Profitsharing

Profit sharing is a compensation arrangement in which employees receive a portion of an organization's profits in addition to regular wages. Profit shares are typically calculated from net profits and are not guaranteed, dependent on the company's financial performance. Plans may allocate shares according to a formula or be discretionary, and the payout timing varies by plan.

Common forms include cash profit-sharing plans, where employees receive cash payments, and deferred plans, where the share is placed into retirement accounts or other long-term arrangements. Some firms use employee stock ownership plans (ESOPs) to convert profits into company stock. Vesting schedules and eligibility rules determine when employees receive payouts.

Advantages include alignment of employee interests with company performance, potential for increased productivity, and improved retention. Disadvantages include exposure to profits variability, potential inequities if distributions favor higher-salary workers, and the administrative costs of maintaining the plan.

Legal and regulatory considerations vary by country. In the United States, profit-sharing plans are often structured under tax-advantaged frameworks with ERISA oversight and rules on vesting and eligibility. Companies must communicate plan terms and ensure fiduciary compliance.

Profit sharing is distinct from discretionary bonuses or annual profit-based incentives, although some plans blend elements. It is related to but separate from employee stock ownership plans, bonus pools, and other incentive programs used to attract and retain talent.