Jack Stack, founder, president and CEO of SRC Holdings, and the author of The Great Game of Business and considered by many to be the father of open-book management, has this to say about discretionary profit sharing plans (bold emphasis mine):
By profit sharing, I mean the practice of taking a percentage of a company’s profits, putting it into a pool, and disbursing it to the company’s employees, usually sometime after the close of the year. Understand, I’m not saying that this is a bad thing to do, just that the benefits of doing it are limited. For openers, the recipients seldom know exactly how they helped generate the profits, beyond just doing their jobs. No doubt, they enjoy getting the money. They may even be grateful for it. But they aren’t likely to think or act differently because of it or to be greatly motivated by it.
What’s more, if they keep getting it, they will eventually come to expect it, depend on it. If they don’t know what they’ve done to deserve the extra money, they will begin to view it as part of their regular compensation — that is, as an entitlement program. At that point, the profit-sharing check is a bonus in name only, no matter how much the amount may vary from year to year. Meanwhile, you’re getting results that are the opposite of what you’re paying for. You’re promoting the same attitudes you had hoped to change by moving to variable pay in the first place.
Many thanks to Mr. Stack, not only for the variable pay wisdom, but for coining a useful new term.
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Has your profit sharing plan become a BINO?