Profit sharing is defined as an arrangement between the employer and the employee whereby a certain percentage of the profits gained by the employer are shared with the employee. The profits may be of cash, bonds and Stocks. The employee may receive the profits immediately or through a creation of profit account where the share of the profits is send by the employer to the employee’s account. A saving can also be done for the employee so as to receive a full package of the share of the profits to be enjoyed at the retirement age (JoshSimon, 2012).
The profit sharing can also be set to be given to the employees at the end of the year. Certain employers’ device formulas for the distribution of the available amount of profits to the employees. On the other hand, other employees divide the percentage of the profits shared among the employees in equal shares. The sharing of profits is not a right of an employee and the wording of such an arrangement should be expressly spelt out in the contract of employment. There are other employees who do not prefer stating the sharing of the profit arrangement in the contract of employment but they make clear specifications on the profits to be shared (Secord & Secord, 2003).
The main Strategy used by lucrative companies in maintaining close partnership and cooperation in the company is by profit sharing. There are numerous misconceptions associated with profit sharing. Many employees and also employers have a misconception that options mean the same as profit sharing. One thing that the employees need to be informed is that profit sharing does no in any way depend on the merit of the employees. The only requirement to receiving a share of the profit is making sure that one maintains the employment (Lederer, 1997).
Profit sharing is an incentive which works in maintaining teamwork in the employment. The profit sharing makes employees feel as a first class beneficiary of the company’s profits. The employer is expected to explain to the employees that the benefits of the company are the benefits of the employees. In such an environment the entire body of employees will work towards profit making since they have a share in it. When profit sharing is used by the company, it ought not to be used as a benefit but also as an efficient tool to facilitate team building. The concept should be understood by the employees that if the company loses everyone loses (Secord & Secord, 2003).
The profit sharing should be geared towards motivating the employees to feel that they are all aiming at one goal which will in turn assist the company in achieving its goals. With the individual’s compensation/reward being pegged on the success of the organization, profit plans greatly encourage team work. A need by the employees to work together so as to increase the profits of the company and in turn increasing theirs is engineered. The easiest way of making profits in a company is building trust and cooperation between members of a company and its management (Business Knowledge Source .com, 2012).
On the other hand, profit sharing has its setbacks which include the fact that an individual’s compensation may not reflect the actual contribution of such a person in the organization. Some employees will always benefit more than others. There are also other extraneous factors which may influence the profits of a company’s profit gains. It follows that given the said factors, an employee will benefit from what he/she has not worked for (JoshSimon, 2012).
Profit sharing is a very vital tool in team building of any company or any other organization. The profits benefit sharing makes an employee feel that the success of the company is the success of everyone. There are several benefits associated with profit sharing but it also has a couple of disadvantages.