What Is the Meaning of Profit Sharing?

Profit sharing is a good way to generate motivation among employees.

Profit sharing refers to incentive programs, utilized by businesses, that allow employees to receive a portion or all of their salary, bonuses or other incentives based on the profit of the business.

Benefits

The primary benefit of profit sharing comes through the creation of a common incentive for every employee, with each directly receiving benefits based on the success of the company. Also, the chasm between employee and employer becomes bridged by a common goal: profit.

Disadvantages

Although profit-sharing employees have a common goal, an employer cannot reward an employee who exceeds levels of expectation, so individuals have no direct incentive to work harder. In addition, because employees focus primarily on profit, the company's quality and customer service could suffer.

Types

A cash profit-sharing plan gives bonuses to employees at the end of a fiscal year in the form of cash, checks or bonuses. A deferred plan places the profit into an account that the employee can only access for certain events, such as for health reasons, or after a certain amount of time has elapsed. A combination plan, however, gives employees the choice between cash and the deferred plan.

References

• Internal Revenue Service: Choosing a Retirement Plan: Profit-Sharing Plan
• HR Guide to the Internet: Compensation--Incentive Plans--Profit Sharing