024 May 2022

Economic crisis demands a focus on profit and loss sharing

Implemented to encourage employees and engage them with the company, profit and loss sharing consists of a financial increase that depends on the company’s performance. And that is precisely why this reward requires attention: in a scenario of an economic crisis, resorting to this strategy can demotivate and even damage the company’s profits. Read on to find out how to deal with this problem.

Profit and loss sharing aims at collaboration

Before explaining the implications of the economic slowdown on the profit and loss sharing policy, it is necessary to understand how it works and for what purpose it is adopted in companies.

Generally speaking, companies have two options for adopting the profit and profit-sharing system: to distribute a percentage of the profits earned by the company at regular periods (almost always annually) or to contribute to the pension plan. The criterion is the employee’s performance and the company’s results.

This form of additional bonus is intended to motivate employees to pursue the goals set by the company’s management. It is, therefore, a merit-based award. It is possible to name additional objectives:

• To improve the salary of the employees;
• To stimulate the search for better individual and collective results;
• Align employees’ commitment with the company’s organisational culture;
• To engage employees in the processes of cost reduction and the search for efficiency.

However, it is important to understand that profit-sharing is not a foolproof model of motivation. While one employee may be stimulated by additional remuneration, another may prioritise personal growth, professional experience or the work environment.

It is up to you as a manager to understand the aspirations of each employee to reach the best compromise to achieve the desired results. Money may not be as significant when the team comprises young, single people who are unattached to material possessions, for example.

The economic crisis means change

When demand declines, sales decrease and consumption slows down, whether due to an economic crisis or a strategic mistake by the company, the profit and loss sharing policy needs to be reviewed or changed.

Anyone who thinks it is a good idea to stipulate a target above the market reality to motivate employees and reduce the “risk” of profit splitting is deluded. Setting an unattainable goal is more likely to lead to general demotivation: if it is impossible to reach the goal, why strive to get close?

In the same way, if the company decides to distribute a very large part of the profit (50%, for example) and obtains lower results than expected, there may be a lack of resources to invest in the company’s growth.

When the crisis hits, it is common to cut costs, which means reducing the team. In this scenario, many companies opt to cancel the profit and loss sharing policy for the following years and adopt other forms of additional bonuses.

Finally, it is worth remembering that the success of the measures often depends on the transparency managers adopt at the time of the decision. When employees feel cheated, it is difficult to regain their trust or legitimately commit them to the company’s ideals.