It’s simple math. You receive an amount equal to the usual base pay for the value of the job you perform. Then a full share of company’s gain share is stacked on top.
Not the way it is if you Google “profit sharing” or gain sharing.
Don’t be fooled.
What you get from the media is the “pros and cons” of profit sharing as seen in the caldron of Corporate America. To traditional management, profit sharing means bribes. Contributions to one’s 401K or stock in the company. Some times a Christmas bonus.
The Captains of Industry can only think of money as an incentive for people to do more. Their version of profit sharing is to make employees feel like they “own their own work.”
I read an analogy once that really made me laugh. It went something like this:
Imagine your boss takes you and your team to an expensive restaurant for lunch on the company. You are allowed to order anything you want. When the food arrives, you are not allowed to eat it. You only “feel like” you had a free lunch.
There’s no such thing as feeling like you own your own work if you don’t really own it. And the few bennies that are left are in lieu of adequate pay.
Corporate HR View of Profit Sharing
Here are some of the disadvantages of profit sharing as seen by the HR industry:
“The company contributes a portion of its pre-tax profits to a pool that will be distributed among eligible employees. The amount distributed to each employee may be weighted by the employee’s base salary so that employees with higher base salaries receive a slightly higher amount. Generally this is done on an annual basis.”
HR/Disadvantages of profit sharing:
- The pay for employees moves up or down together (no individual differences for merit or performance).
- Focuses only on the goal of profitability (which may be at the expense of quality).
- For smaller companies, these plans may result in drastic swings in earnings for employees that may be difficult for them to manage.
Corporate America is even more nervous about “Gain Sharing.”
Gain sharing is a system of management in which an organization seeks higher levels of performance through the involvement and participation of its people in helping the company improve net gain. As performance improves, employees share financially in the resulting gain.
HR/Disadvantages of Gain Sharing:
- Gains may be paid even though profits may be down.
- Requires a participative management style.
- Requires that management openly shares information.
- Employees may question or challenge management decisions.
- Works best in a work environment that requires teamwork and collaboration rather than that of individual entrepreneurship.
- Paid on the basis of group performance rather than individual merit.
These are certainly disadvantages where profit sharing is practiced under the current management style where business and labor are at odds.
Incidentally, HR departments have been repurposed by most companies as profit centers, not service centers.
The workplace atmosphere is not one of trust or common purpose and it will not be changed by an annual bonus that would not be needed anyway if the company had paid an adequate wage throughout the year.
Under the SSP business model, many of those “problems” are not problems. They are goals. Those that are problems have been solved by COWORK Entrepreneurs with its Socially Responsible, Self-managed, Profit-sharing (SSP) business model.
COWORK Entrepreneurs uses gain sharing. I’ve called it profit sharing because it is a more popularly understood form sharing excess revenue.
Under SSP we have no payroll expense per se. Our version of gain is everything that remains after all expenses (less payroll) are covered. The gain is the sum total of what payroll and benefits would have cost plus a share of the profit the company would have made.
The rest is shared and sharing beats pay hands down!
The company does not amass wealth beyond what it needs to keep in reserve to assure stability and level the ups and downs of net gain and gain sharing.
Under the SSP plan, the cons become pros. From the top:
The Socially Responsible, Self-managed, Profit-sharing (SSP) business model dissolves the barrier between business and labor, turning a hostile place into a happy place where people are self-motivated, self-managed and engaged with a spirit of mutuality in team performance. Instead of competing with each other for credit.
- Yes, there’s no pay for performance in our plan. Instead of threats and bribes, we use real profit sharing (gain sharing), mutuality and collegial mentoring as incentives.
- We focus on social responsibility, common purpose and teamwork to spawn quality assurance.
- Our SSP plan includes a profit pool that will retain funds as needed to smooth out the ups and downs of revenue and a steady flow of gain shares.
- Beyond that, the company is not allowed to amass corporate wealth.
- And you bet our people will question or challenge our decisions. In the SSP business model our indie entrepreneurs (investors of personal human capital) have the power of governance.
- There is no law (human or legal) that says entrepreneurs can’t be collaborative. We will foster the benefits of personal knowledge sharing and management.
- The very fact that compensation will depend on teamwork assures quality, productivity and (best of all) innovation through the power of knowledge sharing.
- And our prosperity will bring prosperity to our communities.
There are other problems to overcome in our woodpile. Chief among them is the tax collector.
Employment Tax Evasion Schemes
All businesses are required by the Internal Revenue Service (IRS) to pay employment taxes. These include:
- 4% Social Security until the wage ceiling is reached.
- 9% Medicare
- An additional 0.9% on wages over $200,000 earned by single employees.
- And $250,000 by married couples.
- Employers are required to withhold half of the Social security and Medicare taxes from paychecks. The company is supposed to pays the other half.
The role of business is to help the tax collector, not you. If you were handling your own money you could do a better job.
In fact, many employers attempt to evade their employment tax responsibilities by holding the whole bundle for the company’s purposes.
They are supposed to submit these funds to the IRS on a regular basis. But sometimes they don’t for a number of reasons.
Some cash-starved businesses try to use the IRS as a bank. They withhold the employment taxes and then borrow money against it with the intent of paying it back later.
Some simply take the money with no plan ever to repay it. Tax protestors among them.
The most recent business scheme for avoiding taxes has been to misclassify employees as independent contractors.
That could cause us a problem, but we’re ready for it.
IRS takes the position that if the hiring firm has the right to control what work will be done and how it will be done, the worker is an employee, not a contractor and the IRS wants their money.
Unfortunately, there are as many tests to determine whether a worker qualifies as an independent contractor as there are government agencies that deal with workers. Figuring it all out is a complicated undertaking.
But COWORK Entrepreneurs can show evidence that our indie entrepreneurs — both our partners who own the major divisions of the company, its franchisees and their solo entrepreneurs who truly own their own work.
They work collaboratively but make their own decisions. Instead of training aimed at forcing employees to conform to company policies and procedures, we provide education to help entrepreneurs reach their own goals.
I am confident that the SSP business model meets the basic requirements of the IRS, but the company will need the government’s blessing before we can implement the model. We have a lot of work to do.
The good thing is that once COWORK Entrepreneurs establishes government acceptability for the SSP model, the fight for the right to hire entrepreneurs to do work will be over for those who become COWORK Entrepreneurs franchisees.
Gain Share Beats Profit Share
You’ve been dependent on employers to handle your money for your entire working life and you may worry about leaving that comfort zone.
I’ve said it before and I’ll say it again: Independence brings responsibility. But it’s very much to your advantage and the load is not as great as you might imagine. In fact, it will likely be of advantage to you.
My wife Michele has been a solopreneur since 1985. She owns her own company, Associated Professional Services (APS) but has no employees.
The IRS considers her as a proprietorship. She pays the full amount of taxes to the IRS and Medicare. No more, no less than she would be paying through an employer.
If she were an employee, her employer would handle the money — hers as well as the employer’s share.
As a proprietor, she gets to handle her own money. And she can deduct her expenses from what she pays to the IRS. Couldn’t do that as an employee.
All that money the employer was handling will come to you directly under SSP as gain share. The excess revenue is simply transferred from the company to you. It’s a wash.
With deductions, it can really be a gain.
On the down side, you have bookkeeping to do and you probably need a certified public accountant. Your personal tax return is the same as before except a bit more complicated. You will save more through indie entrepreneurship than the CPA costs and you will be in a position to continually increase your income. Sky’s the limit.
Beating the High Cost for the Self-insured
Self insurance is the greater problem. I have previously shared my experience as the founder of a self-funded liability insurance pool in Nevada for frontier hospitals and the process is high on my bucket list for COWORK Entrepreneurs and its franchisees.
The difference in performance of self-funded insurance pools is that you take joint responsibility for your own risk instead of transferring it to an insurance company that pays the claims. No skin off your back. Why worry?
Those who participate in a private risk pool own the money in the pool and don’t want to give it up. The result is fewer claims and a growing pot of money to be managed at will.
One of the goals of COWORK Entrepreneurs is to establish a self-insured pool for our indie entrepreneurs. It may take awhile.
So there you have it
I’ve given you the entire thinking behind our profit sharing plan (now gain sharing), answered the “whys” and faced the “why nots.” I am a dreamer, not a financial wizard, but I have considerable experience in business and government. As with everything else, these thoughts and ideas await further input from you, my eventual partnership team and professional consultants who are able to think outside the box.
Meanwhile, I move forward to the next steps toward launching of COWORK Entrepreneurs. Please follow me.
Please move on to the next essay
Not the End. The Beginning.