How To Guide For: Understanding A Profit Sharing Plan -- How It Works & The Pros And Cons

A Profit Sharing Plan is a system in which the people who work for a company receive a direct share of the profits. Under this type of plan, an employee receives a percentage of a company's profits based on its quarterly or annual earnings. There are generally restrictions as to when and how a person can withdraw these funds without penalties. A profit-sharing plan is a defined contribution plan in which your employer has discretion to determine when and how much the company pays into the plan. The amount allocated to each individual account is usually based on the salary level of the employee. Now that we understand what a Profit Sharing Plan is and how it works, lets look at the pros and cons. Lets start with the the pros of having this type of plan. Profit Sharing Plans allows a business to give its employees a sense of ownership in the company, which can work to the business's advantage. This can work to the business's advantage because if the company offers this incentive, they directly link employees to the success of their company on a financial level -- if the employee helps the company make a profit, the employee earns a reward. Acknowledging the importance of the work the employee does by giving a tangible benefit may increase the employee loyalty to your company and their levels of job satisfaction. Which could also help the company improve employee retention rates, saving money on recruitment and training. Aside from keeping people happier in their roles, the extra money may deter them from looking for other jobs. The downside to this is that employees focus only on profits, your company may suffer, because the employee is only focused on working towards making a profit at the expense of other key factors like quality. Another con to having a Profit Sharing Plan is that it can lead to a sense of entitlement meaning once employees receive them, they may feel entitled to earning the extra money. If the company doesn't make profits in a period, the employees may become unmotivated. These are just some of the pros and cons of having a Profit Sharing Plan to learn more about Profit Sharing Plans, how it works and the pros and cons click the pictures below to read the articles.