Ask HN: The best formula for profit sharing in a small ISV? | Hacker News Reader

Ask HN: The best formula for profit sharing in a small ISV?

2 pointssimonswords824 comments

Good morning HNers,

I'm creating a plan to implement profit sharing in my bespoke software business Atlas - https://www.atlascode.com.

Each year I'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.

However...

I fear that sooner or later, my team will conclude they have no real power to affect the size of their own bonus.

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'm struggling to find similar levers to pull on the following departments:

* Software development

* Testing and 2nd line support

* Customer service and support

For each of these departments I need to identify what it is that that they do which most contributes to Atlas' bottom line. Any ideas on how to motivate these particular departments is greatly appreciated.

Alternatively, if I can't I'll still implement the profit share but it's very much "just" 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.

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.

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.

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

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

Good luck.

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.

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