Profit sharing / bonus / small business

[countthestars]

If your company has profit sharing or a bonus structure, can you share with me a bit on how it's calculated? Is your "target" a percentage of your salary? Is there always a bonus pool or profit sharing opportunity, or is it just if profit for the company is at or above X% or $X?


H and I purchased a small business and we are revamping the commission structure for the salespeople. The new commission structure will be a lower percentage of their current (salespeople currently make ~26-29% of profit on average), but with the opportunity to make up some of what they're losing in profit sharing. Salespeople here currently make "too much" - there is not a big incentive to go get new business because if you hit one or two big accounts, you are set for a few years*. We need our salespeople to be hustling both for the big accounts and smaller accounts for a few reasons:

1) we are going to get swallowed whole by our competitors if we don't grow

2) we need to reinvest in the company because this has not been done in many years. Our sales systems are extremely outdated and clunky, and we need to update our marketing to be new and fresh.  

3) we want all employees to feel an ownership for the work we do and for all employees to have a better opportunity to prosper here

4) we have a large business loan to pay back and can't afford to be paying out such large commissions, especially in COVID times

*Note that really only 2 salespeople will be affected by the lower commission structure - H being one of the two. The other is a salesperson who has been complacent for years and we would be okay losing, so we are comfortable lowering commission structure in this case. We also have sign off from our lawyer and HR rep. 

Thanks in advance for any info you can provide! This isn't our area of expertise so anything helps. 

[Poppy]

I don't know how our sales people's commissions are structured. I work in product development and if the company is profitable enough in a given year, they pay out a 10% of salary profit sharing bonus. It's not transparent but they've always been very fair in all dealings, so I trust them. Also there was only one year so far where the profit sharing was reduced.


It seems like you have a good case for the commission restructuring, and it makes sense that existing structure will be revisited since ownership has changed. GL.

[tcu2003]

Not a sales company, but my company generally targets 1% of salary for profit sharing for most engineers/tech staff and support staff. We also get annual bonuses, which can range from 5-10% of salary depending on the year you had (ie how you performed compared to your peers), role in the company, and tenure.

Not related, but they also have a 5.25% 401k match if you are contributing 9%.

[k3am]

My bonuses tend to range from 20-40% of my annual salary. They are based on a combo of individual performance, division performance, and company performance. They are.. a big deal.

If they messed with my bonus structure, I'd be pissed. But it sounds like you're willing to lose the only person it would effect. If that's the only one person besides YH that it effects, will it make enough of a difference? If this person is complacent and you wouldn't be upset to see them go.. why not just see them go?

I am not sure if what you're saying is that the change would effect more sales people than the one you mentioned, but based on their performance, they wouldn't really notice a difference. If that's the case, just keep in mind that messing with a bonus, even just optically, is hard on morale and a risk.

Are there different tax implications for the employees and the company for paying it our via profit sharing vs. bonus that need to be considered?

[rooster222]

I don't know all the ins and outs but my dh's company has profit sharing. Every person in the company gets the same percent. It's usually 10-12% of salary, depending on the company's profit for the year. My dh is a sales director but his bonus is not at all linked to his profit sharing.

[preppy]

I’m not in sales but I at my organization our bonus targets have a specific % based on your cohort. I think it’s as low as 12% for entry level but upwards of 50% for leadership. We have set criteria that fund the bonus pool. So if the overall company hits at 100% you get the full payout and it’s scaled up or down. It’s a big deal and it’s a large portion of what I bring home each year at this point in my career.

[juliej]

Aug 24, 2020 17:23:48 GMT -5 preppy said:

I’m not in sales but I at my organization our bonus targets have a specific % based on your cohort. I think it’s as low as 12% for entry level but upwards of 50% for leadership. We have set criteria that fund the bonus pool. So if the overall company hits at 100% you get the full payout and it’s scaled up or down. It’s a big deal and it’s a large portion of what I bring home each year at this point in my career.

This is how it works at my husband's company (in the top 20 in revenue in the US, though - so not at all small). He's an engineer, so not in sales. But your annual bonus is based on your position's "band," and the bonuses range significantly as you move up (he moved up a band earlier this year and his bonus jumped 8 percent). He receives an "award summary" each year with an estimate of his total compensation, and the annual bonus appears as a "short-term incentive." If they company hits their target at 100%, he'll get that amount. Over or under their target, and his STI scales with it. 

[goldengirlz]

Also not in sales (or small business) but our bonus targets are a percentage of salary — and then half of that depends on your individual performance and the other half is company performance.

In flush years, bonuses were paying out above 100%.

So if you had a $100k salary with a 15% bonus target, and you exceeded your targets by 10% and the company exceeded its own targets by 20%, your bonus would be $8250 based on your performance and $9000 based on company (or $17250).

[thebreakfastclub]

Im not in sales but my bonus max is 33% of my salary in my job band. The pay out can go down based on how the total company did. Last year we got 80% of whatever % we are entitled to. Of course the execs make like 500% of salary, but we all were prorated the same. At my last job, your % was weighted 30% company goals, 70% how you specifically did. So you might not get much of a bonus if your book of business was tough.

Based on point #3, sounds like they're prospering with less effort, so I think there's going to be push back. I think I'd want to see my compensation as 2019 actual vs how it would have looked under the new structure to have confidence in it.

[countthestars]

Aug 24, 2020 14:09:03 GMT -5 k3am said:

My bonuses tend to range from 20-40% of my annual salary. They are based on a combo of individual performance, division performance, and company performance. They are.. a big deal.

If they messed with my bonus structure, I'd be pissed. But it sounds like you're willing to lose the only person it would effect. If that's the only one person besides YH that it effects, will it make enough of a difference? If this person is complacent and you wouldn't be upset to see them go.. why not just see them go?

I am not sure if what you're saying is that the change would effect more sales people than the one you mentioned, but based on their performance, they wouldn't really notice a difference. If that's the case, just keep in mind that messing with a bonus, even just optically, is hard on morale and a risk.

Are there different tax implications for the employees and the company for paying it our via profit sharing vs. bonus that need to be considered?

Good questions! I was trying to keep my explanation simple in my OP but should have included more detail for you guys.

- There are currently 3 salespeople and we are in the process of hiring one more. We have two other good candidates that could replace Salesman A if he chooses to leave.

1) Salesman A has been with the company for 30 years and is approaching retirement. He has been complacent for many many years and would like to ride out his last couple of years making big money from projects that he sold in the past few years. While doing this though, he is not currently making his stops or putting much effort into keeping up with or building up his territory, and competitors are stealing business from him. We have considered letting him go, but given his age and H's long standing relationship with him, we have decided to present the new comp structure (which will not be good for him if he continues to be complacent but could get back to a good place if he's willing to hustle). From here, he can decide whether it's worth sticking around for a few more years and putting in the work, or if he'd like to retire now. 

2) Salesman B is my H - his pay will be cut drastically as well under this new structure, but we will make that up via my salary and dividends.

3) Salesman C is a valuable employee who carries a few other job functions, so his salary is less commission-heavy. He will move to the same lower commission structure but will have a higher base salary and will make up for any commission loss in bonuses. We will assure him that he will not make less under the new structure. 

4) New salesman will be under new commission structure. His territory is expected to pay ~$80k-$100k under the new structure, plus the opportunity for bonus. This is competitive for the role/territory and there is enough opportunity to go up from there. 

The net goal is to share the wealth of Salesman A and H across the company, and also to motivate our sales employees to actually get out and sell and service their territories, because Salesman A in particular has always just done really well by winning one or two big contracts a year when we really need to be doing more than that. 

I have a question in to our accountant on the tax benefits of the options! 

[woowoo]

I can't share specifics because it's propriety but I've been in Sales for 20 years so this is a pretty important topic for me.

Most of our sales people have a base salary plus bonus based on two factors - individual performance and team/business unit performance. The individual component of the bonus makes up the great majority of the plan and there is a quarterly bonus plus an annual bonus. Quarterly bonus range from 10-30% of income depending on the position and Annual bonuses range from 20% to uncapped. Booking or Sales goals are based on NEW business only, although we do get a lot of repeat customers in our business so sales people with longevity can certainly have an easier time.

What I have valued the most in the past (and what I would look for when interviewing) is that if your yearly goal is over a certain threshold and one of the higher goals in the organization, you are uncapped for the Annual component of your bonus. Sales people become very motivated sales people when they know that, while they carry a higher goal, exceeding that goal by a wide margin can be very lucrative.

My recommendation is to split the structure into two components - new business (the greatest portion of their plan) and either existing business OR total health of the organization. This way, Sales people still can benefit from the past business they have brought in, but they are mostly incented to bring in new business. And if you make the annual component of their goal that is tied to new business uncapped, you are giving them a clear message that A) this is where their focus should be and B) they will be compensated for an unlimited amount of new business.

My #1 recommendation is to keep things as simple as possible. Bonus plans with a million different components, thresholds, etc are demotivating. I love that my team can calculate their bonus on their own at any time based on their productivity.

Feel free to PM me with more questions.

[flygirl]

We have a target % of our salary if we meet our company set goals, and then it’s adjusted based upon if the company was profitable with the business we get. So if someone makes 50k and their target bonus is 10% of salary, they would get $5K, but if profits were poor, this is adjusted by how far off we are, for example, 10% more losses, then bonus would be 5K*.9. Or if we were 10% more profitable, 5K*1.10.
This assumes that you meet requirements for your job function as well.

[k3am]

countthestars, that helps. I am not a fan of carrying dead weight. It is, generally bad for morale of coworkers as well as the company's bottom line. My initial thoughts would be to just be done with him, but knowing that it's such a small company AND that YH has a relationship with him that you'd like to keep on good terms, I can understand why you wouldn't go there right away. It seems like a reasonable compromise, and it seems well thought through.

[k3am]

My old company had a.. very complicated formula for bonuses, and then a discretionary component always came into play. So individual and division performance factored into it, as well as where we hit plan - base, target, stretch, or max. It was honestly so complicated that no one understood it. Even the managers. Everyone I talked to always felt cheated.

My new company has.. seemingly no formula. My division is very, very, very small compared to the old one. I have no individual goals, but we do have divisional goals (and.. I'm the only one who does new business, so if the division doesn't hit them, it's obvious why.) All I know is I get a check, I'm usually happy with it, but I don't work throughout the year and adjust my efforts as if it's going to effect my bonus. (I.. work hard regardless. I don't think it would make a difference in my case.)

Hopefully you find that elusive middle ground.

[mokes]

We have a significant amount of performance-based comp across the company. Basically there are 4 "bonuses" -- one is based on achieving individual goals, two on overall company performance metrics and one on client satisfaction.

Additionally for those in sales roles, we have a two-fold commission structure -- a % of the initial contract and smaller percentage of any subsequent contracts, then a percentage of profit on that client that lasts 24 months (decreasing % over time).