profit-related pay

profit-related pay (PRP)

a form of PROFIT SHARING in the UK. This was a very widespread scheme that gave employees significant INCOME TAX benefits if they took some of their WAGES as PROFIT-linked payments. In principal, their wages would vary according to company profitability. The objective was to combat the unemployment effects of ‘wage stickiness’ – i.e. that wages tend to remain unchanged when company profitability declines causing firms to adjust by reducing employment levels. However, a large proportion of these schemes were felt to be ‘cosmetic’ i.e. wages did not really respond to changes in profits. For this reason, the tax advantages have now been phased out. See FINANCIAL PARTICIPATION.

profit-related pay

a PAY system whereby employees receive a proportion of their pay in the form of PROFIT-related payments. Advocates of such schemes suggest that they can help to reduce UNEMPLOYMENT by making wages more variable. They hold that unemployment occurs because the price of labour is stuck at too high a level and argue that profit-related income schemes can build some flexibility into labour markets. Specifically, they argue that because of the automatic profit-related cushion, employers will be slower to lay off workers during a recession and quicker to hire workers when conditions are good. In addition, it is held that profit-sharing workers are better motivated than wage earners to improve PRODUCTIVITY within their companies since they share in any additional profits created (see PROFIT SHARING).

Problems can arise, however, because of the variability of profits in the face of events outside the firm's immediate control. For example, profits can be wiped out by an industry ‘price war’ or by falling demand in times of recession. Thus, the higher the required profit element in the workers’ overall pay package to provide a decent living wage, the more vulnerable they are to the variability factor, and this may deter people from joining the firm. See PRINCIPAL-AGENT THEORY. See also SUPPLY-SIDE ECONOMICS, WAGE RATE, MINIMUM WAGE RATE.

References in periodicals archive ?
These include: | holiday pay | ||sick pay | ||bonuses | | profit-related pay | | notice payments | | pensions.
Thatmeansthey share ownership in John Lewis, get profit-related pay bonuses and have a democratic say in how the company is run.
It's when employers offer extra benefits and they're taxable like Save As You Earn (SAYE), charity giving and profit-related pay that it can make it slightly more complicated.
His complaint about sick pay being suspended and a failure to award him profit-related pay were upheld and the money will now be handed over.
n If your company has an employee share plan, use it - about pounds 207m tax could be saved by an estimated 600,000 staff currently in Profit-Related Pay schemes.
The record-breaking year means Esteem's 100-plus employees have benefited from supplementary benefits - such as profit-related pay, bonuses and extra pension contributions - - worth nearly pounds 600,000.
A supply teacher agency has launched an initiative to give cash to schools and teachers as part of a profit-related pay scheme.
2 million staff currently in profit-related pay schemes.
I PAID into a profit-related pay scheme, but when I left the company after the scheme finished they refused to pay out because I am no longer an employee.
Grounds maintenance staff are angry that payments from a profit-related pay scheme set up a few years ago have dwindled away to nothing.
The second section of the book covers practice and planning, including a chapter that details the various tax issues concerned with employee share option and profit-related pay schemes.
He also took a swipe at the Government, which is scrapping tax relief on profit-related pay schemes.