
Ask HN: The best formula for profit sharing in a small ISV? - simonswords82
Good morning HNers,<p>I&#x27;m creating a plan to implement profit sharing in my bespoke software business Atlas -
 https:&#x2F;&#x2F;www.atlascode.com.<p>Each year I&#x27;d like to take 10% - 30% of the annual profit we make, and redistribute it amongst the entire team. This amount will be prorated according to salaries and percentage of the year that people worked, so every employee will receive a part of the profits amounting to an equal percentage of their salary.<p>However...<p>I fear that sooner or later, my team will conclude they have no real power to affect the size of their own bonus.<p>To avoid this I want to design a specific profit share programme for each department. For the sales and marketing department this is quite easy, I simply hook their profit share in to meeting inbound lead and target customer numbers. I&#x27;m struggling to find similar levers to pull on the following departments:<p>* Software development<p>* Testing and 2nd line support<p>* Customer service and support<p>For each of these departments I need to identify what it is that that they do which most contributes to Atlas&#x27; bottom line. Any ideas on how to motivate these particular departments is greatly appreciated.<p>Alternatively, if I can&#x27;t I&#x27;ll still implement the profit share but it&#x27;s very much &quot;just&quot; another benefit of working for Atlas, like the private health care and pensions rather than a true motivator for people to help grow the business.
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stocktech
The way some larger companies do this is by salary * target bonus * bonus
multiplier. Where the bonus multiplier is a function of growth ranging from
0-2. There's no competition between departments and the increase is meaningful
to everyone.

I think this is healthier than a separate plan for each department as then
you'll get people questioning the plan and their roles, value, etc.

~~~
brudgers
Strong ties from salary to bonus can tend to misalign economic interests when
it comes to the dirty work that makes a company successful. When the value of
the manager's bonus is substantially more than the line worker's the manager
has an incentive to push harder than the value of the line worker's bonus to a
rational economic agent. The money might be better to put to the company's
interest by incentivizing the line worker or improving the efficiency of the
line work...by 'better' I mean relative to incentivizing the manager's
economic self interests.

------
brudgers
Random remarks from the internet:

\+ Prorating bonuses based on salaries means that the lowest compensated
people will tend to get, "better than nothing" bonuses and the best
compensated people will get "buy a boat" bonuses. Essentially, this means that
no matter what you do, there are likely to be a swath of workers for whom
working hard to improve their bonus makes little or no rational economic
sense...both at the high end and the low end.

\+ Different bonus structures for different departments means that the company
explicitly values some functions over others. That's good for moral in the
operations that are highly valuable. It's bad for moral in the operations that
are at the bottom...because those employees cannot have much effect on their
bonus.

\+ Sales is always a separate animal. Sales incentives are hard to get right
because there is often misalignment between bonus metrics and what is good for
the company. Closing a bad deal may be good for a salesperson's bonus. Sales
people whose primary compensation is bonuses are more likely to be mercenary
and leave when sales slump due to outside factors (the very time when
developing leads, qualifying prospects and closing sales is _most_ critical to
the business).

\+ The description of your problem does not describe the business purpose of
profit sharing. Is it for retention? Is it to reduce salary burden? Is it for
recruitment? To increase uncompensated overtime? Without a clear business
purpose, there are no metrics by which to determine the program's success and
to fine to the details.

\+ It's ok if the program is simply out of goodwill toward employees. It's ok
if the program is to build a shared sense of mission. Those are also good
business goals. Structuring it to further those goals means thinking about the
effects that a profit sharing bonus is likely to have on individuals. It
requires thinking about how they perceive the bonus structure in terms of
fairness; the impact financial impact it has on their life; and how it fits
into a rational economic actor model. None of it is easy.

\+ Equity is probably a better way to align incentives over the long term.
Bonuses align interests only for people who are there in the last month of the
year.

\+ In cases of tightly controlled entities such as Limited Partnerships in the
real estate industry, shadow equity is sometimes used to compensate non-
partner employees (those who do not have capital at risk) based on
performance.
[https://en.wikipedia.org/wiki/Phantom_stock](https://en.wikipedia.org/wiki/Phantom_stock)

\+ The simplest profit sharing plan is each employee receiving the same
amount.

Good luck.

~~~
simonswords82
Excellent remarks from the Internet, thank you.

Addressing your points in order:

\+ So you're suggesting everyone gets an equal split regardless of salary? I
get it, that's probably fairer.

\+ Again, you're saying the same profit share regardless of role or salary,
right?

\+ Sales easy to manage but they "get" numbers more than most people. Pay them
money when they earn it. Agreeing how they earn it is the trick. My plan is to
compensate sales people in addition to profit sharing on an OTE basis.

\+ The primary business purpose was originally for motivation but to be fair I
think all my team are sufficiently motivated to do a good job. They're all
diligent and thoughtful about their work, and passionate about getting shit
done. Because of that, there's no need for the profit share to motivate them
further.

Instead I suspect it's just a way of rewarding them for their work, and have
them partake in our success meaningfully.

In other words, yes it's a good will program. On that basis if it's an equal
split of profit at say 20% regardless of salary that's fair, and somewhat
easy, to implement.

\+ Equity is a nice idea, and something that comes next when we've solidified
certain key people's roles.

\+ Shadow equity eh? I had not heard of that. I'll give that some
consideration.

\+ Here's the profit sharing scheme I think I'm going to run with, it's as
simple as you suggest: _20% of all profits for the financial year will be paid
out to all staff, split equally across individuals regardless of their salary,
seniority or, length of service. We all ultimately partake in our jobs
equally, and should therefore reap equal benefits._

