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Is revenue sharing with employees a good idea?

Sharing the pie: there are all kinds of ways to motivate and retain good people, and some of them will work better with some employees than other

Jan 10, 2013

by Alberta Venture Staff

One thing we can all pretty much agree on: more money is good.

Recognizing this, many employers use bonuses, retirement savings plans or pension plans to inspire their people to ever-greater heights. But if you want to go a step further and really separate yourself from the crowd, you can offer employees a piece of the pie. You tell your employees that, if the business hits certain revenue or profit targets, they’ll share in the expanded pie. It’s called a deferred profit sharing plan, or DPSP, and it might be more attainable than you think.

The basics of a DPSP

Minimum company size: Generally two or more people
Minimum annual contributions: Generally $10,000 per year or more
The range: Between two and five per cent of revenues or profits, to be divided according to an agreed-upon formula. Or it could be tied to salary whereby if the company achieves the target, employees get, say, an extra three per cent of their salary.

How big should a business be before setting up a DPSP?

It can be as small as two employees, but it’s more attractive as a company grows. “It’s not terribly difficult to set up as long as the employer is prepared to commit some resources to it,” says Jim Myers of Myers Benefit Consulting in Grande Prairie. “You need a person that is doing the payroll that can understand the procedures, but they’re not terribly difficult.”

The insurers, who provide these programs, will do some of the heavy lifting such as the annual information return that has to go to the government, on a fee-for-service basis. “It doesn’t have to add a whole lot of complication to an employer’s life,” Myers says.

When can an employee sign up?
It can be as soon as they begin their employment, but typically employers are looking for three or six months of work before an employee can take part.

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Revenues or Profits?
A gross revenue target is easier for employees to understand, and possibly more fair. Employees, after all, are not in control of a company’s expenses. “As a business owner, I’d be more inclined to make it a gross revenue target so employees don’t have to worry about how I managed my expenses,” Myers says.

On the other hand, many owners choose to use profits as the measuring stick. Either way, the revenue or profit is declared quarterly and the employer makes a contribution on behalf of the employee into a DPSP account.

If you go with profits, who validates them?
“That is typically done by way of a board decision,” Myers says. “It could be quarterly, semi-annually or annually, however the employer chooses to structure it, but the board declares the profit.”

Where does the money go?
The contributions are managed by a third party, generally an insurer. The employee chooses from a list of investments provided by the insurer.

What if an employee leaves a company before retirement?
Then Alberta’s pension rules are followed. If the employee leaves before completing two years of work, the contributions are returned to the employer. If the employee leaves after more than two years, it is pension money, not cash, and can be left with the investment company in the employee’s name or transferred to another financial institution. When a person turns 55, he or she can roll the DPSP into a lifetime income.

Why are DPSPs so attractive?
Contributions are not taxable income for the employee, and the income in the plan is not taxable.

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