Profit Sharing as an Incentive Scheme

Profit sharing is the most popular method rewarding the employees. Under profit sharing incentive plan, the employees are paid in addition to the regular wage, a particular share of the net profits of the business as incentive.

Profit Sharing Incentive Schemes of Employee Compensation

Characteristics of Profit Sharing Incentive Plans

The key features of profit sharing incentive plans may be stated as follows:

  • It is based on an agreement between the employer and the employees.
  • It is a payment made after ascertaining the net profits of the business. It is not therefore, a charge on profits.
  • The amount paid to the employees is over and above their normal pay.
  • The amount to the paid is determined based on some agreed formulas.
  • The payments based on seniority and wage level of individual workers.

Merits of Profit Sharing

The advantages of profit sharing incentive plans are as follows:

  • Better employer-employee relations – This is possible, as the employer is ready to share the profits of the enterprise with his employees.
  • Increase in productivity -The employees make every possible effort to increase productivity because they know very well that higher profits for the enterprise would mean higher bonus for them.
  • Better living standards – It helps to increase the living standards of the employees as the amount received is in addition to the usual wages.
  • Reduced costs of supervision – The workers themselves are duty conscious and, therefore, they need no close supervision. Thus, costs of supervision are reduced.
  • Promotion of team spirit – The employees know the importance of teamwork, as only such an effort would result in higher output.

Limitations of Profit Sharing

The limitations of profit sharing incentive plans are as follows:

  • Regular income not assured: Payment to workers, by way of profit sharing, at a particular rate depends upon the profits of the enterprise. If the enterprise makes low profits or incurs losses, it will not be in a position to pay bonus as agreed.
  • Suppression of profits: Attempts may also be made to suppress true profits so that the employees need not be paid their share. This is done by manipulating accounts.
  • No inducement: Payment under the profit sharing incentive scheme will be made to the employees once or twice a year when accounts are closed. Such payments at longer intervals may not really motivate employees. Daily or weekly incentive payments are far more superior to profit sharing.
  • All workers paid alike: Payment to workers under profit sharing incentive scheme is made without considering their relative level of efficiency. This amounts to doing injustice to those who have really made target attainment possible.

External Links:

  • How to Build a Profit Sharing Plan (Inc.)

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