Profit Sharing vs. Bonuses

Mention the words “pay-for-performance” to executives and their faces take on a glow that can only be described as euphoric.

But the euphoria doesn’t last long as they try to implement variable pay plans that turn into entitlement programs.

Jack Stack, the author of “The Great Game of Business,” defines 2 types of variable pay plans:

1. Profit Sharing – This plan takes a percentage of company profits and distributes the funds on some prescribed basis.

2. Bonus – This plan is designed to make the company stronger and more competitive.  Earning a healthy profit is simply a by-product of a stronger company.

HR POINTER: The fundamental difference between the two plans has to do with the 2 or 3 numbers that drive the business.

In a profit sharing plan, people are focused on profits and often have very little knowledge of what drives profits.

With a bonus plan, employees are engaged with the critical numbers that drive the objectives of the business.  A bonus plan rewards the achievement of strategic objectives that are designed to strengthen the business, not just profits.

With a bonus plan, a company has an opportunity to engage and educate employees, rather than simply drive employees toward the ambiguous goal of “more profits.”

For a good overview of how our Monetary Recognition Program can strengthen a company, view this link on our website: http://www.yourparttimehrmanager.com/recognition-program/

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One Response to Profit Sharing vs. Bonuses

  1. Jason Buss says:

    As a recent attendee of the GGOB program, I’d like to elaborate for Jack Stack beyond the definition above.

    The Critical Number can be any number of things, best if it is something the person has the ability to really effect.

    The Principles of The Great Game of Business:

    Every Employee…
    Should be given the measures of business success and taught to understand them
    Know & Teach the Rules
    Should be expected and enabled to act on their knowledge to improve performance
    Follow the Action & Keep Score
    Should have a direct stake in the company’s success or risk of failure
    Provide a Stake in the Outcome

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