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What is Profit sharing?

1. What is Profit sharing? Profit Sharing is an incentive based compensation program to award employees a percentage of the company's p...

1. What is Profit sharing?

Profit Sharing is an incentive based compensation program to award employees a percentage of the company's profits.

Profit sharing, when used as a special term, refers to various incentive plans introduced by businesses that provide direct or indirect payments to employees that depend on company's profitability in addition to employees' regular salary and bonuses

2. Advantages of Profit sharing:

• The costs of implementing the plan rise and fall with the company's revenues.

• Enhances commitment to organizational goals.

• Brings groups of employees to work together toward a common goal (the success/benefit of the company).

• Helps employees focus on profitability.

3. Disadvantages of Profit sharing:

• For smaller companies, these plans may result in drastic swings in earnings for employees which the employees may find difficult to manage their personal finances.

• Adherence to the FLSA requires employers to recalculate each worker's "regular rate" of pay.
The pay for each employee moves up or down together.

• Focuses only on the goal of profitability.

Profit Sharing Ideas

• Plan Ahead: A profit-sharing plan is only an effective incentive if there is profit to share with your employees, according to the article "How to Implement a Profit Sharing Plan" published in "Inc." magazine.

• Put it in Writing: A profit-sharing plan is subject to tax and business laws, just like a retirement plan would be.

• Structure: A deferred profit-sharing plan is one in which the funds are transferred to an account on behalf of the employee in pre-tax dollars.

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