Virtually no small businesses have a rational incentive plan. Businesses have 3 groups of employees—climbers, campers and quitters. The percentages vary but basically the top 10-25% are the employees who are making the company money (climbers). The next 60-80% are just sort of there neither helping nor hurting the bottom line (campers). The last 5-15% cost the company money (quitters). There is no reason to want everyone “happy” especially the quitters. Yet most companies under-compensate the climbers in order to subsidize the quitters. So now who is the most likely to go pursue other job offers? You end up with turnover in the wrong group. In fact you want to over-compensate your producers at the cost of the under-achievers so that those bottom people change or leave. Beware of the organization where entitlement has become a way of life. “I get a raise because I’ve been here, not because I produce more.” “I get a promotion because I have the most seniority.” “I get a bonus because it is December 25th, not because of what I did.” Entitlement is a disassociation of compensation from results. Many profit sharing and bonus plans encourage entitlement and are actually destructive to the company. People need to know what results are expected in exchange for their paycheck and what results beyond that will produce additional compensation.
Remember also that you cannot hold a person accountable for a result that they cannot control. You must provide people with the authority to control the outcome of anything that you are going to hold them accountable for. The defined results must be simple. They must be appropriately defined based upon the level of the person performing the task. An unreasonably complicated formula to define results may be permissible for a high-level employee but clearly is unacceptable for positions held by less-educated people. Keep it simple.
Organizational structure cannot work with out measurement. Subjective standards are no standards. Objective and clear standards must be established and enforced consistently. Owners are often reluctant to do so and in their effort to “be nice” and “keep people happy” they are actually shooting themselves in the foot. Loyalty is a one-way street. Very few of your employees will be here in 10 years but you will be. Your loyalty must be to your system and people will grow and benefit from this focus. You make money and you are doing your greatest service to your employees. You are not going to make everyone happy anyway so take care of the people who produce your money. The others are whiners.
The use of incentives is critical in addressing the “what’s in it for me” mentality of the modern work force. We have to have incentives or we cannot have accountability—but we cannot pay a bonus for a result that we have already paid for in their wage. People who produce profits for the company beyond that which you have already paid them to produce should be allowed to share in that additional profit that they have produced. This is the basis of excess-based profit incentives. It is critical that this relates back to the basic budget of the business.
 This is the basic flaw in profit sharing. Individual employees cannot control the profit of the company—the owner does. The individual employee can only control the result that is delegated to them. Bonuses must be based upon their performance alone.