profit sharing


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Profit Sharing

A plan by which an employer distributes a set percentage of the company's profits to its employees. Employers may distribute the portion of its profits immediately (that is, employees may receive what amounts to a bonus) or it may set up a series of accounts for employees and defer the profit sharing until employees retire. The idea behind profit sharing is to give employees an incentive to work for the company's profitability. See also: DPSO, ESOP.

Profit sharing.

A profit-sharing plan is a type of defined contribution retirement plan that employers may establish for their workers.

The employer may add up to the annual limit to each employee's profit-sharing account in any year the company has a profit to share, though there is no obligation to make a contribution in any year.

The annual limit is stated as a dollar amount and as a percentage of salary, and the one which applies to each employee is the lower of the two alternatives.

Employers get a tax deduction for their contribution. Employees owe no income tax on the contributions or on any of the earnings in their accounts until they withdraw money.

In some cases, employees in the plan may be able to borrow from their accounts to pay for expenses such as buying a home or paying for college.

Profit-sharing plans offer employers certain flexibility. For example, in a year without profits, they don't have to contribute at all. And they can vary the amount of each year's contribution to reflect the company's profitability for that year.

However, each employee in the plan must be treated equally. This means that if an employer contributes 10% of one employee's salary to the plan, the employer must also contribute 10% of the salaries of all other employees in the plan.

profit sharing

the distribution of some portion of PROFITS to the employees of a company. It can take the form of an annual cash bonus based on the previous year's profits or it can form an element of weekly or monthly pay (see PROFIT-RELATED PAY). Less direct forms of profit sharing include allocation to employees of shares in the company, paid for out of company profits, and providing employees with the option to buy shares at some point in the future at current prices, thereby enabling them to benefit from both the share dividend and any growth in share value resulting from increases in profitability (see EMPLOYEE SHARE OWNERSHIP PLAN). Profit sharing is often advocated to improve employee commitment and thereby improve PRODUCTIVITY. See FINANCIAL PARTICIPATION.

profit sharing

the distribution of some portion of PROFITS to the employees of a company. It can take the form of an annual cash bonus based on the previous year's profits, or it can form an element of weekly or monthly pay (see PROFIT-RELATED PAY). Less direct forms of profit sharing include allocation to employees of shares in the company, paid for out of company profits, and providing employees with the option to buy shares at some point in the future at current prices, thereby enabling them to benefit from both the share dividend and any growth in share value resulting from increases in profitability (see EMPLOYEE SHARE OWNERSHIP PLAN). Profit sharing is often advocated to improve employee commitment and thereby improve PRODUCTIVITY. See PRINCIPAL-AGENT THEORY.
References in periodicals archive ?
Weitzman [1987] has argued that in an economy with long term unemployment due to extra-competitive wages, profit sharing can eliminate this unemployment by lowering the marginal cost of labor.
Finally, there is some evidence that organizations that use profit sharing and gainsharing as part of their compensation strategy may be influencing participation in voluntary retirement programs such as the 401 (k).
A plan participant may always amend the beneficiary designation with reference to his or her profit sharing account.
But on balance, profit sharing seems to have a positive impact on productivity.
Kruse finds that profit sharing is associated with less variability in employment in response to changes in aggregate and company-specific product demand.
This is one reason profit sharing is so important to the agent: this income allows us to keep our business running.
Once the plan design is agreed to, it is relatively easy for companies that already have an existing profit sharing plan to convert it to an age-weighted plan, a service-weighted plan, an owner-weighted plan or other alternative.
Profit sharing as a form of employee compensation has a long history in the United States.
The paper examines the effects of Profit sharing in an economy with decentralized wage bargaining.
Profit sharing is paid annually, based on pro rata share of premium.
The reduction in profit sharing was a result of costs related to restructuring and its ignition switch issue, the company said.