What Are Some Good Profit Sharing Packages and Bonus Structures?

I own a bootstrapped startup that now has a big enough customer base where I can actually hire a developer to help me push it to the next level.

Since we don't have all the bells and whistles that well funded startups have I'm finding that the best way to attract good developers is to have a good bonus structure based on the company's profit and performance.

Maybe something like a percentage of net profit divided among the employees, or something similar.

How do you guys structure such packages (if at all) where it's fair to the new employee (he's taking a risk) and to the founders.

Thanks.

One of the more interesting companies I saw had an idea where they would set a profit target.

Once that target is reached, then they will use whatever they exceed by to have some celebration with their employees.

One year the employees and families took a 4 day cruise with the excess.

If you are going to have a bonus, you may want to do something similar, where you will set a target each year, and announce what it is, and it may be helpful if you can show everyone how the company is doing, marching toward the profit.

Then, you could start with just splitting up the excess, but I would suggest that you also get your bonus like they do, don't have the target profit include your bonus.

I think a performance based bonus would be bad, at the moment, because who is to say how much the new developer's work helped with the profit.

Well, your first decision should be about the desired outcome of your company-building. Is a exit (merger/acquisition/IPO) within a few years realistic or not? Note that it's not about the "bells and whistles" of already having VC money on board -- it is about the expected end result.

If a exit seems realistic, then stock options with vesting would be the most common solution. If you're in it for the long haul, if you have no plans to sell your baby/company then that's just fine -- but maybe stock options aren't the best solution then.

Profit-sharing systems are perhaps less common. The best I have read about is Joel Spolsky & Michael Pryor's scheme at Fog Creek Software -- initial description here and updates linked from here.

What I ended up doing is giving a base salary plus a bonus.

The bonus is 10% of net profit (gross profit - (salaries + usual business expenses)) divided by the number of employees in the company. But each employee, based on skill level, gets a cap on how much money they could make each year.

So someone who will increase the company's net income the most will get a bigger cap than someone who will increase it less.

The tough part is figuring out the expected increase in net profit from hiring a certain employee. A programmer ads features that sell more. A salesperson brings customers in and in turn sells more. These are relatively easier to measure than say a tech support person that helps users use the app and sloves their problem.

There is no standard that assigns caps at the moment, but it's something that I will definitely work on in the near future when we're ready to hire more people.

As for right now, we gotta keep moving. Can't get hung up on anything in startup life!

Thanks for the responses!

-Nash

The best way I have seen this done is a Days of Pay bonus. The basic concept is that you figure out your triggers for the bonus and award days of pay instead of a percentage of salary. That way, everyone knows that the bonus is, it's easy to relate too and you can do a percentage completed. See below:

The Days of Pay method also works for partial bonuses as well. For example, lets say you set the profit target for the quarter at $1M. If you hit that target, then the bonus for each employee is like 5 days of pay. Now, let's say you hit $500k, then instead of 5 days, it would be 2.5 days (0.5M/1.0M).

You can also have minimum triggers as well but that's totally up to you.