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This post is part of a series about our VERY FEW company policies. Read this intro post for some context.
Quick update: now that we have over 25 employees, we raised the % again from 15 to 20%.
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! 🙂
*: 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:
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:
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.
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
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This is always a great piece of content to read and meditate, even after all these years.
And thank you for your inspiring transparency!
I love the transparency, so thank you so much for sharing. I love most of this equation. One point I think is worth further consideration is weighting by cost of living. Why is it completely obvious that “it’s fair.” There is an argument to be made that weighting by cost of living is not fair. Am I contributing more value to the company, to the family, because I live in SF or NYC? Why should someone living in Texas have to subsidize my choice to live in SF, or on a beach in LA? Why should they have to subsidize my more expensive house investment and higher taxes? I understand your goal is to make it so your employees shouldn’t have to worry about $, and that’s great. But I wouldn’t necessarily call it fair.
Winston, cost of living and local economic differences within a distributed company is definitely a complicated topic! We’ve had a number of very lively discussions about it over the years, and it deserves a series of blog posts I think! We recently decided to remove the cost of living calculation from our profit sharing program. We actually removed cost of living by US location way back in 2012. In the fall of 2018 we chose to remove the calculation by country – or at least to try it out for a while. In both cases, the main reason was because none of us live in areas that are drastically different from one another (we are now in Illinois, California, France, Germany, the Netherlands, and Italy). We felt the calculation added an unnecessary level of complexity. We do still base our salaries on regional salaries for similar jobs – but they are for rather wide regions. One of the reasons for doing large regions is the situation you describe. We wouldn’t change a salary down because someone wanted to move away from a big city, nor up because they chose to move to an exclusive area within the same broad region. Thanks for the reminder to post an update on our profit sharing program!
FYI, there was a little bit of discussion on this policy here: https://news.ycombinator.com/item?id=11327692 – in short, this policy is still working out very well for us.
it sounds like a great idea, and i would love to try and implement something similar into my company. But what if there are staff that simply dont make great sales and are being carried by the stronger ones. Wont that cause friction because the harder working and better revenue generating staff are basically earning for the rest?
Ofcourse if you are lucky and have an equally hard working team this may not be an issue, but here in Thailand i can imagine it not being such an easy task to find equally responsible and strong players.
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It is now July 22 2013 is the plan still working
HI – if you have a loss in Q1 – for instance – do you deduct this from your employees in Q2?
Very interested in knowing this as the company I work for seems to think that if they have a loss I should be penalized. I feel a quarter profit share is just that – profit share.
Thank you – look forward to your response.
[Peldi: Hi Trista, we wouldn’t ask employees to pay anything back, no. No profit = no bonuses, that’s all]
Thank you for this article, this is great and very informative. I have learned something new now
This does seem very fair and equitable. Do you have a spreadsheet with formulae and such that you use? Is it possible to share a template with suggested/helpful weightage?
Many thanks for sharing your ideas on building a transparent organization.
>> so in the long run the first comers will be less rewarded than they are now, with the same amount of profit on the table.
I think that’s the point; 10 years from now the fact that someone has one year of extra seniority shouldn’t count for as much.
You do touch on my big problem with this approach: If intelligent people are already asking questions on how it works, it’s way too complicated. It includes:
3. Consulting external indices
4. Non-trivial accounting definitions
I understand the intent: eliminate “hidden” HR things like how salaries are set and bonuses calculated, but public definitions like this discourage iterative tweaks, which ironically is one of the things small companies like his do best. I realize he states it can basically end immediately, but you can’t change publicized policy frequently or it loses all value as it is no longer trusted.
There’s no easy answer but I’m skeptical of a “simple” policy that requires (a) an accountant, (b) an economist and (c) HR admin to calculate my bonus.
Also, since you have this profit sharing in place. Does it mean that you don’t issue stock to employees? I’m in the process of incorporating my business, so we can higher employees and offer options. So all this is very intriguing to me 🙂
When you say “Employees” do you also include yourself? Even if you are a majority share owner? So essentially give yourself a bonus also?
yes but 10 years vs 9 years is just 53% vs 47%, when instead 3 years vs 1 year is 75& vs 25%
so in the long run the first comers will be less rewarded than they are now, with the same amount of profit on the table.
Sounds like a nice model, yes thanks for sharing! I particularly liked the history behind it that led to your current system.
Kareem, as for seniority balancing out…
Let’s say you’ve worked for 40 days while I’ve done 10 days. Between us there are 50 work days so your contribution is 80% and mine 20%.
In 100 working days, you’ll be at 140 and me at 110 so our total is now 250 days. You’re now at 56% and me at 44%.
…btw that is just a quick example, not how their system actually calculates things.
Love that you’re sharing stuff like this – thank you!
One question: how does this work:
“Over time the difference in seniority goes down as we all become senior.”
If all your employees keep working, won’t there always be a “number of days worked” gap that makes longer-serving employees more senior than ones that have come on board more recently?
Hacker News Discussion: http://news.ycombinator.com/item?id=2986673