How to Set up a Profit-Sharing or Employee Equity Program

Square cannot provide advice on tax issues. This article is for educational purposes and does not constitute legal or tax advice. For specific advice applicable to your business, please contact a professional.

As business owners continue to consider ways to recruit and retain staff in a competitive market, measures that go beyond regular offerings, such as employee discounts and standard benefits, can become more appealing.

In a recent Square Staffing Survey, 41% of restaurateurs say the workplace shortages are having a major or moderate negative impact on top-line growth in the restaurant business. The most popular strategies restaurateurs are planning to implement to help with staffing include shifts in pay rates, growth opportunities, and decreasing the application/hiring timeline.

But there are also businesses considering changes to their business structure, including profit sharing and employee equity. Here’s a breakdown of how those programs can work, with some examples from businesses that have implemented them.

Structures that benefit your employees (and your business)

Profit-sharing plans

San Francisco-based restaurant Zazie has a no-tip policy for customers. Instead, profits are shared with both full-time and part-time employees in addition to other benefits. Rather than accepting tips, 25% of every menu item is paid directly to staff as a revenue share.

Profit-sharing plans offer employers a way to share a percentage of the business’s profits with employees. While these plans can come in many forms, they all share part of the profits the business makes with employees, in addition to their wage or salary. Some plans offer employees flexibility in how they participate in the profit sharing while others are structured in the same way for all employees. Businesses that offer profit-sharing programs give employees access to a percentage of the company’s profits. This can be a percentage of quarterly or annual profits.

The Department of Labor suggests these tips to keep in mind if you’re thinking about creating a profit-sharing program:

  • Create and written plan document: Add in details, such as a formula, to determine what contributions will be distributed to participating employee accounts and how often those contributions will be made.

  • Develop a record-keeping system: Keep a record of contributions, earnings, and losses, and accurately track what percentage or share of profits should be given to program participants.

  • Consider arranging a trust for the plan’s assets: Establishing a trust is a way to ensure that assets are used for their intended purpose.

  • Provide information to employees eligible to participate in the program

Employee equity program

Trident Booksellers & Cafe moved their store to an employee ownership model in 2020. After over forty years of ownership by the four original owners, they increased this number to thirteen and welcomed employees to buy shares of the company after a year of employment.

In an employee equity program, employees own a share of your business. Much like owning stock in a company, employees’ compensation is partially determined by how the business is performing. Although this is more typical of larger companies, many smaller businesses offer employee equity programs to their staff. Offering employee ownership can come in many forms.

Here are a few examples of employee ownership structures:

  • Employee stock ownership plan (ESOP): ESOP plans offer employees shares of stock through a defined contribution plan. Equity compensation in this structure could include stock options, employee stock purchase plans, and restricted stock, among other options. Businesses offering stock ownership plans to employees may qualify for tax benefits. The IRS provides more detailed information on how it defines these contribution plans.

  • Worker-owned cooperative: In a cooperative structure, the employees own the business and make decisions related to the business together. In these structures, workers have representation on and vote for the business’s board of directors, as well as manage day-to-day operations.

Some businesses offering profit sharing or equity have found it to be an effective way to attract new employees as well as retain their existing staff. According to a 2020 survey by Rutgers University, employee-owned companies surveyed were 3.2 times more likely to retain staff and were able to maintain standard hours and salaries at higher rates than non-employee-owned companies.

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Insights from business owners and employees

Square recently conducted surveys surrounding staffing with more than 200 restaurateurs, 200 retailers and 1,500 industry employees. Here are some relevant insights from that data:

  • Thirty percent of retailers and 33% of restaurateurs surveyed have already adopted a form of employee equity as a recruitment and retention strategy.

  • Nineteen percent of retailers and 31% of restaurateurs have employee equity under consideration or in their future plans.

  • Twenty-eight percent of retail and restaurant employees consider employee equity or profit sharing a very important benefit.

While most restaurateurs and retailers surveyed have been more focused on hiring bonuses than equity or profit sharing, implementing those programs have the potential to help a business stand out in a crowded hiring environment while including employees and their work more directly in the businesses’s bottom line and their own pay.

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