Devising a profit sharing program for micro-multinationals
Since we have no plan on ever selling the company or going public, employee stock option programs never made sense to us. Instead, we set up a quarterly profit sharing program, so that employees could benefit from the company's profits all along the way.
We're pretty proud of our system, we started it in 2010 and it has withstood the test of time even as our company has grown from 4 to 30+ employees.
Balsamiq's profit sharing program
Our quarterly bonus program allocates 20% of adjusted profits to "staffers." Of this, 25% is split equally and 75% is split based on seniority.
Let's break it down:
- Our quarterly: we pay out bonuses 4 times a year, at the end of January (for Q4 of the previous year), April (for Q1), July (for Q2), and October (for Q3).
- bonus program: it's a bonus program, meaning that it can change or stop in the future depending on how we do. Basically, it's gravy.
- allocates 20%: twenty percent of adjusted profits is extremely generous while still responsible for the financial well-being of the company. Note: we started with 2%, then raised this to 10%, 15%, and finally 20% as both our profits and the number of employees grew. The goal is to strike a balance between giving everyone a noticeable bonus and not stretching our cash-flow too much.
- of adjusted profits: using profits is better than earnings (like we did at first) because it encourages all of us to limit our expenses. The profits are _adjusted_ to exclude "crazy one-off costs of Peldi's choosing" (see below) and owner dividends, so we can have these expenses without worrying about their impact on bonuses.
- to "staffers": bonuses are for people who work more than 20 hours/week (50% time) for Balsamiq who are permanent employees or have a long-term external collaborator contract with us. However, part-time employees working less than 20 hours a week and contract workers later hired will receive seniority points for the days worked (see below).
- eligibility date: you are eligible to start receiving a profit sharing bonus beginning with the bonus for the Quarter in which your start date as a staffer fell. (e.g. if you started in November 2012, you would be eligible for the QTR 4 2012 bonus paid in Jan/Feb 2013. If you started in January 2013, you would be eligible for the QTR 1 2013 bonus paid in April/May 2013). If your employment at Balsamiq ends, you will not be eligible for bonuses that have not yet been calculated and paid out (so if you leave in December 2017, you won't get the QTR 4 bonus paid out in January/February 2018), but you will be eligible for a pro-rated Exit Bonus.
- based 25% split equally: this is good because it promotes a team spirit: while the majority of the bonus is weighted towards time spent in the company, this portion of the bonus is equally shared by all employees. This gives a nice incentive for everyone to be fully part of the team, even when they are just starting with Balsamiq. It will also be good down the line for a new employee who will take much longer to even out with the seniority of current staff.
- and 75% on seniority: this is good because it smooths out the impact of new employees, and evens out over time. Also to note how this is NOT based on salary / skills. We're all members of the same company and we're all equally responsible for the success of Balsamiq. In addition, nothing forbids us to also give out other merit-based bonuses as well. Note: if a staffer works less than 100% of their time for Balsamiq, their seniority will be adjusted.
OK, so that's the program and the philosophy behind it.
Here's some more details:
How we calculate adjusted profits
We take the gross revenue and remove all the "normal" expenses: operating costs, taxes, previous bonuses given out as part of this bonus program. Basically everything EXCEPT:
- Owner dividends — so that if Peldi takes some money out it won't impact the amount of the bonuses (these don't show up on the Profit and Loss statement anyway, but we wanted to confirm they don't affect bonuses).
- Extra one-off expenses — Large items such as the one-time big bonus handed out in Sep 2010 and smaller items like when Peldi choses to fly first class. This is again so that we can have these "extravagant" expenses without impacting the amount of the bonuses.
- Charitable donations.
- Nest construction costs.
Because there are delays in getting expenses finalized in the accrual accounting system, we use the average % of profit from the prior 2 years. This % of profit is applied to the gross revenue of the quarter being calculated.
How we calculate seniority
This is the number of days at Balsamiq since qualifying for profit sharing as a staff member (since starting to work more than 20 hours/week as a permanent employee or signing the long-term external collaborator contract), with possible addition of days from previous contract or part-time work. If a staffer works less than 100% of their time at Balsamiq, their seniority will accrue at a rate equal to their % of time.
Over time the difference in seniority goes down as we all become senior. This means that in the long run, bonuses will even out for everyone. It also means that the addition of a new employee does not dramatically reduce everyone else's bonus right away.
That's it! We heard of several companies using our policy for inspiration over the years. If you do the same, let us know, we'll be thrilled!
Peldi for the Balsamiq Team
Comments (20)
Can you share the spreadsheet you use to calculate this? It would be super helpful!
Hi Ben! I’ll send you a generic version by email. It’s not anything special. I keep thinking I’ll update the spreadsheet format at some point since it’s 10 years old and we now have a lot more people than when we started. But it still works, so why create work for myself. 🙂
This is always a great piece of content to read and meditate, even after all these years.
And thank you for your inspiring transparency!
I love the transparency, so thank you so much for sharing. I love most of this equation. One point I think is worth further consideration is weighting by cost of living. Why is it completely obvious that “it’s fair.” There is an argument to be made that weighting by cost of living is not fair. Am I contributing more value to the company, to the family, because I live in SF or NYC? Why should someone living in Texas have to subsidize my choice to live in SF, or on a beach in LA? Why should they have to subsidize my more expensive house investment and higher taxes? I understand your goal is to make it so your employees shouldn’t have to worry about $, and that’s great. But I wouldn’t necessarily call it fair.
Winston, cost of living and local economic differences within a distributed company is definitely a complicated topic! We’ve had a number of very lively discussions about it over the years, and it deserves a series of blog posts I think! We recently decided to remove the cost of living calculation from our profit sharing program. We actually removed cost of living by US location way back in 2012. In the fall of 2018 we chose to remove the calculation by country – or at least to try it out for a while. In both cases, the main reason was because none of us live in areas that are drastically different from one another (we are now in Illinois, California, France, Germany, the Netherlands, and Italy). We felt the calculation added an unnecessary level of complexity. We do still base our salaries on regional salaries for similar jobs – but they are for rather wide regions. One of the reasons for doing large regions is the situation you describe. We wouldn’t change a salary down because someone wanted to move away from a big city, nor up because they chose to move to an exclusive area within the same broad region. Thanks for the reminder to post an update on our profit sharing program!
Quick update: now that we have over 25 employees, we raised the % again from 15 to 20%.
FYI, there was a little bit of discussion on this policy here: https://news.ycombinator.com/item?id=11327692 – in short, this policy is still working out very well for us.
it sounds like a great idea, and i would love to try and implement something similar into my company. But what if there are staff that simply dont make great sales and are being carried by the stronger ones. Wont that cause friction because the harder working and better revenue generating staff are basically earning for the rest?
Ofcourse if you are lucky and have an equally hard working team this may not be an issue, but here in Thailand i can imagine it not being such an easy task to find equally responsible and strong players.
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It is now July 22 2013 is the plan still working
HI – if you have a loss in Q1 – for instance – do you deduct this from your employees in Q2?
Very interested in knowing this as the company I work for seems to think that if they have a loss I should be penalized. I feel a quarter profit share is just that – profit share.
Thank you – look forward to your response.
[Peldi: Hi Trista, we wouldn’t ask employees to pay anything back, no. No profit = no bonuses, that’s all]
Thank you for this article, this is great and very informative. I have learned something new now
This does seem very fair and equitable. Do you have a spreadsheet with formulae and such that you use? Is it possible to share a template with suggested/helpful weightage?
Many thanks for sharing your ideas on building a transparent organization.
>> so in the long run the first comers will be less rewarded than they are now, with the same amount of profit on the table.
I think that’s the point; 10 years from now the fact that someone has one year of extra seniority shouldn’t count for as much.
You do touch on my big problem with this approach: If intelligent people are already asking questions on how it works, it’s way too complicated. It includes:
1. Formulas
2. Footnotes
3. Consulting external indices
4. Non-trivial accounting definitions
5. Financials
I understand the intent: eliminate “hidden” HR things like how salaries are set and bonuses calculated, but public definitions like this discourage iterative tweaks, which ironically is one of the things small companies like his do best. I realize he states it can basically end immediately, but you can’t change publicized policy frequently or it loses all value as it is no longer trusted.
There’s no easy answer but I’m skeptical of a “simple” policy that requires (a) an accountant, (b) an economist and (c) HR admin to calculate my bonus.
Also, since you have this profit sharing in place. Does it mean that you don’t issue stock to employees? I’m in the process of incorporating my business, so we can higher employees and offer options. So all this is very intriguing to me 🙂
When you say “Employees” do you also include yourself? Even if you are a majority share owner? So essentially give yourself a bonus also?
@kareem
yes but 10 years vs 9 years is just 53% vs 47%, when instead 3 years vs 1 year is 75& vs 25%
so in the long run the first comers will be less rewarded than they are now, with the same amount of profit on the table.
Sounds like a nice model, yes thanks for sharing! I particularly liked the history behind it that led to your current system.
Kareem, as for seniority balancing out…
Let’s say you’ve worked for 40 days while I’ve done 10 days. Between us there are 50 work days so your contribution is 80% and mine 20%.
In 100 working days, you’ll be at 140 and me at 110 so our total is now 250 days. You’re now at 56% and me at 44%.
…btw that is just a quick example, not how their system actually calculates things.
Love that you’re sharing stuff like this – thank you!
One question: how does this work:
“Over time the difference in seniority goes down as we all become senior.”
If all your employees keep working, won’t there always be a “number of days worked” gap that makes longer-serving employees more senior than ones that have come on board more recently?
Hacker News Discussion: http://news.ycombinator.com/item?id=2986673