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Profit Sharing?

| Posted in Business on April 5, 2002 04:56am

Hi there,  An electriacian friend of mine is an excellent foreman for his company.  He negotiated, in addition to his wage to get 1/3 of all hours and material saved on a job.  That is if in the price there was $100,000 labour in the job and they only used say $97,000 dollars,  my buddy would get 1/3 of the 3,000 dollars saved.  He would get an extra $1,000.

Is this the same as profit sharing?  Or is this insentive bonuses?

Does anyone use any of these methods with their companyies.  It seems like it is a good idea.

Can someone explain this to me?

Thanks, Ace

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  1. User avater
    JeffBuck | Apr 05, 2002 06:08am | #1

    Don't know what this would fall under. When I interviewed at my last company....I was told a new profit sharing plan would be talking place. All the other guys said...yeah, sure....we've heard that before.

    About a year later.....a few of us were laid off....and I or anyone else in the company never saw a penny of profit sharing.

    The innitial plan sounded good on paper....but with one obvious fault.....the only ones to see if there was a final profit was the owners....the very same that would have to make the pay out!

    The deal was supposed to be.....they tracked thru weekly time cards...who worked which jobs....and on what phases. Then....if the job turned a profit......and say everything came in on budget...but framing turned the profit......And I think they meant "Extra Profit".......the guys that worked the framing protion would split the "profit"...as it would be prorated to the time ya put in.

    Sounded way to complicated to keep track of.....and I guess it was. And on a coupla jobs I was on...I know a few guys asked about the profits ..and were told This or That ate the profits up.

    I'm saying this to point out.....that if you are thinking of making an offer.....have a way that the crew can accurately track the money....and it doesn't look like you just switched accounts at the end to hide any profit. This might have been a good idea.....but it just led to resentment and mistrust.

    Another job I did both framing and trim on....the framing was way ahead ....but trim ate all that up then some....as the bidding owner forgot half the material and all the labor...for a whole house gut and addition. Lotsa framing....even more trim. I'm not doubting that the profit went away.......but the framing only guys were none to happy to lose what was almost guaranteed money because the owner forgot trim didn't stick itself to the walls!

    As an employee.....I'd say sounds great....as an owner....unless you have open books...I don't see how it could work and keep everyone happy. Jeff

       *  Jeff J. Buck/ Buck Construction/ Pittsburgh, PA  *    

    2nd Generation Buck Const, 3rd generation Craftsman                         

    1. User avater
      BossHog | Apr 05, 2002 03:54pm | #2

      I think profit sharing can be a great thing, under the right circumstances. But - As Jeff says - The devil's in the details.

      It's awfully hard to track every single job, and figure how much you made/lost on it. I think profit sharing could be beneficial to long term employees if paid on an annual basis. That also helps with retention - A guy is more likely to hang around if he knows he's got a check coming.

      For instance - I worked for a truss company who paid profit sharing. You had to be there 3 years before you got in the program. And you only got it if you worked continuously the whole year, and were still employed there the next year when they gave out the checks in March. The employees got 18% of the pre-tax profit, and it was split up based on points. You got one point for every year you had worked there, and one point for every $1,000 of salary you had recieved the year before. Another bonus was added if you didn't use all your sick time.

      This worked well for me for a couple of reasons - It gave the employees a reason to care if the company is profitable or not. Most don't. And it was nice to get a big check at the end of the year, which we would typically use to build up a retirement account and/or fix up our house. If the company had paid me that much more throughout the year, it probably would've dribbled away like most weekly paychecks seem to.

      I also think it worked well for the company in some respects. If they had a good year, it was no big deal to come up with the cash to pay the profit sharing. If they had a bad year, they weren't stuck paying higher wages all year. It seemed to help with retention - This particular company had employees that had been there for 15 years.

      The system wasn't perfect - We occasionally had guys who wanted to leave the company who would hang around until their profit sharing cleared the bank then quit right away. And some of them would complain when the owner bought anything new, saying he was trying to increase his expenses so he wouldn't have to pay out as much profit sharing. But they would also complain if he *DIDN'T* replace equipment, saying that they had junk to work with. You can't make everybody happy.

      1. User avater
        JeffBuck | Apr 06, 2002 10:08am | #3

        Boss touches on another point I had in mind. Same place had Christmas Bonuses.

        Passed out at the X-Mas party. I was there about 8 months, at that point..as a carpenter. My best buddy...a lead...had been there 6 years. I was privy to a conversation he and the project manager had.....who had been there 6 or 7 years...the last as the project manager.

        I knew going into the party that the bonus would be $100. Because the PM had argued that the leads....then himself...should get more than the carps.

        I agreed! Why should I expect the same as my buddy...that ran these half-million dollar remodels? And...following the same logic....the PM...that kept all our jobs running...shouild get an even bigger bonus!

        Guess the one owner said....$100's the "per-guy" limit.......and if any changes were made...that'd subtract from that amount. So....everyone got the $100.

        Which I was happy to have......but I could see why the other longer term guys...and those with more responsibility...would be unhappy.

        Instead of a bonus that led to loyality....this lead to internal friction. Not employee to employee...but employee to owner. Kinda defeated the purpose in my mind.

        How hard would it be to add $.50/hr to each guy and pay as a yearly bonus? Think the employee retension would pay for itself. never understood that one. Jeff   *  Jeff J. Buck/ Buck Construction/ Pittsburgh, PA  *    

        2nd Generation Buck Const, 3rd generation Craftsman                         

        1. Schelling | Apr 06, 2002 04:26pm | #4

          We considered some kind of profit sharing scheme but decided against it because of the difficulty of determining the profitability of a particular crew on a particular job, which is, after all, a function of the estimate. Even more important than this was the problem of communicating this to the employees. One of our employees worked for a company that gave out stock in the company. Our guy sold his share back to the boss but others held on to theirs but never saw a penny in profits. They were all able to sell back at a set price.

          We give out bonuses at the end of the year based on a fixed rate .50-.75 per hour of time worked during the year. The rate is determined by our (management's) arbitrary judgement on how we did during the year. There are many possible objections to this system but we have yet to have a serious complaint.

          1. georgeolivergo | Apr 07, 2002 03:31am | #5

            if a company pays 'profit sharing' directly into something like an IRA or 401k does the employee pay taxes as if the money is direct wages?

            also I remember a couple of people like Sonny talking about taking 'dividends' at the end of the year as well to avoid certain taxes (SS taxes?). can dividends or whatever they're called be considered the same as profit sharing bonuses?

            GO

          2. User avater
            BossHog | Apr 07, 2002 04:12am | #6

            Profit sharing can be set up to do any of the things you mentioned. Just depends on what the company and the employee wants to do.

          3. SonnyLykos | Apr 07, 2002 08:09am | #7

            SCHELLINGM, those dividents you referred to are realy called "distributions" - money to the corporate stock holders in lieu of higher salaries. No FICA, State or federal unemployment insurances taken out of those monies for the corporation, but the stock holders still show it as income and pay taxes on it on their personal annual IRS returns.

            The best way to ceate an excellent profit sharing or ESOP (Employee Stock Ownership Program) is to mimic one that is has already been in place for a few years in another industry, like a manufacturing company where the corporation "and" the employees have been happy with it.

            It's almost impossible to implement a profit sharing system unless the company owner has a working budget for the company and tried to stick to it, and first educates the staff about operating expenses, the estimating system used, etc. Once they know how the business is operated, then they can contribute to it's net profits because they will have understood al of the nuances of how a business exists.

            There are not too many owners who want to share that information with their staff, which is unfortunate, because their staff are really their unstated partners. Plus, once they learn the realities of owning a business they would not be so quick to leave the company to start one of their own. That in turn contributes to their own demise or burn out, ultimately due to an unrealistic opinion of what it takes to be self-employed, and worse yet, the added responsibilities of having subsequent employees.

            Edited 4/7/2002 1:11:31 AM ET by Sonny

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