Equity or Profit Sharing? What’s the Right Way to Reward Employees?
In today’s competitive marketplace, it’s important to consider key differentiators for your company when it comes to attracting (and more importantly, retaining) key members of your team.
Both equity and profit sharing send the signal that “You’re a direct part of how these profits happened, so we want to share them with you.”
But which one is right for you?
Key Staff
While we advocate keeping cultural fit in the forefront of your mind when you hire, even those who fit the best with you may not be with you long term. Life changes or spouse relocations can intervene and take some of your most talented people away.
In most small businesses, it doesn’t make sense to do profit or equity sharing with every single person in the company, but rather with those who it would be devastating to lose.
The difference
Profit sharing can include equity, but it usually just means sharing a proportionate share of “profits” (however you determine that at your company) based on a formula everyone understands ahead of time.
This can also add extra eyes to your financial statements who are now at least slightly more incentivized to look for ways to save or opportunities to grow.
If your business is younger and still growing, this is a positive way to demonstrate your core tenets and that’s particularly attractive to millennials who enjoy being valued.
Equity sharing is actual long-term ownership in a company through stock, stock options, membership shares, or other vehicles. It involves serious legal and accounting advice and often a vesting schedule that ensures employees don’t leave with those shares prematurely.
If your business is mature and stable, this might be a way to lock up some of your best people for some time to come.
A Caveat
Rookie business owners often make the mistake of thinking that their best and most engaged employees are necessarily interested in some kind of equity or profit-sharing model. “Then, like me, they’ll be even more motivated to build something.”
The reality that most business owners know is that employees are meant to be precisely that: employees. More than ever there are opportunities for your employees to create “side hustles” on their own and launch small businesses.
So rather than assume such equity or profit sharing schemes would motivate or excite your employees, start with why and ask them (at an annual meeting, for example) what they think you could do to give them more opportunity to engage, earn, and stay with you long-term.
It’s just one more way to indicate that you’re an engaged owner who actually takes the time to ask questions, and even more shockingly, listens to the answers.
Check with your CPA and Financial Advisors on the tax and savings benefits of Profit/Equity Sharing. If you need assistance with connections, contact your Apex Advisor.
