With limited resources, one strategy that can help SMEs in Malaysia level the playing field when competing against larger companies to attract and retain talent is employee profit-sharing.
This article explores what profit-sharing means, how it can be structured for Malaysian SMEs, and common pitfalls to watch out for.
Defining employee profit-sharing
Under a profit-sharing arrangement, employees receive a portion of the company’s profits on top of their regular salary and benefits, directly linked to the company’s financial performance.
If the business does well, employees share in the success; if no, payouts may be reduced or skipped.
This creates a clear connection between employee contributions and rewards. The impact can be especially motivating in smaller businesses, where every effort counts, or in roles like sales and business development, where performance directly drives revenue.
Legal considerations
Once the business owner decides to implement a profit-sharing arrangement, the arrangement must be carefully structured and documented to minimise disputes. Key considerations include:
- Clear documentation: The scheme should be expressly set out in writing, either in a contract or a profit-sharing policy. The documentation should clearly state the basis of calculation, the percentage of profits allocated for distribution, and the distribution mechanism (e.g., equal share, seniority-based, or performance-weighted).
- Eligibility criteria: Business owner should specify which categories of employees qualify for profit-sharing. For example, the scheme may apply only to management-level staff or employees with a minimum period of service.
- Transparency: Employees should be clearly informed of the profit-sharing scheme’s terms. Transparency fosters trust and reduces the risk of disputes, especially in years where profit levels are lower and payouts may be reduced or withheld.
- Professional advice: Business owners are strongly encouraged to consult legal, financial, and accounting professionals when designing a profit-sharing scheme.
This ensures the scheme is legally enforceable, tax obligations are properly managed, and the arrangement does not create unintended cashflow or compliance issues.
Pitfalls to avoid
While profit-sharing can be a valuable tool, it also carries certain risks if not carefully designed and managed. Common pitfalls include:
- Inconsistent payouts: Profit-sharing in one year but not the next can cause dissatisfaction and reduce morale. Business owners should manage expectations by making clear that distributions depend on actual profit levels and may vary from year to year.
- Cashflow strain: A company may be profitable on paper but still face liquidity issues. Committing to profit-sharing without considering cashflow can expose the business to financial stress. Proper financial planning and cashflow management are essential.
- Perceived unfairness: If the scheme is seen as favouring management or certain groups of employees, it may demotivate the broader workforce. Transparency and clearly defined eligibility criteria are crucial to prevent perceptions of bias.
- Group vs. individual performance: Profit-sharing schemes often distribute rewards equally among team members. However, if certain individuals contribute significantly more to profits, they may feel unfairly treated or demotivated if their extra effort is not recognised.
- Unrealistic performance targets: If the profit-sharing scheme is tied to key performance indicators (KPIs) that are set too high or difficult to achieve, employees may lose motivation altogether. On the other hand, if targets are too low, profit-sharing may be seen as an automatic entitlement, employees may simply “wait for the fruits to drop from the tree” rather than striving for better performance.
Targets should strike a balance between being challenging and realistically attainable.
Practical tips for implementation
For business owner considering profit-sharing, careful planning and gradual implementation are key. Some practical steps include:
- Start small: Begin with a simple arrangement, such as allocating a small percentage of profit into a pool for distribution among employees or only for selected staff. This allows the business to test the scheme’s effectiveness before committing to larger sums.
- Treat as a supplement, not substitute: Profit-sharing should complement, not replace, fair wages, statutory benefits, and other incentives. It works best when combined with measures such as training opportunities, career development, and recognition programmes.
- Review and adjust: As the company grows, the scheme should be reviewed regularly to ensure it remains fair and aligned with business goals. Importantly, the profit-sharing policy should reserve the company’s right to review, amend, or discontinue the scheme in the future, giving it the flexibility to adapt to changing circumstances.
Conclusion
Done right, profit-sharing creates a win-win outcome: Employees feel recognised and rewarded for their contributions, while employers gain from stronger motivation, loyalty, and alignment with long-term business goals.
If you are considering introducing a profit-sharing arrangement in your company, we can assist in preparing clear and compliant profit-sharing policy that protects the company’s interests and reduces the risk of future disputes.
