Profit-Sharing Plans: Variable Pay & Executive Compensation

Variable pay and executive compensation are both types of profit-sharing plans that your company can utilize. They allow employees to share in the financial successes of their respective companies during years of profitability. Therefore, this plan is still used to incentivize employees, encouraging them to work hard, be productive, and deliver quality results, as a way to aid in the financial growth of a company.

If you’re a company that’s looking for an additional plan to add to your benefits package that will also boost your bottom line, take a look at the information on these particular plans below to determine whether they’re the right fit for your business.

Defining Variable Pay and Executive Compensation

Variable pay is typically delivered in the form of monetary rewards (e.g., commissions) to employees who have exceeded predetermined performance goals. Executive compensation can include several different benefits. However, within the context of profit-sharing plans, the work an executive does to bolster the financial performance of a profit sharing company is also linked to a financial reward (e.g., bonuses). Unlike other benefit plans, such as phantom stocks or employee stock option plans (ESOPs), variable pay and executive compensation are usually paid out to the employee directly on an annual basis.

The Advantages and Disadvantages of Variable Pay and Executive Compensation Plans

These particular profit-sharing plans can serve as great motivators for employees who are encouraged to be more productive and better their overall work performance due to the financial incentive available. Maintaining a high level of productivity and delivering quality work can ultimately help your business achieve its short and long-term goals.

However, these plans can also breed an unhealthy amount of competition among employees and disrupt an otherwise harmonious work environment in instances where the variable pay of certain, or all employees is disclosed. In these instances, team members can have trouble engaging in a collaborative work environment. Also, it can be challenging to sustain employee performance in the long run using this method, especially during the years when variable pay isn’t distributed because the company is not as profitable.

Plan Creation and Implementation

Creating and implementing a profit-sharing plan that involves variable pay or executive compensation appropriately is crucial to the success of the plan. Listed below are steps you can take to successfully develop and execute a profit-sharing plan that incorporates one or both of the benefits mentioned above:

Identify your business goals.
Determine what you are trying to achieve with this plan. In doing so, you’ll be able to create a series of business objectives that will serve as your guiding light as you work to grow your business. These goals can also be used as a reference point as needed.
Determine your metrics.
Creating ways to measure how close or far away you are from reaching your business goals will help you track your progress toward achieving said goals. Also, developing metrics will help you identify ways in which individual achievements from employees should be measured and rewarded. Under variable pay and executive compensation plans, employee bonuses are paid out in an amount that’s based on data points, such as the number of new clients signed, or the amount of sales revenue earned.
Inform the appropriate parties.
Make sure you let your employees know how these plans will function (e.g., eligibility requirements, how compensation will be earned and delivered, and so on). It’s also crucial that you communicate your company’s objectives to your employees so that they understand what they’re working to achieve. Doing so can help further incentivize them and give them a better understanding of their impact on the company’s financial success.
Track the plan’s progress.
Once you have created a profit-sharing plan document and begun executing said plan, you must make sure your plan is pushing you closer to your business objectives. You can achieve this by tracking your company’s progress through the metrics mentioned above, as well as checking in regularly to ensure your measurements and strategy are still aligned. From there, you can adjust your approach as needed.

If you do choose to incorporate either or both of these profit-sharing plans into your employee benefits package, make sure you offer the benefit consistently to ensure your employees stay motivated. Also, maintaining a certain amount of confidentiality around the variable pay and executive compensation your employees receive can help uphold a work environment that’s conducive to teamwork. In short, when approached correctly, these profit-sharing plans can benefit both your business’s bottom line and your employees’ bank accounts.

Summit CPA Group is a distributed virtual CFO firm with a non-traditional approach to accounting. Their amazing team of CPAs and accountants provide professional Virtual CFO Services and 401(k) Audits for companies all over the United States—many of which are remote companies as well. Contact our office at 866-497-9761 to schedule a consultation today!