Since we have no plan on ever selling the company or going public, employee stock option programs never made sense to us. Instead, we set up a quarterly profit sharing program, so that employees could benefit from the company's profits all along the way.
We're pretty proud of our system, we started it in 2010 and it has withstood the test of time even as our company has grown from 4 to 30+ employees.
Balsamiq's profit sharing program
Our quarterly bonus program allocates 20% of adjusted profits to "staffers." Of this, 25% is split equally and 75% is split based on seniority.
Let's break it down:
- Our quarterly: we pay out bonuses 4 times a year, at the end of January (for Q4 of the previous year), April (for Q1), July (for Q2), and October (for Q3).
- bonus program: it's a bonus program, meaning that it can change or stop in the future depending on how we do. Basically, it's gravy.
- allocates 20%: twenty percent of adjusted profits is extremely generous while still responsible for the financial well-being of the company. Note: we started with 2%, then raised this to 10%, 15%, and finally 20% as both our profits and the number of employees grew. The goal is to strike a balance between giving everyone a noticeable bonus and not stretching our cash-flow too much.
- of adjusted profits: using profits is better than earnings (like we did at first) because it encourages all of us to limit our expenses. The profits are adjusted to exclude "crazy one-off costs of Peldi's choosing" (see below) and owner dividends, so we can have these expenses without worrying about their impact on bonuses.
- to "staffers": bonuses are for people who work more than 20 hours/week (50% time) for Balsamiq who are permanent employees or have a long-term external collaborator contract with us. However, part-time employees working less than 20 hours a week and contract workers later hired will receive seniority points for the days worked (see below).
- eligibility date: you are eligible to start receiving a profit sharing bonus beginning with the bonus for the Quarter in which your start date as a staffer fell. (e.g. if you started in November 2012, you would be eligible for the QTR 4 2012 bonus paid in Jan/Feb 2013. If you started in January 2013, you would be eligible for the QTR 1 2013 bonus paid in April/May 2013). If your employment at Balsamiq ends, you will not be eligible for bonuses that have not yet been calculated and paid out (so if you leave in December 2017, you won't get the QTR 4 bonus paid out in January/February 2018), but you will be eligible for a pro-rated Exit Bonus.
- based 25% split equally: this is good because it promotes a team spirit: while the majority of the bonus is weighted towards time spent in the company, this portion of the bonus is equally shared by all employees. This gives a nice incentive for everyone to be fully part of the team, even when they are just starting with Balsamiq. It will also be good down the line for a new employee who will take much longer to even out with the seniority of current staff.
- and 75% on seniority: this is good because it smooths out the impact of new employees, and evens out over time. Also to note how this is NOT based on salary / skills. We're all members of the same company and we're all equally responsible for the success of Balsamiq. In addition, nothing forbids us to also give out other merit-based bonuses as well. Note: if a staffer works less than 100% of their time for Balsamiq, their seniority will be adjusted.
OK, so that's the program and the philosophy behind it.
Here's some more details:
How we calculate adjusted profits
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:
- Owner dividends — so that if Peldi takes some money out it won't impact the amount of the bonuses (these don't show up on the Profit and Loss statement anyway, but we wanted to confirm they don't affect bonuses).
- Extra one-off expenses — Large items such as the one-time big bonus handed out in Sep 2010 and smaller items like when Peldi choses to fly first class. This is again so that we can have these "extravagant" expenses without impacting the amount of the bonuses.
- Charitable donations.
- Nest construction costs.
Because there are delays in getting expenses finalized in the accrual accounting system, we use the average % of profit from the prior 2 years. This % of profit is applied to the gross revenue of the quarter being calculated.
How we calculate seniority
This is the number of days at Balsamiq since qualifying for profit sharing as a staff member (since starting to work more than 20 hours/week as a permanent employee or signing the long-term external collaborator contract), with possible addition of days from previous contract or part-time work. If a staffer works less than 100% of their time at Balsamiq, their seniority will accrue at a rate equal to their % of time.
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.
That's it! We heard of several companies using our policy for inspiration over the years. If you do the same, let us know, we'll be thrilled!
- Time Off for Exercise
- Employee Donations