How Profit-Sharing Plan Work

Employers provide a variety of benefits to their employees, ranging from free lunch to offering free training. There are also non-standard benefits that some companies give to their employees, privileges that are not mandated by law but can attract employee loyalty and promote a more efficient workforce.

An example of these non-standard benefits is Profit Sharing, wherein the employer designates a percentage of annual profits as a pool of money that all employees-or a portion of the workforce, such as executives-would be shared.

The portion of profit that would be shared among employees can either be distributed equally or through a certain grading system where lower-paying jobs get lower shares, while higher-paying jobs are given with bigger compensation. However, profit sharing can only be done if the company has posted gains during the previous fiscal year. It usually occurs annually after the final results for the annual company profitability have been calculated.

Profit sharing has its share of advantages and disadvantages. On a positive note, this type of employee benefit would provide an impression that all employees are working together on the same team. It also reinforces a sense of service to customers, while minimizing the culture of competition between employees.

However, profit sharing makes employees unable to see and know the impact of their own work and actions affecting the profitability of the company. It would eventually become more of an entitlement rather than a motivational factor because employees would still get a share of the profit regardless of their performance.

In the end, choosing whether or not offering profit sharing to employees can either inspire employees or would make them less productive. Profit sharing should be balanced out by other employee’s benefits.

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