How does Profit sharing work?

How does Profit sharing work?

Incentive Plans: Profit Sharing. An incentive-based compensation program to award employees a percentage of the company’s profits.

The company contributes a portion of its pre-tax profits to a pool that will be distributed among eligible employees. The amount distributed to each employee may be weighted by the employee’s base salary so that employees with higher base salaries receive a slightly higher amount of the shared pool of profits. Generally, this is done on an annual basis. 

Advantages

• Brings groups of employees to work together toward a common goal (the success/benefit of the company). 
• Helps employees focus on profitability. 
• Enhances commitment to organizational goals. 
• The pay for each employee moves up or down together (no individual differences for merit or performance). 

Disadvantages

• The costs of implementing the plan rise and fall with the company’s revenues.
• Focuses only on the goal of profitability (which may be at the expense of quality). 
• 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. 

What is the best way to implement Profit sharing?

Meet with executives to develop a clear understanding of profit sharing. Develop various formulas and models to be used in predicting future gains and the costs associated with sharing those gains. Prepare rules. 

Facts: BLA 2006

• No Wage period shall exceed one month
• Deduction from wages:
• Fines imposed for punishment
• Absence from duty
• Causing damage or loss of goods
• For house accommodation
• For recovery of advances or loans
• Income Tax
• Advances from PF
• Subscription for the CBA

• Compensation systems are designed keeping in mind the strategic goals and business objectives. 
• Compensation system is designed on the basis of certain factors after analyzing the job work and responsibilities 

For what company compensate to the employees

• Employee’s Labor
• Employee’s Time
• Employee’s Intelligence

See Also:

• Workers Profit Participation Fund (WPPF) – Definition and Meaning
• What do you mean by collective bargaining?
• Technical Assessment
• Job Analysis Methods – The different methods
• Different Types of Job Interviews
• What is a Job Interview Definition?
• What is Promotion? Definition and Meaning
• What Are The Different Types Of Employment Leaves?
• What Should Be Included In An Employee Handbook?
• Employee Handbook – Advantages and Disadvantages
• The Practice of RACI Matrix in an organization