Profit Sharing

I am a big fan of profit sharing. We use a percentage of our profit for bonuses to all the employees. Bonuses are based on each person’s effectiveness in the recent quarter, not salary.

The goal is to align everyone’s interests and it works. Everyone here acts like an owner, watching expenses and trying to maximize profit.

We do bonuses every quarter so our profitability is always fresh in everyone’s minds. A yearly bonus can be easily forgotten for about ten months out of the year.

In many ways profit sharing is better than stock options. In a private company, stock options are worthless until the company goes public or is bought out. If that doesn’t happen quickly then those magic beans are gradually forgotten in the back of a desk drawer.

In a public company, stock options are super sexy as the stock rises. But when the stock price falls below your option price it is worthless and morale crashes. Your team is at the mercy of randomly fluctuating markets.

Figuring out bonuses each quarter is my favorite part of my job. I love to see people rewarded for hard work.

About the Author:

Jeff Butterworth is the founder of Alien Skin Software. He used to create the products, but now he does marketing and gets coffee for the programmers.


  1. Ronald Woan October 12, 2011 at 11:11 am

    I like profit sharing too in some circumstances. I remember it making up 33% of my compensation when I worked retail in college.

    For startups though cash is king and I think it is often more important to preserve cash. Stock options or grants seem to be the best way to tie employee compensation with company performance without laying out cash.

    In fact with lockups, you can argue that stock options or grants better reflect long term decision making than profit sharing that usually looks backwards and rewards short term decisions.

    • Jeff October 12, 2011 at 3:43 pm

      I agree that cash is important when a company is young and fragile. However, in our case the company is 18 years old and is always profitable. We can afford the profit sharing and since we will probably never go public or sell the company, stock options aren’t as useful for us.

      Everyone here plans to be with the company for a long time, so we don’t need to worry about short term decision making. If someone here started hurting our long term interests in order to improve our short term profit we would all give them a wedgie until they stopped.

      Thanks for the insightful comments!

Comments are closed.