How to Negotiate Profit Sharing. Employers use profit sharing in several ways. It is often, but not always, used in accordance with its literal meaning: annual payments to employees based directly on the company's net profitability above and beyond ordinary salary and bonuses. Many employers simply refer to any 401(k) or other bonus structure as profit sharing without tying payments directly to profitability.
Negotiate a Profit-Sharing Plan For All Seasons
Negotiate for a profit sharing plan that will maximize your compensation, even if the company's net profit suffers.
Make sure that any true profit-sharing plan is supported by an open-book approach to company finances. The integrity of a true profit-sharing plan, based on a company's actual net profits, depends on the integrity of the numbers that are used.
Negotiate to include top-line company revenues as part of the basis for your profit-sharing equation if your position involves sales, marketing, product development or any function where you can arguably affect company revenue.
Avoid placing too much faith in a profit-sharing plan that will leave you under compensated if the company's overall performance lags behind your expectations. Some companies make great profit-sharing promises that come up empty if the profits aren't there.
Negotiate for your company to contribute significantly to profit-sharing plans, such as a 401(k) plan, as a way of providing employees with a strong incentive to provide revenue and value for the company.
Delay profit-sharing negotiations until late in the discussion of your compensation package, if you are in a key sales position, and consider asking for a percentage of any increment in revenue that is attributable to your performance. Point out that such increments are "found money" for the company based on your performance and that you should be rewarded above and beyond normal compensation for these results.
Ask for a memorandum of agreement recording the results of your negotiations concerning profit sharing.
Although 401(k) plans are often not true profit-sharing plans, they are construed as profit-sharing plans by the IRS. When they are administered by reputable outside firms, with low fees and a wide range of investment options, they are often preferable to some in-house profit-sharing schemes that overload employees with their own company's shares.
Make sure your eyes are wide open if you accept company stock as part of a profit-sharing plan. For every "Dell-ionaire" or Microsoft millionaire there is an Enron-like tragedy.