What percentage of EBITDA or Profit should a company share for profit sharing?

2,623 Views | 14 Replies | Last: 3 yr ago by txcincinnatus
ForeverAg
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8:58p, 11/6/22
AG
Im a scenario at work where our small division happens to have some of the strongest financial metrics however we do not have the highest revenues, we are just extremely profitable. The Executive team has offered us a profit sharing program.

I am fortunate enough to be offered to write the profit sharing program for the company, at least to submit my ideas. The reality is I do not know what is asking too much, or leaving to much money on the table. Is there any standard of any form, or anything I am able to go off of for my first draft?
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Stive
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5:53a, 11/7/22
AG
The exec team asked the employees to propose that amount? That seems weird.
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ForeverAg
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In reply to Stive • 7:22a, 11/7/22
AG
Stive said:
The exec team asked the employees to propose that amount? That seems weird.


Agreed but I'll take it
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dlp3719
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7:43a, 11/7/22
AG
Koch Industries (which is one of the largest privately held companies in the US) targets 10% of profit as profit share after a capital charge. Exec team controls and changes capital charge and amount of capital they deem deployed as they see fit.

Chick-Fil-A is around 12%.

Most companies make it overly complex (like substracting a capital charge or adjusting for capex) so they can effectively retain control and pull it back as they see fit.

Both my example are $20+ billion companies. Revenue size of your company?

If you propose 10%, it shouldn't be seen as unreasonable. I'd look at annual capex (can't take too much profit or capex can't be funded). Id look at FMV of the company and assume equity/debt capital should get 8-10% return on their money annually before profit share to employees.
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HDeathstar
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7:44a, 11/7/22
Should be tied to the goal the company wants to obtain. There is a reason they are offering more benefits, and the new benefit should support those goals. As you note, low revenue but profitable, I would assume they would want higher revenue with the same profit margin. Sounds like they want to expand to your higher margin area of focus.

A bonus meeting increased revenue with margins consistent with historical averages, or a % share of increased revenues with consistent margins.
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evestor1
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In reply to ForeverAg • 10:03a, 11/7/22
ForeverAg said:
Im a scenario at work where our small division happens to have some of the strongest financial metrics however we do not have the highest revenues, we are just extremely profitable. The Executive team has offered us a profit sharing program.

I am fortunate enough to be offered to write the profit sharing program for the company, at least to submit my ideas. The reality is I do not know what is asking too much, or leaving to much money on the table. Is there any standard of any form, or anything I am able to go off of for my first draft?
You obviously dont work for my company where the answer is ZERO or negative ZERO!

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chris1515
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4:27p, 11/7/22
AG
in your suggestion, I think it would be valuable to include examples of other companies for reference.
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Drillbit4
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10:23p, 11/7/22
AG
Really need more info to answer this question properly. Could be 3%. Could be 15%.
Some considerations:

Total headcount and how profit sharing will be split

Profit amount per employee. Ie - you can't just say 10% if 10% equates to an 8 figure allocation per employee per year.

Profit amount relative to salary and relative to historical bonuses. I would guess backing into a number that equals the annual bonus on an average/good year, and approaching 1X salary on a fantastic year could be a good starting point.

Industry, competition and comp analysis
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AgCPA95
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7:45a, 11/8/22
AG
^ What Drillbit4 said.

I will also add in I've seen portions of bonuses based on cash flow come into play depending on the industry, but specifically in construction. Helps drive good behaviors on things like schedule of values, change orders related the scope of projects and collections which many operations folks are key figures in the process.
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Premium
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7:49a, 11/8/22
AG
Open question:

How would you profit share on $1,000,000 profit over 10 employees? 4 sales, 4 service, 2 support/manage
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HouAggie
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5:54p, 11/9/22
$15 sales
$8 service
$4 support

Simply based on my guess of their roles and contributions.
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chris1515
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In reply to Premium • 9:42p, 11/9/22
AG
I'd say it depends on how the rest of their comp is determined. If the sales guys get huge commissions up front, but the profit share is based on ongoing support years after the initial deal, maybe the service team deserves more profit share.
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62strat
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10:42a, 11/10/22
AG
I'll just chime in, my private employer's profit sharing program is 15% of employee salary, flat contribution to a pretax fund.

5 years to fully vest.

We have ~60 employees, and our payroll/bonuses are probably ~$6m, so they payout ~$1m in profit sharing.
That is on $150-200m in revenue with 5% profit, though our profit is probably more like 7%.

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In reply to 62strat • 11:20a, 11/10/22
AG
62strat said:
I'll just chime in, my private employer's profit sharing program is 15% of employee salary, flat contribution to a pretax fund.

5 years to fully vest.

We have ~60 employees, and our payroll/bonuses are probably ~$6m, so they payout ~$1m in profit sharing.
That is on $150-200m in revenue with 5% profit, though our profit is probably more like 7%.



$1M on $7.5M profit (5 percent of 150M) seems really strong at 13% of profit!
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txcincinnatus
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12:59p, 11/10/22
AG
Depends. EBITDA is a flawed metric for such a program. You should really be looking at FCF and using that as your starting point. EBITDA can be the same for two businesses, but one may have high working capital and capex needs while the other doesn't. They will have wildly different profiles and abilities to distribute cash to SHs.
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