Devising a Profit Sharing Program for Micro-Multinationals
This post is part of a series about our VERY FEW company policies. Read this intro post for some context.
When I was at Adobe we had complicated employee stock options purchase program, as well as even more complex (to me at least) bonuses that were tied to "us making our numbers". They all seemed a bit mysterious to me, but I remember liking getting those checks once in a while! :)
When I started Balsamiq, I knew that I would want to put some sort of profit sharing program in place.
Our books are 100% available to all employees, everyone knows how well we're doing and what we're spending money on, including how much everyone else makes (having a fair and clear salary policy helps here).
In other words, we're all in this together.
When Marco (employee #1) started, I came up with a simple rule: he would get 1% of revenue as a bonus every quarter. This was a NET value, POST-tax, which means that it was really about 2% for the company. One percent might not seem much, but it quickly became more than his base salary.
When Valerie started, she got the same deal. As we grew more and more, it became obvious that this was not a sustainable expense.
Being tied to revenue instead of profits didn't encourage people to watch expenses. Also, differences in purchase parity between Italy and the US meant that what was a large bonus for Marco in Italy was not proportionally large to Valerie, in the US.
When we got to six employees, Natalie, Valerie and I sat down to come up with something that would still be generous, would still reflect our values, but would be more fair and most importantly could scale as the company grew.
Note that I'm always operating under the assumption that customers could go to ZERO tomorrow. If that happens, I want to have as much money in the bank as possible to have one or two years of runway, so that we can come up with something new as a team. That's why having a great team is the single most important thing: if that day comes, I wouldn't want to be surrounded by any other group of people. :)
We are very happy with the little formula we came up with, so we'd like to share it with you in case it's useful to other micro-multinationals like ours.
As always, we'd love your feedback on it! :)
Our Profit Sharing Program
*: this is Earnings - Regular Operating Expenses. Regular expenses do not include dividends and "crazy one-off expenses" such as staff gifts or the annual retreat.
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 (you should be happy enough with your base salary anyways).
- allocates 15%: fifteen percent of profits is generous while still responsible for the financial well-being of the company. NOTE: we started the program with 10% but then upped it to 15% as we hired more people and calculated that could afford to.
- of profits: this is better than earnings (like we used to do) because it encourages all of us to limit our expenses.
- *: excluding "crazy costs" and owner dividends from the expense calculation is good because then we can have these expenses without worrying about their impact on bonuses.
- to full-time employees: bonuses are for full-time employees only. However, part-time employees and contract workers later hired as full-timers will receive seniority points for the days worked (see below).
- 25% is 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 members of the family. This gives a nice intentive 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 to even out with the seniority of current staff.
- and 75% is split based on seniority: this is good because is 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 family here, we're all equally responsible for the success of Balsamiq. Also, nothing forbids us to also give out other merit-based bonuses as well.
- then all weighed by the cost of living in each location: this is important because it's fair. The fact that we're using cost of living instead of average wages is even more fair (i.e. Italy has low wages relative to the cost of living).
OK so that's the program and the philosophy behind it. Here's some more details:
How we calculate 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
- extra one-off expenses - for instance the cost of the employee retreat or the one-time big bonus handed out in Sep 2010. Or even smaller costs like Christmas gifts. This is again so that we can have these "extravagant" expenses without impacting the amount of the bonuses.
How we calculate seniority
This is the number of days worked at Balsamiq since starting full-time on the payroll, with possible addition of days from previous contract or part-time work.
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.
How we calculate the cost of living
This is a fun one.
We get the relative cost of living in USA, France and Italy from the OECD Consumer Prices tables.
We get the relative Consumer Price Index for the US from the Bureau of Labor Statistics' Consumer Price Index tables.
We take the latest data available from each and combine them, coming out with a score for each of the following regions: Italy, USA West, France and USA North East.
We use this regional score to weigh the seniority amounts.
That's it! We've been using this formula for over a year now, and everyone seems happy with it. It certainly helps that our profits have been growing this whole time as well... :)
What do you think? Do you have a profit sharing program at your company? How is it calculated? How would you improve ours?
Hope this helps,
Peldi for the Balsamiq team