Profit Sharing

1
Profit Sharing

• Definition of Profit Sharing
• Employees share a portion of the profits based on
  corporate or division performance.
• 16 of ees in medium/large firms covered
• No requirement for employee involvement
• more passive than gainsharing
• Profits shared on quarterly or annual basis.
• Workers share common fate with management.
• In US, 3/4 of plans used to fund retirement.

2
Profit Sharing (Continued)

• Operational Features
• Tax Deferred Plan
• Funds retirement - most common plan
• Cash Bonus Plan
• Employees receive quarterly or annual check for
  cash
• Ex Hewlett Packard, GM, Ford, Nucor
• Mixed Plan
• Portion of money deferred, rest is given in cash.

3
Profit Sharing (Continued)

• Drawbacks
• Weak line of sight
• External factors (business cycle) can influence
  profits
• Lack of employee control
• May restrict managements ability to utilize
  profits.
• Union resistance
• Some countries use for ideological reasons
  (example Mexico requires profit sharing)

4
Profit Sharing (Continued)

• Most favorable conditions for profit sharing
• Private sector firm
• Mature firm or Growing firm (not Declining firm)
• Firms that operate in unstable markets
• Shock Absorber Effect - preserves jobs during
  business downturn.
• Complements pay for performance plans based on
  individual or team contributions.
• May support a cooperative labor relations
  strategy.