Private Company - Profit Sharing Plan Expectations

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cgsMakaveli
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Private Company - Profit Sharing Plan Expectations

Post by cgsMakaveli »

I am a HCE for a small sales company with annual sales revenue around $10m. My compensation is paid via salary, commissions, and bonuses. Recently the owner implemented a profit-sharing plan for a limited number of key contributors. However it is rather opaque as they wont reveal the numbers, which is fine as it is his company. Has anyone had experience with this? If so, what is common in corporate america? Do owners set aside 10%, 20%, 30% of profits? Should i expect a certain range based on total compensation, question the amount received?

Purpose of this thread; i am trying to determine the potential bonus for future finances. We have a kid on the way and want to purchase a home, pay down student loans, etc.

Look forward to hearing input.
Silk McCue
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Re: Private Company - Profit Sharing Plan Expectations

Post by Silk McCue »

This is completely discretionary and with no formal documentation. You shouldn’t plan on anything. Your plan should exist only what you know today.

When and if you receive from this profit sharing plan decide what to do with that tranche. Then rinse and repeat with no expectation for the next year until it occurs. If it becomes more formalized in the future you could then start baking in projections.

Cheers
Jack FFR1846
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Re: Private Company - Profit Sharing Plan Expectations

Post by Jack FFR1846 »

I've received various bonuses, profit sharing, stock options, RSUs, etc. I ALWAYS plan on zero. Why? Sometimes something happens, even with big, well run megacorps. We had this happen within the last year. Because of a certain executive not seeing obvious issues, the company lost hundreds of millions of dollars. Those who paid for this error was....well, everyone who was a non-participant in the screw up. My field based bonus based on certain goals being met was zero'd, even though the metric was met 100%. Our company wide bonus, based on various company metrics was zero'd even though the goals were met 100%. Our 401k match is voted by the board every quarter and they decided to give us our match (2% max) but it got split from the usual cash to mostly RSUs vesting in 6 months and a year.

I guess what my point here is that even with clear metrics where anyone in the company can calculate what their bonus should be, those in charge can zero it all without notice at any time.

With an opaque base for this "profit sharing", I wouldn't count on anything.
Last edited by Jack FFR1846 on Sat Dec 07, 2019 8:51 pm, edited 1 time in total.
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Stinky
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Re: Private Company - Profit Sharing Plan Expectations

Post by Stinky »

Plan on zero.

Be pleasantly surprised if/when you get more than zero.
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Watty
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Re: Private Company - Profit Sharing Plan Expectations

Post by Watty »

cgsMakaveli wrote: Sat Dec 07, 2019 7:11 pm However it is rather opaque as.....

Has anyone had experience with this?
I once worked for family owned company that was larger than yours that had a number of second and third generation family members working for it. They had a profit sharing plan that all employees got some of in the form of a retirement account. (This was a long time ago so things were a lot different then.)

The way it was divvied up was very opaque and most people assumed that it was just porportial to your salary. Each year they would make an announcement that they were contributing $X which seemed like a good amount.

In one of the routine notices they send out there was lots of legalize that few if any people read or could understand. In it there was a "paragraph" that was a half a page long with a lot of dense verbiage about how the funds were split up.

That piqued my attention so I dug into it and as best I understand of the $X that was announced the first slice when to some sort of "management shareholders group"(ie family members) then any remaining money was split between all the employees(including the family members again). There was no way to tell the details of how much they got but the family who were mostly highly paid clearly lot more it is than you would have expected. There was also something like a seven year cliff vesting and they had a lot of turnover(except for family members) and when people left the company any unvested money went back into the pool and was divided up the same way.

One thing to watch out for is not only how much is put into the profit sharing pool, but also how it is split up.

As others have said don't expect anything and be glad when you get something.
sixty40
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Re: Private Company - Profit Sharing Plan Expectations

Post by sixty40 »

cgsMakaveli wrote: Sat Dec 07, 2019 7:11 pm I am a HCE for a small sales company with annual sales revenue around $10m. My compensation is paid via salary, commissions, and bonuses. Recently the owner implemented a profit-sharing plan for a limited number of key contributors. However it is rather opaque as they wont reveal the numbers, which is fine as it is his company. Has anyone had experience with this? If so, what is common in corporate america? Do owners set aside 10%, 20%, 30% of profits? Should i expect a certain range based on total compensation, question the amount received?

Purpose of this thread; i am trying to determine the potential bonus for future finances. We have a kid on the way and want to purchase a home, pay down student loans, etc.

Look forward to hearing input.
We have a small company with much less revenue than the company you work for and I am a trustee of our profit sharing plan. We do not set aside any specific annual % amount, it is determined year to year in our corporate meeting. Ours is tied to a Safe Harbor plan, which is a minimum 3% contribution. The PS & SH plan allows the company to make contributions to our 401k plan. Employers can discriminate in the PS portion of the plan, an employee can get 0%. But the employer cannot discriminate in the SH plan, all employees get 3%. I think the minimum for SH is 3% and once set in the plan, the SH % cannot change. The plan also goes thru testing so the employer cannot just give themselves all the profits, that is where the SH portion helps.

With good profits you should get something on PS, and you are guaranteed the SH portion. It does not help employee morale when an employer tells employees we have a profit sharing plan and then give the employees nothing.
bsteiner
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Re: Private Company - Profit Sharing Plan Expectations

Post by bsteiner »

Contributions to a profit-sharing plan are generally discretionary. There's a maximum. Contributions can be tilted in favor of the higher-ups, within certain limits. A company will typically have an actuary design the plan to favor the higher-ups to the extent permissible. However, the "cost" of providing benefits for the higher-ups is that you have to provide some minimum level of benefits (relative to what you provide for the higher-ups) for the rank and file. So the more they want to provide for themselves, the more they'll have to provide for the workers, though it doesn't have to be the same percentage of salary.
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cgsMakaveli
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Re: Private Company - Profit Sharing Plan Expectations

Post by cgsMakaveli »

Appreciate the responses, thank you. To note, I do not and will not count on this potential "bonus" to make any major financial decisions.
However, after negotiating comp structure and the results being a profit sharing plan, I fully expect some compensation during profitable years which the last few have been very good. From what i am reading, "8% bonus is typically enough to motivate an employee to change behaviors and perform better". So from my understanding, he first needs to decide the pool of money to distribute and then come up with a method to distribute as either equal or performance/contribution based.

If i rephrase my original questions, what is common practice? 30% profits set aside / by the # people sharing? 20%, 10%?

Secondly from a personal finance standpoint, should i put the entire bonus into my 401k to help max out sooner? My wife and I have a little over $30k set aside in a side account for emergencies, $10k-$15k in checking for monthly expenses. We just paid down about $45k in student loan dept and have another $48k to go which i plan to pay off in the first half of 2020. Then restock for down payment on a house.
KyleAAA
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Re: Private Company - Profit Sharing Plan Expectations

Post by KyleAAA »

I don't know if there really is a typical amount for small, closely held companies. Typically things will be more standardized the larger you get as HR departments start to build up the resources to do real competitive analysis.

To answer your 401k question, I would advocate front-loading it unless it impacted the amount of your 401k match.
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cgsMakaveli
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Re: Private Company - Profit Sharing Plan Expectations

Post by cgsMakaveli »

Understood regarding profit sharing, it appears there is no common practice. Without actually setting metrics i should probably just view it as another "bonus" that is TBD annually.
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Stinky
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Re: Private Company - Profit Sharing Plan Expectations

Post by Stinky »

cgsMakaveli wrote: Sun Dec 08, 2019 12:26 pm Secondly from a personal finance standpoint, should i put the entire bonus into my 401k to help max out sooner? My wife and I have a little over $30k set aside in a side account for emergencies, $10k-$15k in checking for monthly expenses. We just paid down about $45k in student loan dept and have another $48k to go which i plan to pay off in the first half of 2020. Then restock for down payment on a house.
When I was working, I received both “annual bonus” and “long term incentive” compensation. The bonus compensation was based on concrete goals being achieved, and was reasonably predictable, while the incentive comp was much less predictable.

DW and I viewed the annual bonus as “spendable”, usually on big ticket items. On the other hand, the incentive comp went entirely toward retirement savings.

Doing it that way worked for us, and may work for you.
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