was adamant; if they hired him, that would be the policy. “Besides,” he reminded them, “you’re not making any money at all! One-third of something is far better than 100 percent of nothing!”

The owners hired him, and he announced his profit-sharing formula to all the employees. The changes in the staff were immediate. Service improved dramatically. “Shrinkage”—a euphemism for theft”—and employee turnover dropped substantially. After the first year, the company was back in the black and employees received a profit-sharing bonus worth about two weeks pay. Seven years later, when the article was written, the employees’ bonuses equaled almost eight months pay. In cash.

The employees were ecstatic, as were the owners. The customers got much better service in a far more beautiful environment. The hotel sparkled. It was a win-win-win-win arrangement”—for employees, owners, customers, and the hotel itself.

After reading the article, I went back to my little company and told the employees I was instigating a profit-sharing plan, as soon as we were able to make a profit. We would retain in the company whatever percentage of profits our bank and accountant felt was necessary (over the years, this has rarely been more than 10 percent of our profits), and whatever was left over would be split 50-50 between owners and employees.

There was an immediate change in the corporate culture. Everyone started thinking and acting like an owner. Every employee, if motivated, can either cut costs, increase sales, or both. Profit sharing turned out to be the single greatest thing we did to create incentives for employees. The advantages were obvious: profit sharing turns a poor employee into a good one, and turns a good employee into a powerful creative force contributing greatly to the bottom line.

Most book and audio publishers have a five to 10 percent pretax profit”…if they’re well managed. Our company has pretax profits that range from 20 to 36 percent, year after year. It’s obvious to me that, because I give half my profits to my employees, we make far more than twice the profits.

Profit sharing motivates people. One new employee researched our 800-number phone system, all on her own, because she thought maybe her previous employer had a better, less expensive system. She ended up saving us about $80,000 a year. We immediately gave her a bonus of $8,000, and remembered her contribution again at the end of the year when it’s time for profit-sharing bonuses.

It was the same with our part-time guy in shipping: He came into my office one day and said, “Marc, I found a cheaper shipping envelope that’s just as good as the ones we use. We’ll save about $12,000 a year, and that goes right to the bottom line, right?” He’s thinking like an owner, because he gets rewarded like an owner. He works two part-time jobs, and because of our profit sharing, he has been able to buy a house in Marin County, Calif.”—one of the most expensive real estate areas in the country.

Every business should have profit sharing, with every employee. I’ve never been able to find any exceptions to this. The Post Office should have profit sharing. Every big corporation, along every little mom-and-pop business with one part-time helper, should have profit sharing.

I love these studies showing employees are motivated more by appreciation and acknowledgment than they are by money. I don’t believe them for a minute, though. Maybe an employee will say that to an interviewer, but nothing motivates an employee more than a fat check. Give them a good percentage of the profits, as well as acknowledgment for a job well done, and you’ll have a motivated employee.

I tell my employees that one of my goals is to make them rich, over time. I’m not doing this out of generosity or out of the goodness of my heart. I’m doing it because I know it is the best way for me to create tremendous financial success—both for my company and myself.

Note: This column was based on the book Visionary Business: An Entrepreneur’s Guide to Success. Copyright 2009 by Marc Allen. Printed with permission of New World Library, Novato, Calif., www.newworldlibrary.com, 800-972-6657, ext. 52.

Marc Allen is the co-founder of New World Library, as well as a seminar leader, author, and composer. Visit his Website at www.MarcAllen.com.